**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

### ** **

**FORM 10-Q**

 

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

### ** **

For the quarterlyperiod ended **JUNE 30, 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:

 
| ** **                    | ** ** | **Name of Each Exchange**   |
|-------------------------------|------------|-----------------------------|
| **Title of Each Class**       | ** ** | **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 markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).

YES   ý   NO   o

 

**COMMONSTOCK, $.001 PAR VALUE – 74,433,629 SHARES OUTSTANDING AS OF JULY 31, 2004**

 

 

----

 

 
| **PART I  – Financial Information** |                      |
|------------------------------------------|---------------------------|
| ** **                               |                      |
|                                     | Item 1  –  | Financial Statements |   |
|                                     |                      |   |   |
|                                     |                      | Consolidated  Condensed Statements of Income (Loss) |   |
|                                     |                      | Consolidated Condensed Balance Sheets |   |
|                                     |                      | Consolidated  Condensed Statements of Cash Flows |   |
|                                     |                      | Notes  to Consolidated Condensed Financial Statements |   |
|                                     |                      |   |   |
|                                     | Item 2  –  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                     |                      |   |   |
|                                     |                      | General |   |
|                                     |                      | General  Business Risks, Critical Accounting Policies and Estimates |   |
|                                     |                      | Results  of Operations |   |
|                                     |                      | Financial Condition  and Liquidity |   |
|                                     |                      | Other Matters |   |
|                                     |                      |   |
|                                     | Item 3  –  | Quantitative and Qualitative Disclosures About  Market Risk |   |
|                                     |                      |   |
|                                     | Item 4  –  | Controls and Procedures |   |
|                                     |                      |   |
| **PART II – Other Information**     |                      |
| ** **                               |                      |
|                                     | Item  1  – | Legal  Proceedings |   |
|                                     |                      |   |
|                                     | Item  4  – | Submission  of Matters to a Vote of Security Holders |   |
|                                     |                      |   |
|                                     | Item  5  – | Other  Information |   |
|                                     |                      |   |
|                                     | Item  6  – | Exhibits and  Reports on Form 8-K |   |
|                                     |                      |   |
|                                     | Signature                 |   |
|                                     |                      |   |
|                                     | Exhibit Index             |   |

 

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**PART I - FINANCIAL INFORMATION**

 

*Asdescribed in Note 1 to the Consolidated Condensed Financial Statements of SITELCorporation and subsidiaries (the Company), KPMG LLP (KPMG), the independentaccountants for the Company, has advised the Company that, due to the ongoingstatus of an internal investigation by the Audit Committee of the Board ofDirectors into an incorrect calculation of performance bonus amount on a singleclient program at an operating site in one of our business units, KPMG iscurrently unable to complete its review under Statement of Auditing StandardsNo. 100, “Interim Financial Information” (SAS 100), of the unauditedConsolidated Condensed Financial Statements included in the Form 10-Q for thequarterly period ended June 30, 2004. The investigation is substantially complete, except for someconfirmatory review of electronic documents. When such reviews have been completed, the Company intends to amend thisForm 10-Q.*

* *

----

 

**Item 1: Financial Statements**

 

### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFINCOME (LOSS)**

**(UNAUDITED)**

(in thousands, except per share data)

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| * *                                                    | * *   | * *                              | * *   | * *                            | * *   | * * | * * | * * | * * |
| **Revenue**                                                 |       | $                                     | 240,055    |                                | $          | 204,566 |   | $ | 484,123 |   | $ | 398,661 |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Operating expenses:**                                     |       |                                  |       |                                |       |   |   |   |   |
| Direct  labor and telecommunications expenses               |       | 143,032                               |       | 121,664                             |       | 287,160 |   | 232,435 |   |
| Subcontracted  and other services expenses                  |       | 13,022                                |       | 12,904                              |       | 25,837 |   | 26,554 |   |
| Operating,  selling and administrative expenses             |       | 76,922                                |       | 70,711                              |       | 153,762 |   | 136,387 |   |
| Asset  impairment and restructuring expenses                |       | —                                |       | —                              |       | — |   | 796 |   |
| Total  operating expenses                                   |       | 232,976                               |       | 205,279                             |       | 466,759 |   | 396,172 |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Operating income (loss)**                                 |       | 7,079                                 |       | (713                                | )          | 17,364 |   | 2,489 |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Other income (expense):**                                 |       |                                  |       |                                |       |   |   |   |   |
| Interest  expense                                           |       | (3,099                                | )          | (2,977                              | )          | (6,332 | ) | (5,834 | ) |
| Interest  income                                            |       | 121                                   |       | 103                                 |       | 242 |   | 236 |   |
| Equity  in earnings of affiliates                           |       | 77                                    |       | 322                                 |       | 70 |   | 939 |   |
| Other  income (expense), net                                |       | (118                                  | )          | 1,393                               |       | (392 | ) | 735 |   |
| Total  other expense, net                                   |       | (3,019                                | )          | (1,159                              | )          | (6,412 | ) | (3,924 | ) |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Income (loss) before income taxes and minority interest** |       | 4,060                                 |       | (1,872                              | )          | 10,952 |   | (1,435 | ) |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| Income  tax expense                                         |       | 1,331                                 |       | 1,269                               |       | 3,183 |   | 1,439 |   |
| Minority  interest                                          |       | 210                                   |       | 102                                 |       | 424 |   | 308 |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Net income (loss)**                                       |       | $                                     | 2,519      |                                | $          | (3,243 | ) | $ | 7,345 |   | $ | (3,182 | ) |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Weighted average common shares outstanding:**             |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                       |       | 73,670                                |       | 74,072                              |       | 73,652 |   | 74,165 |   |
| Diluted                                                     |       | 74,174                                |       | 74,072                              |       | 74,077 |   | 74,165 |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |
| **Earnings per share:**                                     |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                       |       | $                                     | 0.03       |                                | $          | (0.04 | ) | $ | 0.10 |   | $ | (0.04 | ) |
| Diluted                                                     |       | $                                     | 0.03       |                                | $          | (0.04 | ) | $ | 0.10 |   | $ | (0.04 | ) |

 

*SeeNotes to Consolidated Condensed Financial Statements.*

 

1

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### **SITEL CORPORATION ANDSUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
| ** **                                                                                                                                   | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                   |       |                    |       |                        |       |
| **Current assets:**                                                                                                                          |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                   |       | $                       | 49,516     |                        | $          | 29,850 |   |
| Trade  accounts receivable (net of allowance for doubtful accounts of $2,196 and  $3,088, respectively)                                      |       | 172,085                 |       | 175,542                     |       |
| Prepaid  expenses                                                                                                                            |       | 10,168                  |       | 10,072                      |       |
| Deferred  income taxes                                                                                                                       |       | 2,415                   |       | 2,367                       |       |
| Other  assets                                                                                                                                |       | 6,038                   |       | 7,364                       |       |
| Total  current assets                                                                                                                        |       | 240,222                 |       | 225,195                     |       |
|                                                                                                                                         |       |                    |       |                        |       |
| **Property and equipment, net**                                                                                                              |       | 83,675                  |       | 90,233                      |       |
|                                                                                                                                         |       |                    |       |                        |       |
| **Other assets:**                                                                                                                            |       |                    |       |                        |       |
| Goodwill                                                                                                                                     |       | 53,858                  |       | 53,553                      |       |
| Deferred  income taxes                                                                                                                       |       | 8,805                   |       | 8,724                       |       |
| Investment  in affiliates                                                                                                                    |       | 18,817                  |       | 18,911                      |       |
| Other  assets                                                                                                                                |       | 7,415                   |       | 8,139                       |       |
| **Total assets**                                                                                                                             |       | $                       | 412,792    |                        | $          | 404,755 |   |
|                                                                                                                                         |       |                    |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                |       |                    |       |                        |       |
| **Current liabilities:**                                                                                                                     |       |                    |       |                        |       |
| Revolving  credit facility and other current debt                                                                                            |       | $                       | 24,570     |                        | $          | 22,894 |   |
| Current  portion of capital lease obligations                                                                                                |       | 2,691                   |       | 3,181                       |       |
| Trade  accounts payable                                                                                                                      |       | 32,296                  |       | 30,582                      |       |
| Income  taxes payable                                                                                                                        |       | 314                     |       | 628                         |       |
| Accrued  wages, salaries and bonuses                                                                                                         |       | 40,790                  |       | 38,817                      |       |
| Accrued  operating expenses                                                                                                                  |       | 35,455                  |       | 37,823                      |       |
| Deferred  revenue and other                                                                                                                  |       | 7,740                   |       | 6,884                       |       |
| Total  current liabilities                                                                                                                   |       | 143,856                 |       | 140,809                     |       |
| **Long-term debt and other liabilities:**                                                                                                    |       |                    |       |                        |       |
| Long-term  debt, excluding current portion                                                                                                   |       | 100,000                 |       | 100,000                     |       |
| Capital  lease obligations, excluding current portion                                                                                        |       | 8,368                   |       | 8,684                       |       |
| Deferred  compensation                                                                                                                       |       | 1,236                   |       | 1,389                       |       |
| Deferred  income taxes                                                                                                                       |       | 1,139                   |       | 1,055                       |       |
| Total  liabilities                                                                                                                           |       | 254,599                 |       | 251,937                     |       |
|                                                                                                                                         |       |                    |       |                        |       |
| **Minority interests**                                                                                                                       |       | 2,293                   |       | 1,869                       |       |
| **Stockholders’ equity:**                                                                                                               |       |                    |       |                        |       |
| Common  stock, voting, $.001 par value 200,000,000 shares authorized, 74,412,945 and  74,368,135 shares issued and outstanding, respectively |       | 74                      |       | 74                          |       |
| Additional  paid-in capital                                                                                                                  |       | 168,820                 |       | 168,726                     |       |
| Accumulated  other comprehensive income (loss)                                                                                               |       | (2,233                  | )          | 329                         |       |
| Accumulated  deficit                                                                                                                         |       | (9,683                  | )          | (17,044                     | )          |
| Less  treasury stock, at cost, 734,420 and 755,300 common shares, respectively                                                               |       | (1,078                  | )          | (1,136                      | )          |
|                                                                                                                                         |       |                    |       |                        |       |
| Total  stockholders’ equity                                                                                                             |       | 155,900                 |       | 150,949                     |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $                       | 412,792    |                        | $          | 404,755 |   |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

2

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(in thousands)

 
| ** **                                                                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| * *                                                                                 | * *   | * *                            | * *   | * * | * * |
| **Cash flows from operating activities:**                                                |       |                                |       |   |   |
| Net  income (loss)                                                                       |       | $                                   | 7,345      |   | $ | (3,182 | ) |
| Adjustments  to reconcile net income (loss) to net cash flows from operating activities: |       |                                |       |   |   |
| Asset  impairment and restructuring provision                                            |       | —                              |       | 796 |   |
| Depreciation  and amortization                                                           |       | 17,706                              |       | 18,358 |   |
| Loss  on disposal of assets                                                              |       | 27                                  |       | 20 |   |
| Provision  for deferred income taxes                                                     |       | (26                                 | )          | (13 | ) |
| Equity  in earnings of affiliates                                                        |       | (70                                 | )          | (939 | ) |
| Impairment  of equity investments                                                        |       | —                              |       | 500 |   |
| Changes  in operating assets and liabilities:                                            |       |                                |       |   |   |
| Trade  accounts receivable                                                               |       | (509                                | )          | (15,137 | ) |
| Other  assets                                                                            |       | 1,456                               |       | (986 | ) |
| Trade  accounts payable                                                                  |       | 1,989                               |       | 4,529 |   |
| Other  liabilities                                                                       |       | 2,821                               |       | 4,116 |   |
| Net  cash flows from operating activities                                                |       | 30,739                              |       | 8,062 |   |
|                                                                                     |       |                                |       |   |   |
| **Cash flows from investing activities:**                                                |       |                                |       |   |   |
| Purchases  of property and equipment                                                     |       | (10,546                             | )          | (14,124 | ) |
| Investment  in affiliates                                                                |       | (820                                | )          | (1,000 | ) |
| Receipts  on notes receivable                                                            |       | 380                                 |       | — |   |
| Proceeds  from the sale of property and equipment                                        |       | 8                                   |       | — |   |
| Net  cash flows from investing activities                                                |       | (10,978                             | )          | (15,124 | ) |
|                                                                                     |       |                                |       |   |   |
| **Cash flows from financing activities:**                                                |       |                                |       |   |   |
| Borrowings  on debt                                                                      |       | 9,945                               |       | 12,383 |   |
| Repayments  of debt                                                                      |       | (8,457                              | )          | (6,060 | ) |
| Repayments  of capital lease obligations                                                 |       | (1,551                              | )          | (1,122 | ) |
| Treasury  stock reissuances (repurchases), net                                           |       | 102                                 |       | (835 | ) |
| Net  cash flows from financing activities                                                |       | 39                                  |       | 4,366 |   |
| Effect  of exchange rates on cash                                                        |       | (134                                | )          | 51 |   |
| **Net increase (decrease) in cash**                                                      |       | 19,666                              |       | (2,645 | ) |
| **Cash and cash equivalents, beginning of period**                                       |       | 29,850                              |       | 34,142 |   |
| **Cash and cash equivalents, end of period**                                             |       | $                                   | 49,516     |   | $ | 31,497 |   |
|                                                                                     |       |                                |       |   |   |
| **Non-cash investing and financing activities:**                                         |       |                                |       |   |   |
| Capital  lease obligations incurred                                                      |       | $                                   | 686        |   | $ | 983 |   |

 

*SeeNotes to Consolidated Condensed Financial Statements.*

 

3

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**SITELCORPORATION AND SUBSIDIARIES**

**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 Latin America.We provide customer acquisition, customer care, technical support and riskmanagement services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and internalcontact centers. We serve clients primarily in the automotive, consumer products, financialservices, insurance, telecommunications, Internet service provider, cable,technology and utilities sectors.

 

The accompanyingunaudited consolidated condensed financial statements reflect all normal andrecurring adjustments that are, in the opinion of management, necessary for afair presentation of the results of operations, financial position, and cashflows for the interim periods presented. The consolidated condensed financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto, together with management’s discussion andanalysis of financial condition and results of operations, contained in ourAnnual Report on Form 10-K for the year ended December 31, 2003. Allsignificant intercompany balances and transactions have been eliminated.Certain amounts in prior fiscal periods have been reclassified for comparativepurposes.

 

KPMG LLP (KPMG), theindependent accountants of SITEL Corporation and subsidiaries (the Company),has advised the Company that, due to the ongoing status of the AuditCommittee’s internal investigation into an incorrect calculation of performancebonus amount on a single client program at an operating site in one of our businessunits, KPMG is currently unable to complete its review under Statement ofAuditing Standards No. 100, “Interim Financial Information” (SAS 100), of theunaudited Consolidated Condensed Financial Statements for the quarterly periodended June 30, 2004, as required by Rule 10-01(d) of Regulation S-X promulgatedunder the Securities Exchange Act of 1934, as amended.  In light of the absence of the required SAS100 review for the second quarter of fiscal year 2004, the Section 906certifications required by 18 U.S.C. §1350 and included as Exhibits 32.1 and32.2 to this Form 10-Q have been qualified by reference to the absence of thatreview.  When such reviews have beencompleted, the Company intends to amend its Form 10-Q for such quarterlyperiod.

 

***Restatement***

We have determined thatour previously reported revenue and net income for the three months ended March31, 2004, were overstated by $0.3 million and $0.2 million, respectively.  The overstatement was the result of intentionalimproper changes to operational data, which resulted in an incorrectcalculation of performance bonus amounts on a single client program at anoperating site in one of our business units. The error does not affect previously reported basic and diluted earningsper share of $0.07.  The Company willrestate the previously issued March 31, 2004 interim financial statements forthe correction of the error.

 

***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 that allprimary 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 had no impact on our consolidated condensedfinancial 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 (loss) if the fair-value-based method had been applied to alloutstanding and unvested awards in each period.

 
| ** **                                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| Net  income (loss):                                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| As  reported                                                                                                              |       | $                                     | 2,519      |                                | $          | (3,243 | ) | $ | 7,345 |   | $ | (3,182 | ) |
| Less:  total stock based employee compensation expense determined under the fair  value method for all awards, net of tax |       | (239                                  | )          | (360                                | )          | (498 | ) | (708 | ) |
| Pro  forma                                                                                                                |       | $                                     | 2,280      |                                | $          | (3,603 | ) | $ | 6,847 |   | $ | (3,890 | ) |
|                                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Income  (loss) per common share:                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| As  reported:                                                                                                             |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                     |       | $                                     | 0.03       |                                | $          | (0.04 | ) | $ | 0.10 |   | $ | (0.04 | ) |
| Diluted                                                                                                                   |       | 0.03                                  |       | (0.04                               | )          | 0.10 |   | (0.04 | ) |
| Pro  forma:                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                     |       | 0.03                                  |       | (0.05                               | )          | 0.09 |   | (0.05 | ) |
| Diluted                                                                                                                   |       | 0.03                                  |       | (0.05                               | )          | 0.09 |   | (0.05 | ) |

 

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        |       | 52.3     | %          | 64.0     | %          |
| - Risk-free interest rate  |       | 3.5      | %          | 3.0      | %          |
| - Expected life (in years) |       | 5        |       | 5        |       |

 

***SignificantClients***

Our******top 20 clients accounted for66.9% and 73.0% of our revenue in the three-month periods ended June 30,2004 and 2003, respectively, and 66.9% and 71.0% for the six-month periodsended June 30, 2004 and 2003, respectively, and includemultiple independently managed business units of General Motors Corporation.These General Motors business units were responsible for 16.0% and 21.1% of ourtotal revenue in the three-month periods ended June 30, 2004 and 2003,respectively, and were responsible for 16.7% and 21.3% for the six-monthperiods ended June 30, 2004, and 2003, respectively.  The primary General Motors contract expiresin December 2005, while a second contract terminated inJune 2004.  In addition, Hewlett-Packard(HP) wasresponsible for 11.0% of our revenue for the three-month period endedJune 30, 2004, and was responsible for 11.2% of our revenue for thesix-month period ended June 30, 2004. We did not have any other clients under common control that generatedmore than 10% of our revenue for the periods presented.

 

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

 

Comprehensive income(loss) for the three and six-month periods ended June 30, 2004 and 2003are as follows (in thousands):

 

5

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| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  income (loss)                  |       | $                                     | 2,519      |                                | $          | (3,243 | ) | $ | 7,345 |   | $ | (3,182 | ) |
| Other  comprehensive income (loss): |       |                                  |       |                                |       |   |   |   |   |
| Currency  translation adjustment    |       | (2,563                                | )          | 4,186                               |       | (2,562 | ) | 7,084 |   |
| Comprehensive  income (loss)        |       | $                                     | (44        | )                                   | $          | 943 |   | $ | 4,783 |   | $ | 3,902 |   |

 

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

 

**Note 3.Asset Impairment and Restructuring Expenses**

 

As a result of certainclient contract negotiations that concluded during the first quarter of 2003,we re-assessed our facilities requirements and determined that a certainfacility subject to an operating lease was no longer needed. As a result, werecorded asset impairment and restructuring expenses of $0.8 million during thethree months ended March 31, 2003 related to the write-off of abandonedleasehold improvements of $0.4 million and $0.4 million for scheduled paymentsof operating leases for which we will receive no future economic benefit. Ourestimates are based upon many factors including projections of sublease ratesand the time period required to locate tenants. The facility was abandonedprior to March 31, 2003.

 

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

 

We summarize thecomponents of the accrued restructuring expenses recorded in our consolidatedcondensed balance sheet in the following table:

 
| ** **                     | ** ** | **Accrual  Balance  December 31,  2003** | ** ** | **Expensed  in  2004** | ** ** | **Paid  in  2004** | ** ** | **Other** | ** ** | **Accrual  Balance  June 30,  2004** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|--------------------|------------|-----------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **(in millions)**                             | ** ** |
|                           |       |                                          |       |                   |       |               |       |      |       |                                      |       |
| Severance                      |       | $                                             | 0.1        |                   | $          | —             |       | $         | —     |                                      | $          | — |   | $ | 0.1 |   |
| Facility  closure or reduction |       | 6.5                                           |       | —                 |       | (1.8               | )          | 0.2       |       | 4.9                                       |       |
| Total                          |       | $                                             | 6.6        |                   | $          | —             |       | $         | (1.8       | )                                         | $          | 0.2 |   | $ | 5.0 |   |

 

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 were $3.1 million and $2.9million for the three-month periods ended June 30, 2004 and 2003,respectively, and $6.5 million and $6.3 million for the six-month periods endedJune 30, 2004 and 2003, respectively. The Company had payables to our India joint venture of $2.2 million and$1.9 million at June 30, 2004 and 

 

6

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December 31, 2003,respectively, which are included in trade accounts payable in the accompanyingconsolidated condensed balance sheets.

 

Subcontracted servicesprovided by our Latin America joint venture for the three-month and six-monthperiods ended June 30, 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.

 

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 June 30, 2004, there wereapproximately 5.4 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 ofJune 30, 2004, options granted under these plans aggregating 2.8 millionremained outstanding with strike prices ranging from $2.41 to $19.50.  The last of these options will expire onFebruary 1, 2009.  We will not grantadditional options under these plans. The following table sets forth sharessubject to options:

 
| ** **                     | ** ** | **Number  of Options** | ** ** | **Weighted-  Average  Exercise  Price per Share** | ** ** |
|--------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|                           |       |                   |       |                                              |       |
| Balance,  January 1, 2004 |       | 7,750,390              |       | $                                                 | 3.67       |   |
| Granted                        |       | 176,095                |       | 2.55                                              |       |
| Exercised                      |       | (48,260                | )          | 2.29                                              |       |
| Canceled                       |       | (562,334               | )          | 3.38                                              |       |
| Balance,  June 30, 2004   |       | 7,315,891              |       | 3.68                                              |       |
|                                |            |                        |            |                                                   |            |  |

 

Theoptions exercisable at the end of each period were:

 
| ** **              | ** ** | **Number  of Options** | ** ** | **Weighted-  Average  Exercise  Price per Share** | ** ** |
|-------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|                    |       |                   |       |                                              |       |
| December 31,  2003 |       | 3,175,457              |       | $                                                 | 4.61       |   |
| June 30,  2004     |       | 3,568,574              |       | $                                                 | 4.46       |   |

 

The following tablesummarizes stock options outstanding at June 30, 2004:

 
| **Range  of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                           |       |                    |       |                                    |       |                                    |       |
| $1.24 to $1.75                 |       | 801,491                 |       | 8.6                                     |       | $                                       | 1.55       |   |
| $1.76 to $4.00                 |       | 4,719,251               |       | 5.9                                     |       | $                                       | 3.05       |   |
| $4.01 to $6.33                 |       | 1,051,314               |       | 4.8                                     |       | $                                       | 4.82       |   |
| $6.34 to $7.22                 |       | 482,625                 |       | 5.5                                     |       | $                                       | 6.69       |   |
| $7.23 to $12.66                |       | 201,210                 |       | 3.6                                     |       | $                                       | 9.77       |   |
| $12.67 to $20.00               |       | 60,000                  |       | 2.7                                     |       | $                                       | 17.35      |   |

 

The following tablesummarizes stock options exercisable at June 30, 2004:

 

7

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| **Range  of  Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
|                           |       |                    |       |                                    |       |
| $1.24 to $1.75                 |       | 174,596                 |       | $                                       | 1.52       |   |
| $1.76 to $4.00                 |       | 1,837,775               |       | $                                       | 3.10       |   |
| $4.01 to $6.33                 |       | 900,261                 |       | $                                       | 4.81       |   |
| $6.34 to $7.22                 |       | 395,942                 |       | $                                       | 6.70       |   |
| $7.23 to $12.66                |       | 200,000                 |       | $                                       | 9.75       |   |
| $12.67 to $20.00               |       | 60,000                  |       | $                                       | 17.35      |   |

 

**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 percommon share by dividing our reported net income by the weighted average numberof common shares and common equivalent shares outstanding during each period.Our reported net income is used in the computation of both basic and dilutedincome per share.

 

The difference between thenumber 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. AtJune 30, 2004 and 2003, we had 1.9 million and 7.7 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.Payroll Tax Refund**

 

During the three monthsended June 30, 2004, we recorded a benefit from the refund of payroll taxoverpayments paid in a prior year.  Werecorded the payroll tax refund in the accompanying consolidated condensedstatements of income (loss) as a $1.3 million reduction of direct labor andtelecommunications expenses and a $0.4 million reduction of operating, sellingand administrative expenses during the three months ended June 30, 2004.

 

**Note 9. Supplemental GuarantorFinancial Information**

 

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

 

•                                          ConsolidatingCondensed Statements of Income (Loss) and Comprehensive Income (Loss) for thethree and six- month periods ended June 30, 2004 and 2003,

•                                          ConsolidatingCondensed Balance Sheets at June 30, 2004 and December 31, 2003, and

•                                          ConsolidatingCondensed Statements of Cash Flows for the six months ended June 30, 2004and 2003.

 

8

----

 

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

 
| **Three Months Ended June 30, 2004**                   | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                 |       | $                  | 88,676     |                        | $          | 11,977                         |       | $                | 139,402    |             | $          | — |   | $ | 240,055 |   |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct  labor and telecommunications expenses               |       | 49,549             |       | 6,625                       |       | 86,858                         |       | —           |       | 143,032          |       |
| Subcontracted  and other services expenses                  |       | 9,950              |       | 975                         |       | 2,097                          |       | —           |       | 13,022           |       |
| Operating,  selling and administrative expenses             |       | 26,065             |       | 3,282                       |       | 47,575                         |       | —           |       | 76,922           |       |
| Asset  impairment and restructuring expenses                |       | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Total  operating expenses                                   |       | 85,564             |       | 10,882                      |       | 136,530                        |       | —           |       | 232,976          |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                 |       | 3,112              |       | 1,095                       |       | 2,872                          |       | —           |       | 7,079            |       |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                 |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest  expense                                           |       | (2,550             | )          | (2                          | )          | (547                           | )          | —           |       | (3,099           | )          |
| Interest  income                                            |       | 54                 |       | —                      |       | 67                             |       | —           |       | 121              |       |
| Equity  in earnings (losses) of affiliates                  |       | 1,110              |       | 98                          |       | 77                             |       | (1,208           | )          | 77               |       |
| Other  income (expense), net                                |       | 971                |       | 84                          |       | (1,173                         | )          | —           |       | (118             | )          |
| Total  other income (expense), net                          |       | (415               | )          | 180                         |       | (1,576                         | )          | (1,208           | )          | (3,019           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and minority interest** |       | 2,697              |       | 1,275                       |       | 1,296                          |       | (1,208           | )          | 4,060            |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Income  tax expense                                         |       | 21                 |       | 165                         |       | 1,145                          |       | —           |       | 1,331            |       |
| Minority  interest                                          |       | 157                |       | —                      |       | 53                             |       | —           |       | 210              |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                       |       | $                  | 2,519      |                        | $          | 1,110                          |       | $                | 98         |             | $          | (1,208 | ) | $ | 2,519 |   |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency  translation adjustment                            |       | (2,563             | )          | (149                        | )          | (2,393                         | )          | 2,542            |       | (2,563           | )          |
| **Comprehensive income (loss)**                             |       | $                  | (44        | )                           | $          | 961                            |       | $                | (2,295     | )                | $          | 1,334 |   | $ | (44 | ) |

 

9

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| **Three Months Ended June 30, 2003**                   | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                 |       | $                  | 88,439     |                        | $          | 9,659                          |       | $                | 107,894    |             | $          | (1,426 | ) | $ | 204,566 |   |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct  labor and telecommunications expenses               |       | 48,743             |       | 5,841                       |       | 67,080                         |       | —           |       | 121,664          |       |
| Subcontracted  and other services expenses                  |       | 12,196             |       | 639                         |       | 1,340                          |       | (1,271           | )          | 12,904           |       |
| Operating,  selling and administrative expenses             |       | 28,811             |       | 2,863                       |       | 39,192                         |       | (155             | )          | 70,711           |       |
| Asset  impairment and restructuring expenses                |       | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Total  operating expenses                                   |       | 89,750             |       | 9,343                       |       | 107,612                        |       | (1,426           | )          | 205,279          |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                 |       | (1,311             | )          | 316                         |       | 282                            |       | —           |       | (713             | )          |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                 |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest  expense                                           |       | (2,597             | )          | (3                          | )          | (377                           | )          | —           |       | (2,977           | )          |
| Interest  income                                            |       | 44                 |       | —                      |       | 59                             |       | —           |       | 103              |       |
| Equity  in earnings (losses) of affiliates                  |       | (135               | )          | (699                        | )          | 322                            |       | 834              |       | 322              |       |
| Other  income (expense), net                                |       | 756                |       | 251                         |       | 386                            |       | —           |       | 1,393            |       |
| Total  other income (expense), net                          |       | (1,932             | )          | (451                        | )          | 390                            |       | 834              |       | (1,159           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and minority interest** |       | (3,243             | )          | (135                        | )          | 672                            |       | 834              |       | (1,872           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Income  tax expense                                         |       | —             |       | —                      |       | 1,269                          |       | —           |       | 1,269            |       |
| Minority  interest                                          |       | —             |       | —                      |       | 102                            |       | —           |       | 102              |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                       |       | $                  | (3,243     | )                           | $          | (135                           | )          | $                | (699       | )                | $          | 834 |   | $ | (3,243 | ) |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency  translation adjustment                            |       | 4,186              |       | 69                          |       | 728                            |       | (797             | )          | 4,186            |       |
| **Comprehensive income (loss)**                             |       | $                  | 943        |                        | $          | (66                            | )          | $                | 29         |             | $          | 37 |   | $ | 943 |   |

 

10

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| **Six Months Ended June 30, 2004**                     | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                 |       | $                  | 180,662    |                        | $          | 24,829                         |       | $                | 278,632    |             | $          | — |   | $ | 484,123 |   |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct  labor and telecommunications expenses               |       | 99,568             |       | 13,177                      |       | 174,415                        |       | —           |       | 287,160          |       |
| Subcontracted  and other services expenses                  |       | 21,507             |       | 1,795                       |       | 2,535                          |       | —           |       | 25,837           |       |
| Operating,  selling and administrative expenses             |       | 52,621             |       | 6,061                       |       | 95,080                         |       | —           |       | 153,762          |       |
| Asset  impairment and restructuring expenses                |       | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Total  operating expenses                                   |       | 173,696            |       | 21,033                      |       | 272,030                        |       | —           |       | 466,759          |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                 |       | 6,966              |       | 3,796                       |       | 6,602                          |       | —           |       | 17,364           |       |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                 |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest  expense                                           |       | (5,097             | )          | (3                          | )          | (1,232                         | )          | —           |       | (6,332           | )          |
| Interest  income                                            |       | 98                 |       | —                      |       | 144                            |       | —           |       | 242              |       |
| Equity  in earnings (losses) of affiliates                  |       | 3,282              |       | (517                        | )          | 70                             |       | (2,765           | )          | 70               |       |
| Other  income (expense), net                                |       | 2,285              |       | 197                         |       | (2,874                         | )          | —           |       | (392             | )          |
| Total  other expense, net                                   |       | 568                |       | (323                        | )          | (3,892                         | )          | (2,765           | )          | (6,412           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and minority interest** |       | 7,534              |       | 3,473                       |       | 2,710                          |       | (2,765           | )          | 10,952           |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Income  tax expense                                         |       | 32                 |       | 191                         |       | 2,960                          |       | —           |       | 3,183            |       |
| Minority  interest                                          |       | 157                |       | —                      |       | 267                            |       | —           |       | 424              |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                       |       | $                  | 7,345      |                        | $          | 3,282                          |       | $                | (517       | )                | $          | (2,765 | ) | $ | 7,345 |   |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency  translation adjustment                            |       | (2,562             | )          | (161                        | )          | (2,380                         | )          | 2,541            |       | (2,562           | )          |
| **Comprehensive income (loss)**                             |       | $                  | 4,783      |                        | $          | 3,121                          |       | $                | (2,897     | )                | $          | (224 | ) | $ | 4,783 |   |

 

11

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| **Six Months Ended June 30, 2003**                     | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                 |       | $                  | 175,969    |                        | $          | 21,441                         |       | $                | 204,225    |             | $          | (2,974 | ) | $ | 398,661 |   |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct  labor and telecommunications expenses               |       | 95,618             |       | 11,743                      |       | 125,074                        |       | —           |       | 232,435          |       |
| Subcontracted  and other services expenses                  |       | 23,807             |       | 1,311                       |       | 2,707                          |       | (1,271           | )          | 26,554           |       |
| Operating,  selling and administrative expenses             |       | 58,094             |       | 5,650                       |       | 74,346                         |       | (1,703           | )          | 136,387          |       |
| Asset  impairment and restructuring expenses                |       | —             |       | —                      |       | 796                            |       | —           |       | 796              |       |
| Total  operating expenses                                   |       | 177,519            |       | 18,704                      |       | 202,923                        |       | (2,974           | )          | 396,172          |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                 |       | (1,550             | )          | 2,737                       |       | 1,302                          |       | —           |       | 2,489            |       |
| ** **                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                 |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest  expense                                           |       | (5,213             | )          | (8                          | )          | (613                           | )          | —           |       | (5,834           | )          |
| Interest  income                                            |       | 122                |       | —                      |       | 114                            |       | —           |       | 236              |       |
| Equity  in earnings (losses) of affiliates                  |       | 2,099              |       | (716                        | )          | 939                            |       | (1,383           | )          | 939              |       |
| Other  income (expense), net                                |       | 1,360              |       | 86                          |       | (711                           | )          | —           |       | 735              |       |
| Total  other expense, net                                   |       | (1,632             | )          | (638                        | )          | (271                           | )          | (1,383           | )          | (3,924           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and minority interest** |       | (3,182             | )          | 2,099                       |       | 1,031                          |       | (1,383           | )          | (1,435           | )          |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Income  tax expense                                         |       | —             |       | —                      |       | 1,439                          |       | —           |       | 1,439            |       |
| Minority  interest                                          |       | —             |       | —                      |       | 308                            |       | —           |       | 308              |       |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                       |       | $                  | (3,182     | )                           | $          | 2,099                          |       | $                | (716       | )                | $          | (1,383 | ) | $ | (3,182 | ) |
|                                                        |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency  translation adjustment                            |       | 7,084              |       | 117                         |       | 3,756                          |       | (3,873           | )          | 7,084            |       |
| **Comprehensive income (loss)**                             |       | $                  | 3,902      |                        | $          | 2,216                          |       | $                | 3,040      |             | $          | (5,256 | ) | $ | 3,902 |   |

 

12

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**ConsolidatingCondensed Balance Sheet**

 

 
| **At June 30, 2004**                             | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Assets**                                            |       |               |       |                        |       |                           |       |             |       |             |       |
| **Current assets:**                                   |       |               |       |                        |       |                           |       |             |       |             |       |
| Cash and cash equivalents                             |       | $                  | 23,616     |                        | $          | 4,226                          |       | $                | 21,674     |             | $          | — |   | $ | 49,516 |   |
| Trade accounts receivable, net                        |       | 99,783             |       | 60,216                      |       | 99,537                         |       | (87,451          | )          | 172,085          |       |
| Prepaid expenses and other current assets             |       | 5,826              |       | 42                          |       | 12,753                         |       | —           |       | 18,621           |       |
| Total current assets                                  |       | 129,225            |       | 64,484                      |       | 133,964                        |       | (87,451          | )          | 240,222          |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Property and equipment, net**                       |       | 19,800             |       | 2,255                       |       | 61,620                         |       | —           |       | 83,675           |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other assets:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Goodwill                                              |       | 19,577             |       | 14                          |       | 34,267                         |       | —           |       | 53,858           |       |
| Deferred income taxes                                 |       | 8,607              |       | —                      |       | 198                            |       | —           |       | 8,805            |       |
| Investments in affiliates                             |       | —             |       | —                      |       | 18,817                         |       | —           |       | 18,817           |       |
| Other assets                                          |       | 5,779              |       | 56                          |       | 1,580                          |       | —           |       | 7,415            |       |
| Investments in subsidiaries                           |       | 132,794            |       | 99,787                      |       | —                         |       | (232,581         | )          | —           |       |
| **Total assets**                                      |       | $                  | 315,782    |                        | $          | 166,596                        |       | $                | 250,446    |             | $          | (320,032 | ) | $ | 412,792 |   |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity**        |       |               |       |                        |       |                           |       |             |       |             |       |
| **Current liabilities:**                              |       |               |       |                        |       |                           |       |             |       |             |       |
| Revolving credit facility and other current debt      |       | $                  | 377        |                        | $          | —                         |       | $                | 24,193     |             | $          | — |   | $ | 24,570 |   |
| Current portion of capital lease obligations          |       | 450                |       | 119                         |       | 2,122                          |       | —           |       | 2,691            |       |
| Trade accounts payable                                |       | 27,792             |       | 31,514                      |       | 60,432                         |       | (87,442          | )          | 32,296           |       |
| Accrued expenses and other current liabilities        |       | 27,255             |       | 2,129                       |       | 55,002                         |       | (87              | )          | 84,299           |       |
| Total current liabilities                             |       | 55,874             |       | 33,762                      |       | 141,749                        |       | (87,529          | )          | 143,856          |       |
| **Long-term debt and other  liabilities:**            |       |               |       |                        |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion             |       | 100,203            |       | —                      |       | (203                           | )          | —           |       | 100,000          |       |
| Capital lease obligations, excluding current  portion |       | 354                |       | 40                          |       | 7,974                          |       | —           |       | 8,368            |       |
| Deferred compensation                                 |       | 1,236              |       | —                      |       | —                         |       | —           |       | 1,236            |       |
| Deferred income taxes                                 |       | —             |       | —                      |       | 1,139                          |       | —           |       | 1,139            |       |
| Total liabilities                                     |       | 157,667            |       | 33,802                      |       | 150,659                        |       | (87,529          | )          | 254,599          |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Minority interests**                                |       | 1,481              |       | —                      |       | 812                            |       | —           |       | 2,293            |       |
| ** **                                            |       |               |       |                        |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                         |       | 156,634            |       | 132,794                     |       | 98,975                         |       | (232,503         | )          | 155,900          |       |
| **Total liabilities and  stockholders’ equity**  |       | $                  | 315,782    |                        | $          | 166,596                        |       | $                | 250,446    |             | $          | (320,032 | ) | $ | 412,792 |   |

 

13

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| **At December 31, 2003**                         | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **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 |   |

 

14

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**ConsolidatingCondensed Statement of Cash Flows**

 
| **Six Months Ended June 30, 2004**               | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating  activities**         |       | $                  | 961        |                        | $          | 5,828                          |       | $                | 23,960     |             | $          | (10 | ) | $ | 30,739 |   |
| ** **                                            |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**            |       |               |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                   |       | (2,936             | )          | (139                        | )          | (7,471                         | )          | —           |       | (10,546          | )          |
| Investment in affiliates                              |       | —             |       | —                      |       | (820                           | )          | —           |       | (820             | )          |
| Receipts on note receivable                           |       | —             |       | —                      |       | 380                            |       | —           |       | 380              |       |
| Proceeds from the sale of property and equipment      |       | 8                  |       | —                      |       | —                         |       | —           |       | 8                |       |
| Net cash flows from investing activities              |       | (2,928             | )          | (139                        | )          | (7,911                         | )          | —           |       | (10,978          | )          |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**            |       |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |       | —             |       | —                      |       | 9,945                          |       | —           |       | 9,945            |       |
| Repayments of debt and capital lease obligations      |       | (2,145             | )          | —                      |       | (7,863                         | )          | —           |       | (10,008          | )          |
| Net borrowings and payments in intercompany  balances |       | 15,616             |       | (4,553                      | )          | (11,073                        | )          | 10               |       | —           |       |
| Treasury stock reissuances (repurchases), net         |       | 102                |       | —                      |       | —                         |       | —           |       | 102              |       |
| Net cash flows from financing activities              |       | 13,573             |       | (4,553                      | )          | (8,991                         | )          | 10               |       | 39               |       |
| Effect of exchange rates on cash                      |       | —             |       | —                      |       | (134                           | )          | —           |       | (134             | )          |
| **Net increase (decrease) in cash**                   |       | 11,606             |       | 1,136                       |       | 6,924                          |       | —           |       | 19,666           |       |
| **Cash and cash equivalents,  beginning of period**   |       | 12,010             |       | 3,090                       |       | 14,750                         |       | —           |       | 29,850           |       |
| **Cash and cash equivalents, end of  period**         |       | $                  | 23,616     |                        | $          | 4,226                          |       | $                | 21,674     |             | $          | — |   | $ | 49,516 |   |

 

15

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| **Six Months Ended June 30, 2003**               | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating  activities**         |       | $                  | 8,126      |                        | $          | 4,215                          |       | $                | (4,279     | )                | $          | — |   | $ | 8,062 |   |
| ** **                                            |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**            |       |               |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                   |       | (3,300             | )          | (409                        | )          | (10,415                        | )          | —           |       | (14,124          | )          |
| Investment in affiliates                              |       | (1,000             | )          | —                      |       | —                         |       | —           |       | (1,000           | )          |
| Receipts on note receivable                           |       | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Proceeds from the sale of property and equipment      |       | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Net cash flows from investing activities              |       | (4,300             | )          | (409                        | )          | (10,415                        | )          | —           |       | (15,124          | )          |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**            |       |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |       | 656                |       | —                      |       | 11,727                         |       | —           |       | 12,383           |       |
| Repayments of debt and capital lease obligations      |       | (6,647             | )          | —                      |       | (535                           | )          | —           |       | (7,182           | )          |
| Net borrowings and payments in intercompany  balances |       | 2,503              |       | (3,452                      | )          | 949                            |       | —           |       | —           |       |
| Treasury stock reissuances (repurchases), net         |       | (835               | )          | —                      |       | —                         |       | —           |       | (835             | )          |
| Net cash flows from financing activities              |       | (4,323             | )          | (3,452                      | )          | 12,141                         |       | —           |       | 4,366            |       |
| Effect of exchange rates on cash                      |       | (376               | )          | —                      |       | 427                            |       | —           |       | 51               |       |
| **Net increase (decrease) in cash**                   |       | (873               | )          | 354                         |       | (2,126                         | )          | —           |       | (2,645           | )          |
| **Cash and cash equivalents,  beginning of period**   |       | 16,615             |       | 2,855                       |       | 14,672                         |       | —           |       | 34,142           |       |
| **Cash and cash equivalents, end of  period**         |       | $                  | 15,742     |                        | $          | 3,209                          |       | $                | 12,546     |             | $          | — |   | $ | 31,497 |   |

 

16

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

 

##### **General**

##### ** **

References in this reportto “we” and “our” are to SITEL Corporation and its subsidiaries, collectively.

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of largecorporations in North America, Europe, Asia Pacific, and Latin America. Weprovide customer acquisition, customer care, technical support and riskmanagement services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and in-housecontact centers. 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 (Loss), which presents the results of our operations for the three-monthand six-month periods ended June 30, 2004 and 2003, and are summarized onthe following pages. We analyze and explain the differences between periods forthe components of net income (loss) in the following sections. Our analysis isimportant in making decisions about your investment in SITEL Corporation.

 

We have determined thatour previously reported revenue and net income for the three months ended March31, 2004, were overstated by $0.3 million and $0.2 million, respectively.  The overstatement was the result of intentionalimproper changes to operational data, which resulted in an incorrect calculationof performance bonus amounts on a single client program at an operating site inone of our business units.  The errordoes not affect previously reported basic and diluted earnings per share of$0.07.  The Company will restate thepreviously issued March 31, 2004 interim financial statements for thecorrection of the error.

 

##### **General Business Risks**,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, expansions, and losses ofclient contracts and with changes in the scope of client requirements. Our******top 20 clients accounted for66.9% and 73.0% of our revenue for the three-month periods ended June 30,2004 and 2003, respectively, and 66.9% and 71.0% for the six-month periodsended June 30, 2004 and 2003, respectively, and includemultiple independently managed business units of General Motors Corporation.These General Motors business units were responsible for 16.0% and 21.1%of our revenue for the three-month periods ended June 30, 2004 and 2003,respectively, and 16.7% and 21.3% for the six-month periods ended June 30,2004 and 2003, respectively.  On April 21, 2004, we announced the signing of a newcontract with General Motors to continue to provide customer support servicesfor General Motors’ North American Vehicle Sales, Service, and Marketing Groupthrough December 31, 2005. An existing agreement under which we supportedOnStar operations terminated effective June 22, 2004. In addition, Hewlett-Packard(HP) wasresponsible for 11.0% of our revenue for the three-month period endedJune 30, 2004, and 11.2% for the six-month period ended June 30,2004.  We did not have any other clientsunder common control that generated more than 10% of our revenue for theperiods presented.  The financialfailure of any of these clients or the loss of any or all of their businesscould have an adverse impact on our operating results.

 

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

 

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

 

17

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**CriticalAccounting Policies and Estimates**

The process of preparing financialstatements requires the use of estimates on the part of management. Theseestimates 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.

 

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

 

***Revenue Recognition***

We recognize revenue inaccordance with applicable accounting standards, including Securities andExchange Commission Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101)“Revenue Recognition in Financial Statements” and SAB 104, “RevenueRecognition”. We recognize revenue at the time services are performed based onan hourly, monthly, per call or per employee rate detailed in the clientcontract. A portion of our revenue is often subject to performance standards,such as sales per hour, average handle time, occupancy rate and abandonmentrate.  Our performance against such standards may result in incentives orpenalties, which are recognized as earned or incurred. In certain circumstances,we receive payment in advance of providing service. Accordingly, amounts billedbut not earned under these contracts are excluded from revenue and included indeferred revenue and other in the consolidated balance sheet. Revenue forservices performed under certain collection service agreements are recognizedas the related consumer debts are collected and are calculated based upon apercentage of cash collected or other agreed upon contractual parameters.

 

***Trade AccountsReceivable***

We report our trade accountsreceivable 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 having 

 

18

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goodwill is greater thantheir estimated fair value, we will be required to take additional goodwillimpairment charges. We are required to make certain assumptions and estimatesregarding the fair value of goodwill when assessing for impairment. Changes inthe fact patterns underlying such assumptions and estimates could ultimatelyresult in the recognition of additional impairment losses. Effective as ofOctober 1, 2003, we completed the annual evaluation of our goodwill anddetermined no impairment charge was required.

 

The operating results ofone of our reporting units is below expectations. Management will monitor theoperating performance of this reporting unit and will conduct a review of thecarrying value of goodwill during our annual evaluation at October 1,2004. The recorded goodwill for this reporting unit, as a result of prioracquisitions, is approximately $7.6 million. At this point in time, we areunable to predict what effect, if any, the outcome of this review will have onthe carrying value of our goodwill or on our financial position or results ofoperations.

 

***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 all available positive and negativeevidence needs to be considered, including our current and past performance,the market environment in which we operate, the utilization of past taxcredits, length of carryback and carryforward periods, and existing orprospective contracts that will result in future profits.

 

Forming a conclusion thata valuation allowance is not needed is difficult when there is negativeevidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign tax jurisdictions.We expect to continue to record a valuation allowance on future tax benefits incertain tax jurisdictions until an appropriate level of profitability issustained. Until an appropriate level of profitability is reached, we do notexpect to recognize any significant tax benefits in future results ofoperations. If future taxable income is lower than expected, we may record anadditional valuation allowance through income tax expense in the period suchdetermination is 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 theThree and Six Month Periods Ended June 30, 2004 Compared with the SamePeriods 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.

 

19

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**Componentsof Net Income**

 

The following table summarizesour income statement data on a percentage-of-revenue basis.

 
| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** **  |
|--------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|-------------|
| ** **                                                   | ** ** | **2004**                             | ** ** | **2003**                           | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **$**                                | ** ** | **%**                              | ** **  | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** **  |
| **Revenues**                                                 |       | $                                    | 240,055    | * *                           | ***100.0*** | **%** | $ | 204,566 | * * | ***100.0*** | **%** | $ | 484,123 | * * | ***100.0*** | **%** | $ | 398,661 | * * | ***100.0*** | ***%*** |
|                                                         |       |                                 |       | ** **                         | ** **  |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Direct labor and telecommunications expenses                 |       | 143,032                              | * *   | ***59.6***                         | **%**       | 121,664 | * * | ***59.5*** | **%** | 287,160 | * * | ***59.3*** | **%** | 232,435 | * * | ***58.3*** | ***%*** |
| Subcontracted and other services expenses                    |       | 13,022                               | * *   | ***5.4***                          | **%**       | 12,904 | * * | ***6.3*** | **%** | 25,837 |   | **5.3** | **%** | 26,554 | * * | ***6.7*** | ***%*** |
| Operating, selling and administrative expenses               |       | 76,922                               | * *   | ***32.0***                         | **%**       | 70,711 | * * | ***34.6*** | **%** | 153,762 | * * | ***31.8*** | **%** | 136,387 | * * | ***34.2*** | ***%*** |
| Asset impairment and restructuring expenses                  |       | —                               | * *   | ***0.0***                          | **%**       | — | * * | ***0.0*** | **%** | — | * * | ***0.0*** | **%** | 796 | * * | ***0.2*** | ***%*** |
| **Operating income (loss)**                                  |       | 7,079                                | * *   | ***2.9***                          | **%**       | (713 | *)* | ***-0.4*** | **%** | 17,364 | * * | ***3.6*** | **%** | 2,489 | * * | ***0.6*** | ***%*** |
|                                                         |       |                                 |       | ** **                         | ** **  |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Interest expense, net                                        |       | (2,978                               | *)*        | ***-1.2***                         | **%**       | (2,874 | *)* | ***-1.4*** | **%** | (6,090 | *)* | ***-1.3*** | **%** | (5,598 | *)* | ***-1.4*** | ***%*** |
| Equity in earnings of affiliates                             |       | 77                                   | * *   | ***0.0***                          | **%**       | 322 | * * | ***0.2*** | **%** | 70 | * * | ***0.0*** | **%** | 939 | * * | ***0.2*** | ***%*** |
| Other expense, net                                           |       | (118                                 | *)*        | ***0.0***                          | **%**       | 1,393 | * * | ***0.7*** | **%** | (392 | *)* | ***-0.1*** | **%** | 735 | * * | ***0.2*** | ***%*** |
| **Income (loss) before income taxes  and minority interest** |       | 4,060                                | * *   | ***1.7***                          | **%**       | (1,872 | *)* | ***-0.9*** | **%** | 10,952 | * * | ***2.3*** | **%** | (1,435 | *)* | ***-0.4*** | ***%*** |
|                                                         |       |                                 |       | ** **                         | ** **  |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Income tax expense                                           |       | 1,331                                | * *   | ***0.6***                          | **%**       | 1,269 | * * | ***0.6*** | **%** | 3,183 | * * | ***0.7*** | **%** | 1,439 | * * | ***0.4*** | ***%*** |
| Minority interest                                            |       | 210                                  | * *   | ***0.1***                          | **%**       | 102 | * * | ***0.1*** | **%** | 424 | * * | ***0.1*** | **%** | 308 | * * | ***0.1*** | ***%*** |
| **Net income (loss)**                                        |       | $                                    | 2,519      | * *                           | ***1.0***   | **%** | $ | (3,243 | *)* | ***-1.6*** | **%** | $ | 7,345 | * * | ***1.5*** | **%** | $ | (3,182 | *)* | ***-0.8*** | ***%*** |

# * *

# ***Three Months Ended June 30,2004 Compared to the Same Period of 2003***

# * *

***Revenue***

Revenue increased $35.5million, or 17.3%, in the three months ended June 30, 2004 compared to thesame period of 2003. The changes in revenue by geographic region are shown inthe following table:

 
| **Three  Months  Ended June 30,** | ** ** | **2004**          | ** ** | **2003** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|----------------------------------------|------------|-------------------|------------|----------|------------|---------------|------------|---------------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| North  America                         | ** ** | **$**             | **123.7**  |     | $          | 112.2         |       | $             | 11.6       |   | 10.3 | % |
| Europe                                 | ** ** | **99.4**          |       | 81.6     |       | 17.8          |       | 21.8          | %          |
| Asia  Pacific                          | ** ** | **9.8**           |       | 7.5      |       | 2.3           |       | 30.2          | %          |
| Latin  America                         | ** ** | **7.2**           |       | 3.3      |       | 3.9           |       | 116.6         | %          |
| Totals                                 | ** ** | **$**             | **240.1**  |     | $          | 204.6         |       | $             | 35.5       |   | 17.3 | % |

 

North American revenueincreased for the three months ended June 30, 2004 compared to the sameperiod in 2003 primarily due to an increase of $15.0 million in customer care,technical support and risk management services offset by a $3.4 milliondecrease in customer acquisition business as a result of a decline in outboundcustomer acquisition programs. The weakening of the U.S. dollar versus theCanadian dollar accounted for $0.4 million of the increase.

 

European revenueincreased $17.8 million for the three months ended June 30, 2004 comparedto the same period in 2003.  Higher salesvolumes from new and existing clients resulted in an increase in revenue of$11.4 million for the three months ended June 30, 2004 compared to thesame period in 2003.  The weakening ofthe U.S. dollar versus the British pound and Euro accounted for the remaining$6.4 million of the increase.

 

Asia Pacific revenueincreased $2.3 million for the three months ended June 30, 2004 comparedto the same period in 2003.  Higher salesvolumes with existing clients resulted in an increase in revenue of $1.4million, while the weakening of the U.S. dollar versus the New Zealand andAustralian dollars resulted in the remaining $0.9 million of the increase.

 

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The increase in LatinAmerican revenue was primarily due to the change in how we report ourinvestment in our Panama affiliate. Effective October 1, 2003, we completed the previously announcedrestructuring in the governance of our Latin America joint venture whichhandles services in Panama and other Latin American countries and offshoreservices in Mexico and Central America. 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 this change, our Latin Americarevenue includes the revenue associated with our Panama affiliate resulting ina $3.5 million increase in revenue for the three months ended June 30,2004 compared to the same period in 2003. The strengthening of the US dollar accounted for a $0.1 million decreasein revenue for the three months ended June 30, 2004 compared to the sameperiod in 2003.  Excluding the impact ofthe change in accounting and the impact of changes in foreign currency, LatinAmerican revenue increased $0.6 million for the three months endedJune 30, 2004 compared to the same period in 2003 as a result of highersales 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.

 

During the three monthsended June 30, 2004, we recorded a benefit from the refund of $1.3 millionof payroll tax overpayments paid in a prior year as a reduction of direct laborand telecommunications expenses. Excluding the impact of the payroll taxrefund, direct labor and telecommunications expenses as a percentage of revenueincreased to 60.1% for the three months ended June 30, 2004 compared to59.5% in same period in 2003. The increase was primarily the result of higherdirect labor costs, particularly in Europe, and a change in the mix of servicesprovided in the three months ended June 30, 2004 compared to the sameperiod in 2003.

 

***Subcontractedand Other Services Expenses***

Subcontractedand other services expenses included services provided to clients throughsubcontractors and other out-of-pocket expenses.  Subcontracted and other services expensesremained consistent for the three months ended June 30, 2004 compared tothe same period of 2003.

 

Subcontracted expensesfor services provided by our India joint venture for the three months endedJune 30, 2004 and 2003 were $3.1 million and $2.9 million, respectively.

 

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

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

 

Operating, selling andadministrative expenses increased $6.2 million, or 8.8%, for the three monthsended June 30, 2004 compared to the same period of 2003.  The weakening of the US dollar compared tothe primary currency in the jurisdictions that we operate accounted for anincrease of $2.7 million in operating, selling and administrative expenses forthe three months ended June 30, 2004 compared to the same period in2003.  As a result of the change inaccounting for our Panama affiliate as previously discussed, operating, sellingand administrative expenses increased $1.0 million for the three months endedJune 30, 2004 compared to the same period in 2003.  As a percentage of revenue, operating,selling and administrative expenses decreased to 32.0% for the three monthsended June 30, 2004 compared to 34.6% in the same period of 2003.  The decrease is primarily the result ofhigher sales volumes while maintaining the existing cost structure.

 

***Operating Income(Loss)***

Operating incomeincreased $7.8 million for the three months ended June 30, 2004 comparedto the same period of 2003 due to the factors discussed above.

 

***InterestExpense, Net***

Interest expense, net ofinterest income, remained consistent for the three months ended June 30,2004 compared to the same period in 2003.

 

21

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***Equity inEarnings of Affiliates***

Equity in earnings ofaffiliates decreased $0.2 million for the three months ended June 30, 2004compared to the same period in 2003 primarily due to higher costs related tothe transition of clients served by one of our joint ventures.

 

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

Other income (expense),net decreased $1.5 million for the three months ended June 30, 2004compared to the same period in 2003 primarily as a result of fluctuations inforeign currency remeasurement gains (losses) arising from monetary assets andliabilities denominated in currencies other than a business unit’s functionalcurrency.

 

***Income TaxExpense***

For the three monthsended June 30, 2004, income tax expense as a percentage of income beforeincome taxes and minority interest was 32.8%. The difference between this rate and the statutory U.S. Federal rate of35% was primarily due to the utilization of net operating loss carryforwards incertain subsidiaries for which a full valuation allowance had previously beenprovided against the net deferred tax asset.

 

The effective tax ratefor the three months ended June 30, 2003 was significantly more than theU.S. statutory rate which was primarily the result of not reflecting anysignificant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

**SixMonths Ended June 30, 2004 Compared to the Same Period of 2003**

 

***Revenue***

Revenue increased $85.5million, or 21.4%, for the six months ended June 30, 2004 compared to thesame period of 2003. The changes in revenue by geographic region are shown inthe following table:

 
| **Six  Months  Ended June 30,** | ** ** | **2004**          | ** ** | **2003** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------------|------------|-------------------|------------|----------|------------|---------------|------------|---------------|------------|
| ** **                           | ** ** | **(in millions)** | ** ** |
| North  America                       | ** ** | **$**             | **252.9**  |     | $          | 226.5         |       | $             | 26.4       |   | 11.6 | % |
| Europe                               | ** ** | **197.9**         |       | 151.5    |       | 46.4          |       | 30.6          | %          |
| Asia  Pacific                        | ** ** | **19.5**          |       | 15.0     |       | 4.5           |       | 29.8          | %          |
| Latin  America                       | ** ** | **13.8**          |       | 5.6      |       | 8.2           |       | 147.1         | %          |
| Totals                               | ** ** | **$**             | **484.1**  |     | $          | 398.7         |       | $             | 85.5       |   | 21.4 | % |

 

North American revenueincreased for the six months ended June 30, 2004 compared to the sameperiod in 2003 primarily due to a $32.4 million increase in customer care,technical support and risk management services offset by a $6.1 milliondecrease in customer acquisition business as a result of a decline in outboundcustomer acquisition programs.  Theweakening of the U.S. dollar versus the Canadian dollar accounted for $2.8million of the increase.

 

European revenueincreased $46.4 million for the six months ended June 30, 2004 compared tothe same period in 2003.  Higher salesvolumes from new and existing clients resulted in an increase in revenue of$26.5 million for the six months ended June 30, 2004 compared to the sameperiod in 2003.  The weakening of theU.S. dollar versus the British pound and Euro accounted for the remaining $19.9million of the increase.

 

Asia Pacific revenueincreased $4.5 million for the six months ended June 30, 2004 compared tothe same period in 2003.  Higher salesvolume with existing clients resulted in an increase in revenue of $1.7million, while the weakening of the U.S. dollar versus the New Zealand andAustralian dollars resulted in the remaining $2.8 million of the increase.

 

The increase in LatinAmerican revenue was primarily due to the change in how we report ourinvestment in our Panama affiliate. Effective October 1, 2003, we completed the previously announcedrestructuring in the governance of our Latin America joint venture which handlesservices in Panama and other Latin American countries and offshore services inMexico and Central America.  As a resultof this revision in governance, we reported our investment in our Panamaaffiliate using the consolidation method rather than the equity method ofaccounting effective October 1, 2003. As a result of this change, our Latin America revenue includes therevenue associated with our Panama affiliate resulting in a $6.6 millionincrease in revenue for six months ended June 30, 2004 compared to thesame period in 2003.  The weakening ofthe US dollar accounted for $0.5 million of the increase for the six monthsended June 30, 2004 compared to the same period in 2003.  Excluding the impact of

 

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the change in accountingand the impact of changes in foreign currency, Latin American revenue increased$1.1 million for the six months ended June 30, 2004 compared to the sameperiod in 2003 as a result of higher sales volume.

 

***Direct Labor andTelecommunications Expenses***

During the six monthsended June 30, 2004, we recorded a benefit from the refund of $1.3 millionof payroll tax overpayments paid in a prior year as a reduction of direct laborand telecommunications expenses. Excluding the impact of the payroll taxrefund, direct labor and telecommunications expenses as a percentage of revenueincreased to 59.6% in the six months ended June 30, 2004 compared to 58.3%in same period in 2003. The increase was primarily the result of higher directlabor costs, particularly in Europe, and a change in the mix of servicesprovided in the six months ended June 30, 2004 compared to the same periodin 2003.

 

***Subcontractedand Other Services Expenses***

Subcontracted and otherservices expenses included in services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expenses decreased $0.7 million, or2.7%, for the six months ended June 30, 2004 compared to the same periodin 2003.  The decrease was primarily theresult of lower subcontracted IT costs to support client programs.

 

Subcontracted expensesfor services provided by our India joint venture for the six months endedJune 30, 2004 and 2003 were $6.5 million and $6.3 million, respectively.

 

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

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

 

Operating, selling andadministrative expenses increased $17.4 million, or 12.7%, for the six monthsended June 30, 2004 compared to the same period in 2003.  The weakening of the U.S. dollar compared tothe primary jurisdictions that we operate in accounted for an increase of $8.3million for the six months ended June 30, 2004 compared with the sameperiod in 2003.  As a result of thechange in accounting for our Panama affiliate as previously discussed, operating,selling and administrative expenses increased $1.8 million for the six monthsended June 30, 2004 compared to the same period in 2003.  As a percentage of revenue, operating,selling and administrative expenses decreased to 31.8% for the six months endedJune 30, 2004 compared to 34.2% for the same period of 2003.  The decrease is primarily the result ofhigher sales volumes while maintaining the existing cost structure.

 

***Asset Impairmentand Restructuring Expenses***

During the six monthsended June 30, 2003, in connection with the closure of a contact center,we recorded asset impairment and restructuring expenses of $0.8 million, whichconsisted of the write-off of abandoned leasehold improvements of $0.4 millionand $0.4 million of scheduled payments of operating leases for which we willreceive no future economic benefits.

 

***Operating Income***

Operatingincome increased $14.9 million for the six months ended June 30, 2004 dueto the factors discussed above.

 

***InterestExpense, Net***

Interest expense, net ofinterest income, increased $0.5 million, or 8.8%, for the six months endedJune 30, 2004 compared to the same period in 2003 primarily as a result ofhigher average short-term borrowings to finance our growth in Europe.

 

***Equity inEarnings of Affiliates***

Equityin earnings of affiliates decreased by $0.9 million for the six months endedJune 30, 2004 as compared to the same period in 2003 primarily due tohigher costs related to the transition of clients served by one of our jointventures.

 

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

Other income (expense),net decreased $1.1 million for the six months ended June 30, 2004 comparedto the same period in 2003.  The decreasewas primarily as a result of fluctuations in foreign currency remeasurement gains(losses) arising from monetary assets and liabilities denominated in currenciesother than a business unit’s functional currency offset by an impairment chargeof $0.5 million to reduce our basis in an investment to fair value.

 

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***Income Tax Expense***

For the six months endedJune 30, 2004, income tax expense as a percentage of income before incometaxes and minority interest was 29.1%. The difference between this rate and the statutory U.S. Federal rate of 35%was primarily due to the utilization of net operating loss carryforwards incertain subsidiaries for which a full valuation allowance had previously beenprovided against the net deferred tax asset.

 

The effective tax ratefor the same period of 2003 was significantly more than the U.S. statutory ratewhich was primarily the result of not reflecting any significant tax benefitsfor the current net operating losses in certain federal, state and foreign taxjurisdictions.

 

**FinancialCondition and Liquidity**

 

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

 

# ***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.

 
| **Six  Months Ended June 30,** | ** ** | **2004**          | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|-------------------|------------|------------|------------|
| ** **                          | ** ** | **(in millions)** | ** ** |
| **Net cash provided by (used in):** |       |              |       |       |       |
| Operating  activities               | ** ** | **$**             | **30.7**   | ** ** | $          | 8.1 |   |
| Investing  activities               | ** ** | **(11.0**         | **)**      | (15.1      | )          |
| Financing  activities               | ** ** | **—**        | ** ** | 4.4        |       |
|                                     |            |                   |            |            |            |  |  |

 

**2004**

In the six months endedJune 30, 2004, cash provided by operating activities resulted primarilyfrom income before depreciation and amortization, and other charges of $25.0million and $4.8 million of increases in trade accounts payable and otherliabilities, a $1.5 million decrease in other assets offset by increases intrade accounts receivable of $0.5 million.

 

In the six months endedJune 30, 2004, we used cash for investing activities to purchase $10.5million of property and equipment and used $0.8 million to increase investmentsin affiliates, offset partially by receipts on notes receivable of $0.4million.

 

In the six months endedJune 30, 2004, cash used in financing activities resulted in netrepayments of debt and other obligations of $0.1 million offset by cashreceipts from the reissuances of treasury stock.

 

**2003**

In the six months endedJune 30, 2003, cash provided by operating activities resulted primarilyfrom income before asset impairment and restructuring expenses, depreciationand amortization, and other charges of $15.5 million and $8.6 million ofincreases in trade accounts payable and other liabilities offset by increasesin trade accounts receivable and other assets of $16.1 million.

 

In the six months endedJune 30, 2003, we used cash for investing activities to purchase $14.1million of property and equipment and used $1.0 million to increase investmentsin affiliates.

 

In the six months endedJune 30, 2003, cash provided by financing activities resulted from $5.2million of additional borrowings, net of repayments. In addition, we used cashto purchase a total of $0.8 million of common stock under our existing stock repurchaseprogram.

 

**CapitalResources**

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

 

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We have a three-year $50million revolving credit facility that expires in December 2005.  The credit facility is secured by accountsreceivable in the United States, Canada and the United Kingdom.  We intend to utilize the facility, as needed,for ongoing working capital requirements and general corporate purposes. AtJune 30, 2004, we had $40.4 million of available borrowings under thecredit facility, and we were in compliance with all financial covenants of thefacility.

 

We expect to finance ourcurrent operations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash andavailable funds under our credit facility in addition to lease financing forproperty and equipment. We expect capital expenditures in the third 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 contact centers in Canada and Philippines. Future acquisitions, if any, mayrequire additional debt or equity 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 June 30, 2004,

•                                          $24.6million of revolving credit facility and other local short-term debt as shown inour consolidated condensed balance 

sheetat June 30, 2004,

•                                          $11.1million of capital lease obligations as shown in our consolidated condensedbalance sheet at June 30, 2004, and

•                                          operatinglease obligations for property and certain equipment under noncancelableoperating lease arrangements, which 

expireat various dates through 2016.

 

**Other Matters**

 

***QuarterlyResults and Seasonality***

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

 

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

•                  thecommencement of new contracts and the discontinuance and termination ofexisting contracts,

•                  revenuemix,

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

•                  thetiming of recognition of incentive fees.

 

We experience periodicfluctuations in our results of operations related to both the start-up costsassociated with expansion and the implementation of clients’ CRM activities. Inaddition, our business generally can 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 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 financial statements.

 

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**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 statementsare presented in U.S. dollars and can be impacted by foreign exchangefluctuations through both (i) translation risk, which is the risk that thefinancial statements for a particular period or as of a certain date depend on theprevailing exchange rates of the various currencies against the U.S. dollar,and (ii) transaction risk, which is the risk that the functional currencyof costs and liabilities fluctuates in relation to the currency of our revenueand assets, which fluctuation may adversely 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.Remeasurement gains and losses related to transactions denominated in acurrency other than the functional currency of the countries in which we operate,including short-term intercompany accounts, are included in the determinationof net income.

 

***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 and six-month periods ended June 30, 2004, our averageborrowings under our revolving credit facility were $9.2 and $8.4 million, respectively.  Based on our projected cash needs for theforeseeable future, we do not expect that our exposure to changes in interestrates for these borrowings will have a material impact on our interest expense.

 

**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 this Quarterly Report on Form 10-Q. Based on this evaluation,our Chief Executive Officer and our Chief Financial Officer have concluded thatour disclosure controls and procedures are not effective to ensure thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

Duringthe quarter, we identified a deficiency within our internal control framework.We have determined that our previously reported revenue and net income for thethree months ended March 31, 2004, were overstated by $0.3 million and $0.2million, respectively.  The overstatementwas the result of intentional improper changes to operational data, whichresulted in an incorrect calculation of performance bonus amounts on a singleclient program at an operating site in one of our business units.  The error does not affect previously reportedbasic and diluted earnings per share of $0.07. The Company will restate the previously issued March 31, 2004 interimfinancial statements for the correction of the error.  Because the error resulted in the restatementof revenue and earnings for the three months ended March 31, 2004, we havedetermined the deficiency to be a material weakness. We have implementedcorrective action to detect and monitor changes in operations data through asecondary review. There were no other changes in our internal controls overfinancial reporting that occurred during the period covered by this QuarterlyReport on Form 10-Q that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II****– OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we areinvolved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, that the resolution of such matters will nothave a material adverse effect on our consolidated financial position orresults of operations.

 

One of our clients hasreceived letters from time to time containing an offer to license andsuggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clienthas indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain 

 

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may not be sufficient tocover all of the costs of investigating and resolving such matter. We mightalso seek a license under the patents. Any such license may not be availableunder commercially reasonable terms. Any license costs would increase the costof doing 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.

 

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

 

(a)          **Date andType of Meeting**

TheCompany held its Annual Meeting of Stockholders on April 30, 2004.

 

(b)         **MattersVoted Upon and Number of Votes Cast**

Therewere 68,674,228 shares of Common Stock represented at the meeting in person orby proxy. One proposal was presented to the stockholders for the election ofthree directors for three-year terms. The voting on the proposals was as follows:

 

1.               Election of three directors for a three-yearterm:

 
| ** **         | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
| Mathias  J. DeVito |       | 63,018,573 |       | 5,655,654    |       |
| David  J. Hanger   |       | 63,187,193 |       | 5,487,035    |       |
| James  F. Lynch    |       | 62,983,272 |       | 5,690,956    |       |

 

**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:

 
| **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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(b)         Reports on Form 8-K:

 

The Company filed aCurrent Report on Form 8-K dated April 29, 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:    August 9,  2004 |   | By     | /s/                           | *Jorge  A. Celaya* |   |
|                                              |   |   | **Jorge  A. Celaya**          |               |
|                                              |   |   | *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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