**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 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 Other Jurisdiction of Incorporation or Organization)

 

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

 

| **(402)  963-6810**                                              |
|------------------------------------------------------------------|
| (Registrant’s  Telephone Number, Including Area Code)       |
|                                                             |   |   |
| **SECURITIES  REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:** |

 

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

 

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

Not Applicable

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 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 bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act).

YES   ý   NO   o

 

**COMMON STOCK, $.001 PAR VALUE – 74,433,629 SHARES OUTSTANDING AS OFOCTOBER 29, 2004**

 

 

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**SITEL CORPORATION AND SUBSIDIARIES**

 

**TABLE OF CONTENTS**

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

 

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**PART I****- FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

 

**SITELCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSEDSTATEMENTS OF INCOME (LOSS)**

**(UNAUDITED)**

(in thousands, except per sharedata)

 
| ** **                                                   | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| * *                                                     | * *   | * *                               | * *   | * *                              | * *   | * * | * * | * * | * * |
| **Revenue**                                                  |       | $                                      | 229,454    |                                  | $          | 208,755 |   | $ | 713,577 |   | $ | 607,415 |   |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Operating expenses:**                                      |       |                                   |       |                                  |       |   |   |   |   |
| Direct labor and telecommunications  expenses                |       | 138,230                                |       | 124,899                               |       | 425,390 |   | 357,335 |   |
| Subcontracted and other services expenses                    |       | 12,401                                 |       | 13,799                                |       | 38,238 |   | 40,352 |   |
| Operating, selling and administrative  expenses              |       | 77,785                                 |       | 70,453                                |       | 231,547 |   | 206,840 |   |
| Asset impairment and restructuring expenses                  |       | —                                 |       | —                                |       | — |   | 796 |   |
| Total operating expenses                                     |       | 228,416                                |       | 209,151                               |       | 695,175 |   | 605,323 |   |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Operating income (loss)**                                  |       | 1,038                                  |       | (396                                  | )          | 18,402 |   | 2,092 |   |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Other income (expense):**                                  |       |                                   |       |                                  |       |   |   |   |   |
| Interest expense                                             |       | (3,055                                 | )          | (3,110                                | )          | (9,387 | ) | (8,943 | ) |
| Interest income                                              |       | 152                                    |       | 117                                   |       | 394 |   | 352 |   |
| Equity in earnings of affiliates                             |       | 298                                    |       | 518                                   |       | 368 |   | 1,458 |   |
| Other income (expense), net                                  |       | (70                                    | )          | (317                                  | )          | (462 | ) | 418 |   |
| Total other expense, net                                     |       | (2,675                                 | )          | (2,792                                | )          | (9,087 | ) | (6,715 | ) |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Income (loss) before income taxes and  minority interest** |       | (1,637                                 | )          | (3,188                                | )          | 9,315 |   | (4,623 | ) |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| Income tax expense                                           |       | 67                                     |       | 651                                   |       | 3,250 |   | 2,090 |   |
| Minority interest                                            |       | 32                                     |       | 107                                   |       | 456 |   | 415 |   |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Net income (loss)**                                        |       | $                                      | (1,736     | )                                     | $          | (3,946 | ) | $ | 5,609 |   | $ | (7,128 | ) |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Weighted average common shares outstanding:**              |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                                        |       | 73,710                                 |       | 73,584                                |       | 73,671 |   | 73,969 |   |
| Diluted                                                      |       | 73,710                                 |       | 73,584                                |       | 74,089 |   | 73,969 |   |
|                                                         |       |                                   |       |                                  |       |   |   |   |   |
| **Earnings per share:**                                      |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                                        |       | $                                      | (0.02      | )                                     | $          | (0.05 | ) | $ | 0.08 |   | $ | (0.10 | ) |
| Diluted                                                      |       | $                                      | (0.02      | )                                     | $          | (0.05 | ) | $ | 0.08 |   | $ | (0.10 | ) |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

### **1**

### ****

 

**SITEL CORPORATION ANDSUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except share data)

 
| ** **                                                                                                                                   | ** ** | **September  30,  2004** | ** ** | **December  31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
| **Assets**                                                                                                                                   |       |                     |       |                    |       |
| **Current assets:**                                                                                                                          |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                    |       | $                        | 42,116     |                    | $          | 29,850 |   |
| Trade accounts receivable (net of allowance  for doubtful accounts of $2,377 and $3,088, respectively)                                       |       | 175,895                  |       | 175,542                 |       |
| Prepaid expenses                                                                                                                             |       | 8,839                    |       | 10,072                  |       |
| Deferred income taxes                                                                                                                        |       | 3,322                    |       | 2,367                   |       |
| Other assets                                                                                                                                 |       | 7,005                    |       | 7,364                   |       |
| Total current assets                                                                                                                         |       | 237,177                  |       | 225,195                 |       |
|                                                                                                                                         |       |                     |       |                    |       |
| **Property and equipment, net**                                                                                                              |       | 83,497                   |       | 90,233                  |       |
|                                                                                                                                         |       |                     |       |                    |       |
| **Other assets:**                                                                                                                            |       |                     |       |                    |       |
| Goodwill                                                                                                                                     |       | 54,297                   |       | 53,553                  |       |
| Deferred income taxes                                                                                                                        |       | 7,885                    |       | 8,724                   |       |
| Investment in affiliates                                                                                                                     |       | 17,311                   |       | 18,911                  |       |
| Other assets                                                                                                                                 |       | 7,388                    |       | 8,139                   |       |
| **Total assets**                                                                                                                             |       | $                        | 407,555    |                    | $          | 404,755 |   |
|                                                                                                                                         |       |                     |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                |       |                     |       |                    |       |
| **Current liabilities:**                                                                                                                     |       |                     |       |                    |       |
| Revolving credit facility and other current  debt                                                                                            |       | $                        | 21,750     |                    | $          | 22,894 |   |
| Current portion of capital lease  obligations                                                                                                |       | 2,287                    |       | 3,181                   |       |
| Trade accounts payable                                                                                                                       |       | 23,189                   |       | 30,582                  |       |
| Income taxes payable                                                                                                                         |       | 14                       |       | 628                     |       |
| Accrued wages, salaries and bonuses                                                                                                          |       | 47,197                   |       | 38,817                  |       |
| Accrued operating expenses                                                                                                                   |       | 33,620                   |       | 37,823                  |       |
| Deferred revenue and other                                                                                                                   |       | 8,297                    |       | 6,884                   |       |
| Total current liabilities                                                                                                                    |       | 136,354                  |       | 140,809                 |       |
|                                                                                                                                         |       |                     |       |                    |       |
| **Long-term debt and other liabilities:**                                                                                                    |       |                     |       |                    |       |
| Long-term debt, excluding current portion                                                                                                    |       | 100,000                  |       | 100,000                 |       |
| Capital lease obligations, excluding  current portion                                                                                        |       | 8,575                    |       | 8,684                   |       |
| Deferred compensation and other                                                                                                              |       | 1,980                    |       | 1,389                   |       |
| Deferred income taxes                                                                                                                        |       | 898                      |       | 1,055                   |       |
| Total liabilities                                                                                                                            |       | 247,807                  |       | 251,937                 |       |
|                                                                                                                                         |       |                     |       |                    |       |
| **Minority interests**                                                                                                                       |       | 2,450                    |       | 1,869                   |       |
| **Stockholders’ equity:**                                                                                                               |       |                     |       |                    |       |
| Common stock, voting, $.001 par value  200,000,000 shares authorized, 74,433,629 and 74,368,135 shares issued and  outstanding, respectively |       | 74                       |       | 74                      |       |
| Additional paid-in capital                                                                                                                   |       | 168,860                  |       | 168,726                 |       |
| Accumulated other comprehensive income                                                                                                       |       | 830                      |       | 329                     |       |
| Accumulated deficit                                                                                                                          |       | (11,418                  | )          | (17,044                 | )          |
| Less treasury stock, at cost, 723,845 and  755,300 common shares, respectively                                                               |       | (1,048                   | )          | (1,136                  | )          |
| Total stockholders’ equity                                                                                                              |       | 157,298                  |       | 150,949                 |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $                        | 407,555    |                    | $          | 404,755 |   |
|                                                                                                                                              |            |                          |            |                         |            |  |  |  |  |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

2

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOW****S**

**(UNAUDITED)**

(in thousands)

 
| ** **                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| * *                                                                                 | * *   | * *                             | * *   | * * | * * |
| **Cash flows from operating activities:**                                                |       |                                 |       |   |   |
| Net income (loss)                                                                        |       | $                                    | 5,609      |   | $ | (7,128 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows from operating activities: |       |                                 |       |   |   |
| Asset impairment and restructuring  provision                                            |       | —                               |       | 796 |   |
| Depreciation and amortization                                                            |       | 26,682                               |       | 27,702 |   |
| Loss on disposal of assets                                                               |       | 45                                   |       | 20 |   |
| Provision for deferred income taxes                                                      |       | (284                                 | )          | 1 |   |
| Equity in earnings of affiliates                                                         |       | (368                                 | )          | (1,458 | ) |
| Impairment of equity investments                                                         |       | —                               |       | 500 |   |
| Changes in operating assets and  liabilities:                                            |       |                                 |       |   |   |
| Trade accounts receivable                                                                |       | (2,426                               | )          | (27,474 | ) |
| Other assets                                                                             |       | 2,085                                |       | 197 |   |
| Trade accounts payable                                                                   |       | (7,394                               | )          | 1,414 |   |
| Other liabilities                                                                        |       | 6,934                                |       | 11,853 |   |
| Net cash flows from operating activities                                                 |       | 30,883                               |       | 6,423 |   |
|                                                                                     |       |                                 |       |   |   |
| **Cash flows from investing activities:**                                                |       |                                 |       |   |   |
| Purchases of property and equipment                                                      |       | (17,104                              | )          | (19,057 | ) |
| Dividend received from affiliates                                                        |       | 1,747                                |       | 1,085 |   |
| Investment in affiliates                                                                 |       | (820                                 | )          | (1,000 | ) |
| Receipts on notes receivable                                                             |       | 510                                  |       | — |   |
| Proceeds from the sale of property and  equipment                                        |       | 9                                    |       | — |   |
| Net cash flows from investing activities                                                 |       | (15,658                              | )          | (18,972 | ) |
|                                                                                     |       |                                 |       |   |   |
| **Cash flows from financing activities:**                                                |       |                                 |       |   |   |
| Borrowings on debt                                                                       |       | 19,158                               |       | 16,197 |   |
| Repayments of debt                                                                       |       | (20,573                              | )          | (6,614 | ) |
| Repayments of capital lease obligations                                                  |       | (2,297                               | )          | (1,887 | ) |
| Proceeds from stock options exercised, net  of tax                                       |       | 146                                  |       | — |   |
| Treasury stock reissuances (repurchases),  net                                           |       | 89                                   |       | (1,120 | ) |
| Other                                                                                    |       | —                               |       | 59 |   |
| Net cash flows from financing activities                                                 |       | (3,477                               | )          | 6,635 |   |
| Effect of exchange rates on cash                                                         |       | 518                                  |       | (661 | ) |
| **Net increase (decrease) in cash**                                                      |       | 12,266                               |       | (6,575 | ) |
| **Cash and cash equivalents, beginning of  period**                                      |       | 29,850                               |       | 34,142 |   |
| **Cash and cash equivalents, end of period**                                             |       | $                                    | 42,116     |   | $ | 27,567 |   |
|                                                                                     |       |                                 |       |   |   |
| **Non-cash investing and financing  activities:**                                        |       |                                 |       |   |   |
| Capital lease obligations incurred                                                       |       | $                                    | 1,453      |   | $ | 983 |   |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

3

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

 

**Note 1. Basis ofConsolidation and Presentation**

 

***General***

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

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of large andmid-size corporations in North America, Europe, Asia Pacific, and LatinAmerica. We provide customer acquisition, customer care, technical support andrisk management services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and internalcontact centers. We serve clients primarily in the automotive, consumer products, financialservices, insurance, telecommunications, Internet service provider, cable,technology and utilities sectors.

 

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

 

***Use of Accounting Estimates***

Management makes estimates andassumptions when preparing financial statements under accounting principlesgenerally accepted in the United States of America that affect our reportedamounts of assets and liabilities at the dates of the financial statements, ourdisclosure of contingent assets and liabilities at the dates of the financialstatements, and our reported amounts of revenue and expenses during thereporting periods. These estimates involve judgments with respect to, amongother things, future economic factors that are difficult to predict and arebeyond management’s control. As a result, actual amounts could differ fromthese estimates.

 

***Recently Issued Accounting Pronouncements***

In January 2003, the FASB released Interpretation No. 46, “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46),which requires that all primary beneficiaries of Variable Interest Entities(VIE) consolidate that entity. FIN 46 is effective immediately for VIE’screated after January 31, 2003 and to VIE’s in which an enterprise obtains aninterest after that date. It applies in the first fiscal year or interim periodbeginning after June 15, 2003 to VIE’s in which an enterprise holds a variableinterest it acquired before February 1, 2003. In December 2003, the FASBpublished a revision to FIN 46 (FIN 46R) to clarify some of the provisions ofthe interpretation and to defer the effective date of implementation forcertain entities. The remaining provisions of FIN 46R were effective January 1,2004.  The adoption of FIN 46R had noimpact on our consolidated condensed financial statements.

 

***Stock-Based Compensation***

We apply theintrinsic-value-based method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB No. 25)*,*and related interpretations to account for our fixed-plan stock options. Underthis method, compensation expense is recorded on the date of grant only if thecurrent market price of the underlying stock exceeded the exercise price.Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation”(SFAS No. 123)*,*established accounting and disclosure requirements using a fair-value-basedmethod of accounting for stock-based employee compensation plans.

 

4

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The followingtable illustrates the effect on our net income (loss) if the fair-value-basedmethod had been applied to all outstanding and unvested awards in each period.

 
| ** **                                                                                                               | ** ** | **Three Months Ended  September 30,**        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2004**                                     | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income (loss):                                                                                                       | ** ** | ** **                                   | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| As reported                                                                                                              |       | $                                            | (1,736     | )                                    | $          | (3,946 | ) | $ | 5,609 |   | $ | (7,128 | ) |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (249                                         | )          | (267                                 | )          | (747 | ) | (975 | ) |
| Pro forma                                                                                                                |       | $                                            | (1,985     | )                                    | $          | (4,213 | ) | $ | 4,862 |   | $ | (8,103 | ) |
|                                                                                                                     |       |                                         |       |                                 |       |   |   |   |   |
| Income (loss) per common share:                                                                                          |       |                                         |       |                                 |       |   |   |   |   |
| As reported:                                                                                                             |       |                                         |       |                                 |       |   |   |   |   |
| Basic                                                                                                                    |       | $                                            | (0.02      | )                                    | $          | (0.05 | ) | $ | 0.08 |   | $ | (0.10 | ) |
| Diluted                                                                                                                  |       | (0.02                                        | )          | (0.05                                | )          | 0.08 |   | (0.10 | ) |
| Pro forma:                                                                                                               |       |                                         |       |                                 |       |   |   |   |   |
| Basic                                                                                                                    |       | (0.03                                        | )          | (0.06                                | )          | 0.07 |   | (0.11 | ) |
| Diluted                                                                                                                  |       | (0.03                                        | )          | (0.06                                | )          | 0.07 |   | (0.11 | ) |

 

The fair value of options was estimated at the date of the grant usingthe Black-Scholes option-pricing model with an expected dividend yield of 0.0%,and the following weighted-average assumptions:

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| * *                 | * *   | * * | * *   | * * | * *   |
| Volatility factor        |       | 50.3     | %          | 64.5     | %          |
| Risk-free interest rate  |       | 3.6      | %          | 2.9      | %          |
| Expected life (in years) |       | 5        |       | 5        |       |

 

***Significant Clients***

Our******top 20clients accounted for 68.5% and 70.8% of our revenue for the three-monthperiods ended September 30, 2004 and 2003, respectively, and 67.2% and 69.6%for the nine-month periods ended September 30, 2004 and 2003,respectively.  Some of these top 20clients include multiple independently managed business unitswithin the clients’ affiliated group. General Motors Corporation business units were responsible for 13.9% and22.3% of our total revenue for the three-month periods ended September 30, 2004and 2003, respectively, and were responsible for 15.8% and 21.6% for thenine-month periods ended September 30, 2004, and 2003, respectively.  The primary General Motors Corporationcontract expires in December 2005, while a second contract terminated in June2004.  Hewlett-Packard Companybusiness units were responsible for 11.4% of our revenue for the three-month period endedSeptember 30, 2004, and 11.3% of our revenue for the nine-month period endedSeptember 30, 2004.  We did not have anyother clients under common control that generated more than 10% of our revenuefor the periods presented.

 

5

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**Note 2. ComprehensiveIncome (Loss)**

 

Comprehensive income (loss) forthe three and nine-month periods ended September 30, 2004 and 2003 are asfollows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)               |       | $                                     | (1,736     | )                                    | $          | (3,946 | ) | $ | 5,609 |   | $ | (7,128 | ) |
| Other comprehensive income:     |       |                                  |       |                                 |       |   |   |   |   |
| Currency translation adjustment |       | 3,063                                 |       | 472                                  |       | 501 |   | 7,556 |   |
| Comprehensive income (loss)     |       | $                                     | 1,327      |                                 | $          | (3,474 | ) | $ | 6,110 |   | $ | 428 |   |

 

Accumulated other comprehensive income included in ourconsolidated condensed balance sheets represents the accumulated foreigncurrency translation adjustment.

 

**Note 3. Asset Impairmentand Restructuring Expenses**

 

As a result of certain client contract negotiations that concludedduring the first quarter of 2003, we re-assessed our facilities requirementsand determined that a certain facility subject to an operating lease was nolonger needed. As a result, we recorded asset impairment and restructuringexpenses of $0.8 million during the three months ended March 31, 2003 relatedto the write-off of abandoned leasehold improvements of $0.4 million and $0.4million for scheduled payments of operating leases for which we will receive nofuture economic benefit. Our estimates are based upon many factors includingprojections of sublease rates and the time period required to locate tenants.The facility was abandoned prior to March 31, 2003.

 

The additional remaining asset impairment and restructuring accrualsrelate to previous restructurings in conjunction with our plan designed tointensify our focus on core competencies, accelerate revenue growth, andimprove profitability, which was announced in June 2001.

 

We summarize the components of the accrued restructuring expensesrecorded in our consolidated condensed balance sheet in the following table:

 
| ** **                    | ** ** | **Balance  December 31,  2003** | ** ** | **Expensed  in  2004** | ** ** | **Paid  in  2004** | ** ** | **Other** | ** ** | **Balance  September 30,  2004** | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------|------------|-----------|------------|----------------------------------|------------|
| ** **                    | ** ** | **(in millions)**               | ** ** |
|                          |       |                            |       |                   |       |               |       |      |       |                             |       |
| Severance                     |       | $                               | 0.1        |                   | $          | —             |       | $         | (0.1       | )                                | $          | — |   | $ | — |   |
| Facility closure or reduction |       | 6.5                             |       | —                 |       | (2.5               | )          | 0.1       |       | 4.1                              |       |
| Total                         |       | $                               | 6.6        |                   | $          | —             |       | $         | (2.6       | )                                | $          | 0.1 |   | $ | 4.1 |   |

 

Other changes in the accrued restructuring expenses represent theimpact of foreign currency fluctuations.

 

**Note 4. Investments inAffiliates**

 

We have made minority interest investments for business and strategicpurposes through the purchase of voting common and preferred stock ofcompanies.  We periodically evaluatewhether declines in fair value, if any, of our investments areother-than-temporary. This evaluation consists of a review of qualitative andquantitative factors. We also consider other factors to determine whetherdeclines in fair value are other-than-temporary, such as the investee’sfinancial condition, results of operations and operating trends. We alsoconsider the implied value from any recent rounds of financing completed by theinvestee. Based upon an evaluation of the facts and circumstances during thequarter ended March 31, 2003, we determined that an other-than-temporaryimpairment existed for one of our investments. Impairment charges of$0.5 million were recorded in other expense, net in the consolidatedcondensed statement of income (loss) to record this investment at fair value.

 

6

----

 

Subcontracted expenses for services provided by our India joint venturewere $3.0 million and $2.8 million for the three-month periods ended September30, 2004 and 2003, respectively, and $9.4 million and $9.5 million for thenine-month periods ended September 30, 2004 and 2003, respectively.  The Company had payables to our India jointventure of $1.8 million and $1.9 million at September 30, 2004 and December 31,2003, respectively, which are included in trade accounts payable in theaccompanying consolidated condensed balance sheets.

 

Subcontracted services provided by our Latin America joint venture forthe three-month and nine-month periods ended September 30, 2004 and 2003 werenot material.

 

**Note 5. Stock-Based Compensation**

 

The 1999 Stock Incentive Plan(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 with eachgrant, and option terms may not exceed ten years. Option prices, set by theCompensation Committee of the Board of Directors, may not be less than the fairmarket value at date of grant for incentive stock options or less than parvalue for nonqualified stock options. At September 30, 2004, there wereapproximately 5.6 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

 

Prior to the adoption of the1999 Plan, we granted options under several different plans. As of September30, 2004, options granted under these plans aggregating 2.8 million remainedoutstanding 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 forthshares subject to options:

 
| ** **                  | ** ** | **Number  of Options** | ** ** | **Weighted-Average  Exercise  Price per Share** | ** ** |
|-----------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
|                        |       |                   |       |                                            |       |
| Balance, January 1, 2004    |       | 7,750,390              |       | $                                               | 3.67       |   |
| Granted                     |       | 332,924                |       | 3.21                                            |       |
| Exercised                   |       | (65,494                | )          | 2.22                                            |       |
| Canceled                    |       | (580,103               | )          | 3.44                                            |       |
| Balance, September 30, 2004 |       | 7,437,717              |       | $                                               | 3.70       |   |

 

The options exercisable at the end of each period were:

 
| ** **         | ** ** | **Number** | ** ** | **Weighted-Average  Exercise  of Options  Price per Share** | ** ** |
|--------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** **                                                  | ** ** |
| December 31, 2003  |       | 3,175,457  |       | $                                                           | 4.61       |   |
| September 30, 2004 |       | 3,660,658  |       | $                                                           | 4.44       |   |

 

7

----

 

The following table summarizesstock options outstanding at September 30, 2004:

 
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | ** **                             | ** ** | ** **                             | ** ** |
| $1.24 to $1.75                |       | 787,584                 |       | 8.4                                    |       | $                                      | 1.55       |   |
| $1.76 to $4.00                |       | 4,857,954               |       | 5.8                                    |       | $                                      | 3.08       |   |
| $4.01 to $6.33                |       | 1,049,544               |       | 4.5                                    |       | $                                      | 4.82       |   |
| $6.34 to $7.22                |       | 481,425                 |       | 5.3                                    |       | $                                      | 6.69       |   |
| $7.23 to $12.66               |       | 201,210                 |       | 3.4                                    |       | $                                      | 9.77       |   |
| $12.67 to $20.00              |       | 60,000                  |       | 2.5                                    |       | $                                      | 17.35      |   |

 

The following table summarizes stock options exercisable at September30, 2004:

 
| **Range of  Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | ** **                             | ** ** |
| $1.24 to $1.75                |       | 206,832                 |       | $                                      | 1.54       |   |
| $1.76 to $4.00                |       | 1,860,923               |       | $                                      | 3.10       |   |
| $4.01 to $6.33                |       | 938,161                 |       | $                                      | 4.82       |   |
| $6.34 to $7.22                |       | 394,742                 |       | $                                      | 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 totime, we are involved in litigation incidental to our business. We cannotpredict the ultimate outcome of such litigation with certainty, but managementbelieves, after consultation with counsel, that the resolution of such matterswill not have a material adverse effect on our consolidated financial positionor results of operations.

 

One of ourclients has received letters from time to time containing an offer to licenseand suggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clienthas indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain may not be sufficient to cover all of the costs ofinvestigating and resolving such matter. We might also seek a license under thepatents. Any such license may not be available under commercially reasonableterms. Any license costs would increase the cost of doing business in thefuture and may or may not be fully reflected in our pricing. To our knowledge,no litigation has been initiated against our client or us concerning thismatter. At this stage, due to the inherent uncertainties, we are unable topredict whether this matter may have a material adverse effect on our businessor on our financial condition or results of operation.

 

**Note 7. Earnings Per Share**

 

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

 

The difference between the number of shares used to calculate basic anddiluted earnings per share represents the number of shares assumed to be issuedfrom the exercise of dilutive stock options under our stock option plans, lessshares assumed to be purchased with proceeds from the exercise of the stockoptions and the related tax benefits. At September 30, 2004, we had 6.6 millionoptions, which have been excluded from the diluted net income per sharecomputation because their exercise price

 

8

----

 

exceeds the fair marketvalue.  At September 30, 2003, all 7.7million options were excluded from the diluted net income per share computationdue to the net loss for the three and nine month periods.

 

**Note 8. Payroll TaxRefund**

 

During the quarter ended June 30, 2004, we recorded a benefit from therefund of payroll tax overpayments paid in a prior year. We recorded thepayroll tax refund in the accompanying consolidated condensed statements ofincome (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 nine months ended September 30, 2004.

 

**Note 9. Supplemental Guarantor FinancialInformation**

 

Our 9.25% Senior SubordinatedNotes are guaranteed, on a full, unconditional and joint and several basis, bysubstantially all of our wholly owned domestic subsidiaries. Separate financialstatements for each of the guarantor subsidiaries are not presented becausethey would not be material to investors. However, on the following pages wehave presented the following statements of (a) SITEL Corporation, the parent,(b) the guarantor subsidiaries, (c) the nonguarantor subsidiaries, and (d)SITEL Corporation on a consolidated basis:

 

•                                          ConsolidatingCondensed Statements of Income (Loss) and Comprehensive Income (Loss) for thethree and nine-

month periodsended September 30, 2004 and 2003,

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

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

 

9

----

 

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

 
| **Three Months Ended September 30, 2004**                    | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                         |       | **(in thousands)** |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                  |       | $                  | 83,391     |                        | $          | 9,972                          |       | $                | 137,967    |             | $          | (1,876 | ) | $ | 229,454 |   |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications  expenses                |       | 44,030             |       | 5,739                       |       | 88,461                         |       | —           |       | 138,230          |       |
| Subcontracted and other services expenses                    |       | 10,019             |       | 1,034                       |       | 3,206                          |       | (1,858           | )          | 12,401           |       |
| Operating, selling and administrative  expenses              |       | 24,643             |       | 2,571                       |       | 50,627                         |       | (56              | )          | 77,785           |       |
| Total operating expenses                                     |       | 78,692             |       | 9,344                       |       | 142,294                        |       | (1,914           | )          | 228,416          |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                  |       | 4,699              |       | 628                         |       | (4,327                         | )          | 38               |       | 1,038            |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                             |       | (2,565             | )          | (1                          | )          | (489                           | )          | —           |       | (3,055           | )          |
| Interest income                                              |       | 73                 |       | —                      |       | 79                             |       | —           |       | 152              |       |
| Equity in earnings (losses) of affiliates                    |       | (4,091             | )          | (4,804                      | )          | 298                            |       | 8,895            |       | 298              |       |
| Other income (expense), net                                  |       | (150               | )          | 57                          |       | 61                             |       | (38              | )          | (70              | )          |
| Total other income (expense), net                            |       | (6,733             | )          | (4,748                      | )          | (51                            | )          | 8,857            |       | (2,675           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and minority  interest** |       | (2,034             | )          | (4,120                      | )          | (4,378                         | )          | 8,895            |       | (1,637           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                           |       | (141               | )          | (29                         | )          | 237                            |       | —           |       | 67               |       |
| Minority interest                                            |       | (157               | )          | —                      |       | 189                            |       | —           |       | 32               |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                        |       | $                  | (1,736     | )                           | $          | (4,091                         | )          | $                | (4,804     | )                | $          | 8,895 |   | $ | (1,736 | ) |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                              |       | 3,063              |       | 28                          |       | 2,997                          |       | (3,025           | )          | 3,063            |       |
| **Comprehensive income (loss)**                              |       | $                  | 1,327      |                        | $          | (4,063                         | )          | $                | (1,807     | )                | $          | 5,870 |   | $ | 1,327 |   |

 

10

----

 
| **Three Months Ended September  30, 2003**                   | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| ** **                                                   | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Revenue**                                                  |       | $                  | 94,386     |                        | $          | 9,392                          |       | $                | 106,418    |             | $          | (1,441 | ) | $ | 208,755 |   |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications  expenses                |       | 53,218             |       | 5,283                       |       | 66,398                         |       | —           |       | 124,899          |       |
| Subcontracted and other services expenses                    |       | 12,391             |       | 831                         |       | 1,851                          |       | (1,274           | )          | 13,799           |       |
| Operating, selling and administrative  expenses              |       | 27,891             |       | 2,733                       |       | 39,996                         |       | (167             | )          | 70,453           |       |
| Total operating expenses                                     |       | 93,500             |       | 8,847                       |       | 108,245                        |       | (1,441           | )          | 209,151          |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                  |       | 886                |       | 545                         |       | (1,827                         | )          | —           |       | (396             | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                             |       | (2,634             | )          | (3                          | )          | (473                           | )          | —           |       | (3,110           | )          |
| Interest income                                              |       | 46                 |       | —                      |       | 71                             |       | —           |       | 117              |       |
| Equity in earnings (losses) of affiliates                    |       | (3,009             | )          | (3,771                      | )          | 518                            |       | 6,780            |       | 518              |       |
| Other income (expense), net                                  |       | 765                |       | 220                         |       | (1,302                         | )          | —           |       | (317             | )          |
| Total other income (expense), net                            |       | (4,832             | )          | (3,554                      | )          | (1,186                         | )          | 6,780            |       | (2,792           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and  minority interest** |       | (3,946             | )          | (3,009                      | )          | (3,013                         | )          | 6,780            |       | (3,188           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                           |       | —             |       | —                      |       | 651                            |       | —           |       | 651              |       |
| Minority interest                                            |       | —             |       | —                      |       | 107                            |       | —           |       | 107              |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                        |       | $                  | (3,946     | )                           | $          | (3,009                         | )          | $                | (3,771     | )                | $          | 6,780 |   | $ | (3,946 | ) |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                              |       | 472                |       | 6                           |       | 684                            |       | (690             | )          | 472              |       |
| **Comprehensive income (loss)**                              |       | $                  | (3,474     | )                           | $          | (3,003                         | )          | $                | (3,087     | )                | $          | 6,090 |   | $ | (3,474 | ) |

 

11

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| **Nine Months Ended September 30,  2004**                    | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   |
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                  |       | $                  | 264,053    |                        | $          | 34,801                         |       | $                | 416,599    |             | $          | (1,876 | ) | $ | 713,577 |   |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications  expenses                |       | 143,598            |       | 18,916                      |       | 262,876                        |       | —           |       | 425,390          |       |
| Subcontracted and other services expenses                    |       | 31,526             |       | 2,829                       |       | 5,741                          |       | (1,858           | )          | 38,238           |       |
| Operating, selling and administrative  expenses              |       | 77,265             |       | 8,631                       |       | 145,707                        |       | (56              | )          | 231,547          |       |
| Total operating expenses                                     |       | 252,389            |       | 30,376                      |       | 414,324                        |       | (1,914           | )          | 695,175          |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                  |       | 11,664             |       | 4,425                       |       | 2,275                          |       | 38               |       | 18,402           |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                             |       | (7,662             | )          | (4                          | )          | (1,721                         | )          | —           |       | (9,387           | )          |
| Interest income                                              |       | 171                |       | —                      |       | 223                            |       | —           |       | 394              |       |
| Equity in earnings (losses) of affiliates                    |       | (809               | )          | (5,321                      | )          | 368                            |       | 6,130            |       | 368              |       |
| Other income (expense), net                                  |       | 2,135              |       | 254                         |       | (2,813                         | )          | (38              | )          | (462             | )          |
| Total other expense, net                                     |       | (6,165             | )          | (5,071                      | )          | (3,943                         | )          | 6,092            |       | (9,087           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and  minority interest** |       | 5,499              |       | (646                        | )          | (1,668                         | )          | 6,130            |       | 9,315            |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                           |       | (110               | )          | 163                         |       | 3,197                          |       | —           |       | 3,250            |       |
| Minority interest                                            |       | —             |       | —                      |       | 456                            |       | —           |       | 456              |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                        |       | $                  | 5,609      |                        | $          | (809                           | )          | $                | (5,321     | )                | $          | 6,130 |   | $ | 5,609 |   |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                              |       | 501                |       | (133                        | )          | 617                            |       | (484             | )          | 501              |       |
| **Comprehensive income (loss)**                              |       | $                  | 6,110      |                        | $          | (942                           | )          | $                | (4,704     | )                | $          | 5,646 |   | $ | 6,110 |   |

 

12

----

 
| **Nine Months Ended September 30,  2003**                    | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Revenue**                                                  |       | $                  | 270,355    |                        | $          | 30,833                         |       | $                | 310,642    |             | $          | (4,415 | ) | $ | 607,415 |   |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications  expenses                |       | 148,837            |       | 17,025                      |       | 191,473                        |       | —           |       | 357,335          |       |
| Subcontracted and other services expenses                    |       | 36,197             |       | 2,142                       |       | 4,558                          |       | (2,545           | )          | 40,352           |       |
| Operating, selling and administrative  expenses              |       | 85,985             |       | 8,383                       |       | 114,342                        |       | (1,870           | )          | 206,840          |       |
| Asset impairment and restructuring expenses                  |       | —             |       | —                      |       | 796                            |       | —           |       | 796              |       |
| Total operating expenses                                     |       | 271,019            |       | 27,550                      |       | 311,169                        |       | (4,415           | )          | 605,323          |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                  |       | (664               | )          | 3,283                       |       | (527                           | )          | —           |       | 2,092            |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                             |       | (7,822             | )          | (11                         | )          | (1,110                         | )          | —           |       | (8,943           | )          |
| Interest income                                              |       | 168                |       | —                      |       | 184                            |       | —           |       | 352              |       |
| Equity in earnings (losses) of affiliates                    |       | (910               | )          | (4,487                      | )          | 1,458                          |       | 5,397            |       | 1,458            |       |
| Other income (expense), net                                  |       | 2,100              |       | 305                         |       | (1,987                         | )          | —           |       | 418              |       |
| Total other income (expense), net                            |       | (6,464             | )          | (4,193                      | )          | (1,455                         | )          | 5,397            |       | (6,715           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes and  minority interest** |       | (7,128             | )          | (910                        | )          | (1,982                         | )          | 5,397            |       | (4,623           | )          |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                           |       | —             |       | —                      |       | 2,090                          |       | —           |       | 2,090            |       |
| Minority interest                                            |       | —             |       | —                      |       | 415                            |       | —           |       | 415              |       |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net income (loss)**                                        |       | $                  | (7,128     | )                           | $          | (910                           | )          | $                | (4,487     | )                | $          | 5,397 |   | $ | (7,128 | ) |
|                                                         |       |               |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                              |       | 7,556              |       | 124                         |       | 4,439                          |       | (4,563           | )          | 7,556            |       |
| **Comprehensive income (loss)**                              |       | $                  | 428        |                        | $          | (786                           | )          | $                | (48        | )                | $          | 834 |   | $ | 428 |   |

 

13

----

 

**Consolidating Condensed Balance Sheet**

 
| **At September 30, 2004**                             | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Assets**                                            |       |               |       |                        |       |                           |       |             |       |             |       |
| **Current assets:**                                   |       |               |       |                        |       |                           |       |             |       |             |       |
| Cash and cash equivalents                             |       | $                  | 19,447     |                        | $          | 3,982                          |       | $                | 18,687     |             | $          | — |   | $ | 42,116 |   |
| Trade accounts receivable, net                        |       | 93,868             |       | 60,287                      |       | 106,136                        |       | (84,396          | )          | 175,895          |       |
| Prepaid expenses and other current assets             |       | 6,812              |       | 28                          |       | 12,326                         |       | —           |       | 19,166           |       |
| Total current assets                                  |       | 120,127            |       | 64,297                      |       | 137,149                        |       | (84,396          | )          | 237,177          |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Property and equipment, net**                       |       | 18,651             |       | 2,033                       |       | 62,794                         |       | 19               |       | 83,497           |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Other assets:**                                     |       |               |       |                        |       |                           |       |             |       |             |       |
| Goodwill                                              |       | 19,577             |       | 14                          |       | 34,706                         |       | —           |       | 54,297           |       |
| Deferred income taxes                                 |       | 7,800              |       | —                      |       | 85                             |       | —           |       | 7,885            |       |
| Investments in affiliates                             |       | —             |       | —                      |       | 17,311                         |       | —           |       | 17,311           |       |
| Other assets                                          |       | 5,861              |       | 56                          |       | 1,471                          |       | —           |       | 7,388            |       |
| Investments in subsidiaries                           |       | 132,075            |       | 96,581                      |       | —                         |       | (228,656         | )          | —           |       |
| **Total assets**                                      |       | $                  | 304,091    |                        | $          | 162,981                        |       | $                | 253,516    |             | $          | (313,033 | ) | $ | 407,555 |   |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**         |       |               |       |                        |       |                           |       |             |       |             |       |
| **Current liabilities:**                              |       |               |       |                        |       |                           |       |             |       |             |       |
| Revolving credit facility and other current  debt     |       | $                  | 402        |                        | $          | —                         |       | $                | 21,348     |             | $          | — |   | $ | 21,750 |   |
| Current portion of capital lease  obligations         |       | 360                |       | 120                         |       | 1,807                          |       | —           |       | 2,287            |       |
| Trade accounts payable                                |       | 13,700             |       | 28,281                      |       | 65,513                         |       | (84,305          | )          | 23,189           |       |
| Accrued expenses and other current  liabilities       |       | 27,655             |       | 2,495                       |       | 59,048                         |       | (70              | )          | 89,128           |       |
| Total current liabilities                             |       | 42,117             |       | 30,896                      |       | 147,716                        |       | (84,375          | )          | 136,354          |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Long-term debt and other liabilities:**             |       |               |       |                        |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion             |       | 100,000            |       | —                      |       | —                         |       | —           |       | 100,000          |       |
| Capital lease obligations, excluding current  portion |       | 454                |       | 10                          |       | 8,111                          |       | —           |       | 8,575            |       |
| Deferred compensation and other                       |       | 1,770              |       | —                      |       | 210                            |       | —           |       | 1,980            |       |
| Deferred income taxes                                 |       | —             |       | —                      |       | 898                            |       | —           |       | 898              |       |
| Total liabilities                                     |       | 144,341            |       | 30,906                      |       | 156,935                        |       | (84,375          | )          | 247,807          |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Minority interests**                                |       | 1,324              |       | —                      |       | 1,126                          |       | —           |       | 2,450            |       |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                         |       | 158,426            |       | 132,075                     |       | 95,455                         |       | (228,658         | )          | 157,298          |       |
| **Total liabilities and stockholders’ equity**   |       | $                  | 304,091    |                        | $          | 162,981                        |       | $                | 253,516    |             | $          | (313,033 | ) | $ | 407,555 |   |

 

14

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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, excluding current portion             |   | 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 |   |

 

15

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**Consolidating Condensed Statement of CashFlows**

 
| **Nine Months Ended September 30,  2004**             | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating activities**          |       | $                  | 2,768      |                        | $          | 9,588                          |       | $                | 18,619     |             | $          | (92 | ) | $ | 30,883 |   |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing activities:**             |       |               |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                   |       | (3,681             | )          | (139                        | )          | (13,284                        | )          | —           |       | (17,104          | )          |
| Dividend received from affiliates                     |       | —             |       | —                      |       | 1,747                          |       | —           |       | 1,747            |       |
| Investment in affiliates                              |       | —             |       | —                      |       | (820                           | )          | —           |       | (820             | )          |
| Receipts on note receivable                           |       | —             |       | —                      |       | 510                            |       | —           |       | 510              |       |
| Proceeds from the sale of property and  equipment     |       | 9                  |       | —                      |       | —                         |       | —           |       | 9                |       |
| Net cash flows from investing activities              |       | (3,672             | )          | (139                        | )          | (11,847                        | )          | —           |       | (15,658          | )          |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing activities:**             |       |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |       | —             |       | —                      |       | 19,158                         |       | —           |       | 19,158           |       |
| Repayments of debt and capital lease  obligations     |       | (2,491             | )          | —                      |       | (20,379                        | )          | —           |       | (22,870          | )          |
| Net borrowings and payments in intercompany  balances |       | 10,597             |       | (8,557                      | )          | (2,132                         | )          | 92               |       | —           |       |
| Proceeds from stock options exercised, net  of tax    |       | 146                |       | —                      |       | —                         |       | —           |       | 146              |       |
| Treasury stock reissuances (repurchases),  net        |       | 89                 |       | —                      |       | —                         |       | —           |       | 89               |       |
| Net cash flows from financing activities              |       | 8,341              |       | (8,557                      | )          | (3,353                         | )          | 92               |       | (3,477           | )          |
| Effect of exchange rates on cash                      |       | —             |       | —                      |       | 518                            |       | —           |       | 518              |       |
| **Net increase in cash**                              |       | 7,437              |       | 892                         |       | 3,937                          |       | —           |       | 12,266           |       |
| **Cash and cash equivalents, beginning of  period**   |       | 12,010             |       | 3,090                       |       | 14,750                         |       | —           |       | 29,850           |       |
| **Cash and cash equivalents, end of period**          |       | $                  | 19,447     |                        | $          | 3,982                          |       | $                | 18,687     |             | $          | — |   | $ | 42,116 |   |

 

16

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| **Nine Months Ended September 30,  2003**             | ** ** | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating activities**          |       | $                  | 13,313     |                        | $          | 4,131                          |       | $                | (11,021    | )                | $          | — |   | $ | 6,423 |   |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing activities:**             |       |               |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                   |       | (3,750             | )          | (671                        | )          | (14,636                        | )          | —           |       | (19,057          | )          |
| Investment in affiliates                              |       | (1,000             | )          | —                      |       | —                         |       | —           |       | (1,000           | )          |
| Dividends received from affiliates                    |       | —             |       | —                      |       | 1,085                          |       | —           |       | 1,085            |       |
| Net cash flows from investing activities              |       | (4,750             | )          | (671                        | )          | (13,551                        | )          | —           |       | (18,972          | )          |
|                                                  |       |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing activities:**             |       |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |       | 441                |       | —                      |       | 15,756                         |       | —           |       | 16,197           |       |
| Repayments of debt and capital lease  obligations     |       | (7,214             | )          | —                      |       | (1,287                         | )          | —           |       | (8,501           | )          |
| Net borrowings and payments in intercompany  balances |       | (682               | )          | (2,531                      | )          | 3,213                          |       | —           |       | —           |       |
| Treasury stock reissuances (repurchases),  net        |       | (1,120             | )          | —                      |       | —                         |       | —           |       | (1,120           | )          |
| Other                                                 |       | 59                 |       | —                      |       | —                         |       | —           |       | 59               |       |
| Net cash flows from financing activities              |       | (8,516             | )          | (2,531                      | )          | 17,682                         |       | —           |       | 6,635            |       |
| Effect of exchange rates on cash                      |       | (2,697             | )          | —                      |       | 2,036                          |       | —           |       | (661             | )          |
| **Net increase (decrease) in cash**                   |       | (2,650             | )          | 929                         |       | (4,854                         | )          | —           |       | (6,575           | )          |
| **Cash and cash equivalents, beginning of  period**   |       | 16,615             |       | 2,855                       |       | 14,672                         |       | —           |       | 34,142           |       |
| **Cash and cash equivalents, end of period**          |       | $                  | 13,965     |                        | $          | 3,784                          |       | $                | 9,818      |             | $          | — |   | $ | 27,567 |   |

 

**Note 10. Subsequent Event**

 

On October 26, 2004, the Company gave noticeto the holders of its 9.25% Senior Subordinated Notes (the Notes) due 2006 of a$10 million partial redemption effective December 1, 2004.  The Company will use cash to redeem thisportion of the Notes.  Repayment of the$10 million is the initial phase of a plan to refinance the entire $100 millionof the Notes.  The Notes are redeemableat a redemption price of 101.542% plus accrued and unpaid interest, if any, tothe date of redemption.

 

17

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**Item 2****. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

##### **General**

 

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

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of large andmid-size corporations in North America, Europe, Asia Pacific, and LatinAmerica. We provide customer acquisition, customer care, technical support andrisk management services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and in-housecontact centers. We serve clients primarily in the automotive, consumer products, financialservices, insurance, telecommunications, Internet service provider, cable,technology and utilities sectors.

 

In Management’s Discussion andAnalysis, we provide information about our general business risks, criticalaccounting policies and estimates, results of operations, financial conditionand liquidity, and certain other matters affecting our operating results forthe periods covered by this report.

 

As you read this discussion andanalysis, refer to our Consolidated Condensed Statements of Income (Loss),which present the results of our operations for the three-month and nine-monthperiods ended September 30, 2004 and 2003, and are summarized on the followingpages. We analyze and explain the differences between periods for thecomponents of net income (loss) in the following sections. Our analysis isimportant in making decisions about your investment in SITEL Corporation.

 

In the near term, we will be consideringcurrent capacity and the various business units’ performance.  Where excess capacity exists we will look toconsolidate facilities and close some remaining underutilized centers to driveoptimal profit center efficiency.  We willalso be accelerating our restructuring of several underperforming businessunits.

 

##### **GeneralBusiness Risks**, Critical AccountingPolicies and Estimates

 

**GeneralBusiness Risks**

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

 

Our results of operations andoperating cash flows may vary with periodic wins, expansions, and losses ofclient contracts and with changes in the scope of client requirements.  Our******top20 clients accounted for 68.5% and 70.8% of our revenue for the three-monthperiods ended September 30, 2004 and 2003, respectively, and 67.2% and 69.6%for the nine-month periods ended September 30, 2004 and 2003,respectively.  Some of these top 20clients include multiple business units within the clients’ affiliated group.  General Motors Corporation (General Motors)business units were responsible for 13.9% and 22.3% of our revenue forthe three-month periods ended September 30, 2004 and 2003, respectively, and15.8% and 21.6% for the nine-month periods ended September 30, 2004 and 2003,respectively. OnApril 21, 2004, we announced the signing of a new contract with General Motorsto continue to provide customer support services for General Motors’ NorthAmerican Vehicle Sales, Service, and Marketing Group through December 31,2005.  An existing agreement under whichwe supported OnStar operations terminated effective June 22, 2004. In addition, Hewlett-PackardCompany business units were responsible for 11.4% of our revenue for thethree-month period ended September 30, 2004, and 11.3% for the nine-monthperiod ended September 30, 2004.  We didnot have any other clients under common control that generated more than 10% ofour revenue for the periods presented.  Thefinancial failure of any of these clients or the loss of any or all of theirbusiness could have an adverse impact on our operating results.

 

Our liquidity, including ourability to comply with restrictive debt covenants, may be adversely affected ifwe were to lose a significant client or as a result of significant changes inclient demand if we are unable to efficiently re-deploy our human and capitalresources.

 

In the following sections, wealso discuss the importance of our critical accounting policies and the use ofaccounting estimates, and their potential impacts on our results of operations.

 

18

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**CriticalAccounting Policies and Estimates**

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

 

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

 

***Trade Accounts Receivable***

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 (loss),which would reduce our results of operations.

 

***Property and Equipment***

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which range from 3 to20 years. We amortize leasehold improvements and assets under capitalleases on a straight-line basis over the shorter of the lease term or theestimated useful life of the asset. If the actual useful lives of these assetsare less than the estimated depreciable lives, we would record additionaldepreciation expense or losses on disposal to the extent the net book value ofsuch asset is not recovered upon sale.

 

***Asset Impairment***

We evaluate long-lived assetsfor 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.

 

19

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***Goodwill***

At least annually or morefrequently, as changes in circumstances indicate, we will evaluate theestimated fair value of our goodwill. On these evaluation dates, to the extentthat the carrying value of the net assets of any of our reporting units havinggoodwill is greater than their estimated fair value, we will be required totake additional goodwill impairment charges. We are required to make certainassumptions and estimates regarding the fair value of goodwill when assessingfor impairment. Changes in the fact patterns underlying such assumptions andestimates could ultimately result in the recognition of additional impairmentlosses.   As of October 1, 2003, wecompleted the annual evaluation of our goodwill and determined no impairmentcharge was required.

 

The operating results of one of our reporting units iscurrently below expectations. Management will monitor the operating performanceof this reporting unit and will conduct a review of the carrying value ofgoodwill during our annual evaluation at October 1, 2004. The recorded goodwillfor this reporting unit, as a result of prior acquisitions, is approximately$7.6 million. At this point in time, we are unable to predict what effect, ifany, the outcome of this review will have on the carrying value of our goodwillor on our financial position or results of operations.

 

***Deferred Income Taxes***

We record deferred tax assetsand liabilities using enacted tax rates in the jurisdictions in which weoperate for the effect of temporary differences between the book and tax basisof assets and liabilities in accordance with Statement of Financial AccountingStandards, No. 109, “Accounting for Income Taxes”. If enacted tax rates change,we would adjust the deferred tax assets and liabilities, through the provisionfor income taxes in the period of change, to reflect the enacted tax rateexpected to be in effect when the deferred tax items reverse. To the extentthat we believe that recovery is not likely, we establish a valuation allowanceto reduce the deferred tax assets to the amount that is more likely than not tobe realized. The valuation allowance is based on our estimates of futuretaxable income by jurisdiction in which we operate and the period over whichthe deferred tax assets 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 or prospectivecontracts that will result in future profits.

 

Forming a conclusion that a valuationallowance is not needed is difficult when there is negative evidence such ascumulative losses in recent years in certain tax jurisdictions. Cumulativelosses weigh heavily in the overall assessment. We have established valuationallowances for future tax benefits related to net operating losses incurred incertain federal, state and foreign tax jurisdictions. We expect to continue torecord a valuation allowance on future tax benefits in certain taxjurisdictions until an appropriate level of profitability is sustained. Untilan appropriate level of profitability is reached, we do not expect to recognizeany significant tax benefits in future results of operations. Iffuture taxable income is lower than expected, we may record an additionalvaluation allowance through income tax expense in the period such determinationis made.

 

***Self-Insurance Reserves***

We are self-insured in NorthAmerica for health care claims for eligible participating employees, subject tocertain deductibles and limitations. The costs include an estimate of expectedsettlements on pending claims and a provision for claims incurred but notreported. These estimates are based on our assessment of potential liabilityusing an analysis of available information with respect to pending claims,historical experience, and current cost trends. Actual claims results coulddiffer from these estimates.

 

***Contingencies***

We consider the likelihood ofvarious loss contingencies, including tax and legal contingencies arising inthe ordinary course of business, and our ability to reasonably estimate theamount of loss in determining loss contingencies. An estimated loss contingencyis

accrued when it is probable thata liability has been incurred and the amount of loss can be reasonablyestimated. We regularly evaluate current information available to us todetermine whether such accruals should be adjusted.

 

##### **Resultsof Operations** for the Three andNine Month Periods Ended September 30, 2004 Compared with the Same Periods of2003

 

In this section, we discuss our operating results andthe factors affecting them. We describe our general business risks, criticalaccounting policies, and estimates that are important to our operating resultson the previous pages.  Please refer tothat discussion as you read this section.

 

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**Componentsof Net Income (Loss)**

 

The following table summarizes our statement of income(loss) data on a percentage-of-revenue basis.

 
| ** **                                                   | ** ** | **Three Months Ended September 30,** | ** **   | **Nine Months Ended September 30,** | ** **   |
|--------------------------------------------------------------|------------|--------------------------------------|--------------|-------------------------------------|--------------|
| ** **                                                   | ** ** | **2004**                             | ** **   | **2003**                            | ** **   | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **$**                                | ** **   | **%**                               | ** **   | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                   | ** ** | ** **                           | ** **   | **(in thousands)**                  | ** **   | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| **Revenues**                                                 |       | $                                    | 229,454      | *** ***                        | ***100.0***  | ***%*** | $ | 208,755 | *** *** | ***100.0*** | ***%*** | $ | 713,577 |   | ***100.0*** | ***%*** | $ | 607,415 |   | ***100.0*** | ***%*** |
|                                                         |       |                                 |         |                                | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Direct labor and telecommunications  expenses                |       | 138,230                              | *** *** | ***60.2***                          | ***%***      | 124,899 | *** *** | ***59.8*** | ***%*** | 425,390 |   | ***59.6*** | ***%*** | 357,335 |   | ***58.8*** | ***%*** |
| Subcontracted and other services expenses                    |       | 12,401                               | *** *** | ***5.4***                           | ***%***      | 13,799 | *** *** | ***6.6*** | ***%*** | 38,238 |   | ***5.4*** | ***%*** | 40,352 |   | ***6.6*** | ***%*** |
| Operating, selling and administrative  expenses              |       | 77,785                               | *** *** | ***33.9***                          | ***%***      | 70,453 | *** *** | ***33.8*** | ***%*** | 231,547 |   | ***32.4*** | ***%*** | 206,840 |   | ***34.1*** | ***%*** |
| Asset impairment and restructuring expenses                  |       | —                               | *** *** | ***0.0***                           | ***%***      | — |   | ***0.0*** | ***%*** | — |   | ***0.0*** | ***%*** | 796 |   | ***0.1*** | ***%*** |
| **Operating income (loss)**                                  |       | 1,038                                |         | ***0.5***                           | ***%***      | (396 | ) | ***-0.2*** | ***%*** | 18,402 |   | ***2.6*** | ***%*** | 2,092 |   | ***0.3*** | ***%*** |
|                                                         |       |                                 |         |                                | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Interest expense                                             |       | (3,055                               | )            | ***-1.3***                          | ***%***      | (3,110 | ) | ***-1.5*** | ***%*** | (9,387 | ) | ***-1.3*** | ***%*** | (8,943 | ) | ***-1.5*** | ***%*** |
| Interest income                                              |       | 152                                  |         | ***0.1***                           | ***%***      | 117 |   | ***0.1*** | ***%*** | 394 |   | ***0.1*** | ***%*** | 352 |   | ***0.1*** | ***%*** |
| Equity in earnings of affiliates                             |       | 298                                  |         | ***0.1***                           | ***%***      | 518 |   | ***0.3*** | ***%*** | 368 |   | ***0.1*** | ***%*** | 1,458 |   | ***0.2*** | ***%*** |
| Other income (expense), net                                  |       | (70                                  | )            | ***0.0***                           | ***%***      | (317 | ) | ***-0.2*** | ***%*** | (462 | ) | ***-0.1*** | ***%*** | 418 |   | ***0.1*** | ***%*** |
| **Income (loss) before income taxes and minority  interest** |       | (1,637                               | )            | ***-0.7***                          | ***%***      | (3,188 | ) | ***-1.5*** | ***%*** | 9,315 |   | ***1.3*** | ***%*** | (4,623 | ) | ***-0.8*** | ***%*** |
|                                                         |       |                                 |         |                                | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Income tax expense                                           |       | 67                                   |         | ***0.0***                           | ***%***      | 651 |   | ***0.3*** | ***%*** | 3,250 |   | ***0.5*** | ***%*** | 2,090 |   | ***0.3*** | ***%*** |
| Minority interest                                            |       | 32                                   |         | ***0.0***                           | ***%***      | 107 |   | ***0.1*** | ***%*** | 456 |   | ***0.1*** | ***%*** | 415 |   | ***0.1*** | ***%*** |
| **Net income (loss)**                                        |       | $                                    | (1,736       | )                                   | ***-0.8***   | ***%*** | $ | (3,946 | ) | ***-1.9*** | ***%*** | $ | 5,609 |   | ***0.8*** | ***%*** | $ | (7,128 | ) | ***-1.2*** | ***%*** |

 

# ***Three MonthsEnded September 30, 2004 Compared to the Same Period of 2003***

 

***Revenue***

Revenue increased $20.7million, or 9.9%, in the three months ended September 30, 2004 compared to thesame period of 2003. The changes in revenue by geographic region are shown inthe following table:

 
| **Three months ended  September 30,** | ** ** | **2004**          | ** ** | **2003**   | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **(in millions)** | ** ** | ** ** | ** ** |
| North America                         | ** ** | **$**             | **117.5**  |       | $          | 122.6         |       | $             | (5.1       | ) | -4.2 | % |
| Europe                                | ** ** | **93.0**          |       | 74.4       |       | 18.6          |       | 25.0          | %          |
| Asia Pacific                          | ** ** | **11.4**          |       | 8.4        |       | 3.0           |       | 36.1          | %          |
| Latin America                         | ** ** | **7.6**           |       | 3.4        |       | 4.2           |       | 121.9         | %          |
| Totals                                | ** ** | **$**             | **229.5**  |       | $          | 208.8         |       | $             | 20.7       |   | 9.9 | % |

 

North American revenuedecreased $5.1 million for the three months ended September 30, 2004 comparedto the same period in 2003.  An $11.5million decrease, primarily as a result of a decline in customer acquisitionprograms, was partially offset by a $6.5 million increase in customer care andtechnical support services.  Theweakening of the U.S. dollar versus the Canadian dollar accounted for $1.0million of the increase.

 

European revenue increased$18.6 million for the three months ended September 30, 2004 compared to thesame period in 2003.  Higher salesvolumes from new and existing clients resulted in $10.8 million of the increase.  The weakening of the U.S. dollar versus theBritish pound and Euro accounted for the remaining $7.8 million of theincrease.

 

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Asia Pacific revenue increased$3.0 million for the three months ended September 30, 2004 compared to the sameperiod in 2003.  Higher sales volumeswith existing clients resulted in $2.0 million of the increase.  The weakening of the U.S. dollar versus theNew Zealand and Australian dollars resulted in the remaining $1.0 million ofthe increase.

 

Latin American revenueincreased $4.2 million for the three months ended September 30, 2004 comparedto the same period in 2003.  Thisincrease was primarily due to the change in how we report our investment in ourPanama affiliate.  Effective October 1,2003, we completed the previously announced restructuring in the governance ofour Latin American joint venture which handles services in Panama and otherLatin American countries and offshore services in Mexico and CentralAmerica.  As a result of this revision ingovernance, we reported our investment in our Panama affiliate using theconsolidation method rather than the equity method of accounting effectiveOctober 1, 2003.  As a result of thischange, our Latin American revenue includes the revenue associated with our Panamaaffiliate.  Our Panama affiliate’srevenue resulted in $3.8 million of the increase.  Higher sales volume resulted in $0.5 millionof the increase.  These amounts werepartially offset by a $0.1 million decrease in revenue resulting from thestrengthening of the U.S. dollar versus the Brazilian real.

 

***Direct Labor and Telecommunications Expenses***

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

 

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

 

Direct labor andtelecommunications expenses as a percentage of revenue increased to 60.2% forthe three months ended September 30, 2004 compared to 59.8% in the same periodin 2003. The increase was primarily the result of higher direct labor costs,particularly in Europe, and a change in the mix of services we provided.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses included services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expenses decreased $1.4 million for thethree months ended September 30, 2004 compared to the same period of 2003.  The decrease was primarily the result oflower subcontracted IT costs to support client programs.

 

Subcontracted expenses forservices provided by our India joint venture for the three months endedSeptember 30, 2004 and 2003 were $3.0 million and $2.8 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 $7.3 million, or 10%, for the three monthsended September 30, 2004 compared to the same period of 2003.  The weakening of the U.S. dollar compared tothe primary currency in the jurisdictions that we operate accounted for $3.5million of the increase.   The change inaccounting for our Panama affiliate accounted for $1.1 million of theincrease.  The remainder of the increasein these expenses was associated with our revenue increase.  As a percentage of revenue, operating,selling and administrative expenses remained consistent for the three monthsended September 30, 2004 compared to the same period in 2003.

 

***Operating Income (Loss)***

Operating income improved by$1.4 million to operating income of $1.0 million for the three months endedSeptember 30, 2004 compared to a $0.4 million operating loss for the sameperiod in 2003 due to the factors discussed above.

 

***Interest Expense***

Interest expense remainedconsistent for the three months ended September 30, 2004 compared to the sameperiod in 2003.

 

***Interest Income***

Interest income remainedconsistent for the three months ended September 30, 2004 compared to the sameperiod in 2003.

 

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***Equity in Earnings of Affiliates***

Equity in earnings ofaffiliates decreased $0.2 million for the three months ended September 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), netdecreased $0.2 million for the three months ended September 30, 2004 compared tothe same period in 2003 primarily as a result of fluctuations in foreigncurrency remeasurement gains (losses) arising from monetary assets andliabilities denominated in currencies other than a business unit’s functionalcurrency.

 

***Income Tax Expense***

The effective tax rate for thethree months ended September 30, 2004 and 2003 was significantly more than theU.S. statutory rate of 35%, which was primarily the result of not reflectingany significant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

**Nine Months Ended September 30, 2004 Comparedto the Same Period of 2003**

 

***Revenue***

Revenue increased $106.2million, or 17.5%, for the nine months ended September 30, 2004 compared to thesame period of 2003. The changes in revenue by geographic region are shown inthe following table:

 
| **Nine months  ended September 30,** | ** ** | **2004**          | ** ** | **2003**   | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------|------------|---------------|------------|---------------|------------|
| ** **                           | ** ** | **(in millions)** | ** ** | ** ** | ** ** |
| North America                        | ** ** | **$**             | **370.4**  |       | $          | 349.1         |       | $             | 21.3       |   | 6.1 | % |
| Europe                               | ** ** | **290.9**         |       | 225.9      |       | 65.0          |       | 28.8          | %          |
| Asia Pacific                         | ** ** | **30.9**          |       | 23.4       |       | 7.5           |       | 32.1          | %          |
| Latin America                        | ** ** | **21.4**          |       | 9.0        |       | 12.4          |       | 137.5         | %          |
| Totals                               | ** ** | **$**             | **713.6**  |       | $          | 607.4         |       | $             | 106.2      |   | 17.5 | % |

 

North American revenueincreased $21.3 million for the nine months ended September 30, 2004 comparedto the same period in 2003 primarily due to a $41.4 million increase incustomer care, technical support and risk management services partially offsetby a $20.0 million decrease in customer acquisition programs.  The weakening of the U.S. dollar versus theCanadian dollar accounted for $3.7 million of the increase.

 

European revenue increased$65.0 million for the nine months ended September 30, 2004 compared to the sameperiod in 2003.  Higher sales volumesfrom new and existing clients resulted in $37.3 million of the increase.  The weakening of the U.S. dollar versus theBritish pound and Euro accounted for the remaining $27.7 million of theincrease.

 

Asia Pacific revenue increased$7.5 million for the nine months ended September 30, 2004 compared to the sameperiod in 2003.  Higher sales volume withexisting clients resulted in $3.7 million of the increase.   The weakening of the U.S. dollar versus theNew Zealand and Australian dollars resulted in the remaining $3.8 million ofthe increase.

 

Latin American revenue increased $12.4 million for the ninemonths ended September 30, 2004 compared to the same period in 2003.  This increase was primarily due to the changein how we report our investment in our Panama affiliate.  Effective October 1, 2003, we completed thepreviously announced restructuring in the governance of our Latin Americanjoint venture which handles services in Panama and other Latin Americancountries and offshore services in Mexico and Central America.  As a result of this revision in governance,we reported our investment in our Panama affiliate using the consolidationmethod rather than the equity method of accounting effective October 1,2003.  As a result of this change, ourLatin America revenue includes the revenue associated with our Panama affiliate.  Our Panama affiliate’s revenue resulted in$10.4 million of the increase.  Theweakening of the U.S. dollar accounted for $0.5 million of the increase.  Higher sales volume resulted in the remaining$1.5 million of the increase.

 

***Direct Labor and Telecommunications Expenses***

During the nine months endedSeptember 30, 2004, direct labor and telecommunications expenses as apercentage of revenue increased to 59.6% compared to 58.8% in same period in2003.  The increase was primarily the resultof higher direct labor costs, particularly in Europe, and a change in the mixof services we provided.  This increasewas partially offset by

 

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the impact of the recording ofa benefit from a refund of $1.3 million of payroll tax overpayments paid in aprior year as a reduction of direct labor and telecommunications expense.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses included services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expenses decreased $2.1 million, or5.2%, for the nine months ended September 30, 2004 compared to the same periodin 2003.  The decrease was primarily theresult of lower subcontracted IT costs to support client programs.

 

Subcontracted expenses forservices provided by our India joint venture for the nine months endedSeptember 30, 2004 and 2003 were $9.4 million and $9.5 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 $24.7 million, or 11.9%, for the nine monthsended September 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 $11.7 million of theincrease.  The change in accounting forour Panama affiliate resulted in $3.0 million of the increase.  The remainder of the increase in theseexpenses was associated with our revenue increase.  As a percentage of revenue, operating,selling and administrative expenses decreased to 32.4% for the nine monthsended September 30, 2004 compared to 34.1% for the same period of 2003.  The decrease is primarily the result ofhigher sales volumes while maintaining the existing cost structure.

 

***Asset Impairment and Restructuring Expenses***

During the nine months endedSeptember 30, 2003, in connection with the closure of a contact center, werecorded 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 $16.3 million for the nine months ended September 30, 2004compared to the same period in 2003 due to the factors discussed above.

 

***Interest Expense***

Interest expense increased $0.4million, or 5%, for the nine months ended September 30, 2004 compared to thesame period in 2003 primarily as a result of higher average short-termborrowings to finance our growth in Europe.

 

***Interest Income***

Interest income remainedconsistent for the nine months ended September 30, 2004 compared to the sameperiod in 2003.

 

***Equity in Earnings of Affiliates***

Equityin earnings of affiliates decreased by $1.1 million for the nine months endedSeptember 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), netdecreased $0.9 million to other expense of $0.5 million for the nine monthsended September 30, 2004 compared to other income of $0.4 million for the sameperiod in 2003.  The decrease wasprimarily 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.

 

***Income Tax Expense***

For the nine months endedSeptember 30, 2004, income tax expense as a percentage of income before incometaxes and minority interest was 35%, which is consistent with the statutoryU.S. Federal rate of 35%.The effective tax rate for the same period of 2003 wassignificantly more than the U.S. statutory rate which was primarily the resultof not reflecting any significant tax benefits for the current net operatinglosses in certain federal, state and foreign tax jurisdictions.

 

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**FinancialCondition and Liquidity**

 

In this section, we discuss our financial conditionand liquidity and the factors affecting them. We separately discuss cash flows,capital resources, and contractual obligations and commitments. We describe ourgeneral business risks, critical accounting policies, and estimates that areimportant to our financial condition and liquidity earlier in this report.Please refer to that discussion as you read this section.

 

# ***Cash Flows***

The following table sets forth summary cashflow data for the periods indicated. Please refer to this summary as you readour discussion of the sources and uses of cash in each year.

 
| **Nine Months Ended September 30,** | ** ** | **2004**          | ** ** | **2003** | ** ** |
|-------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                          | ** ** | **(in millions)** | ** ** |
| **Net cash provided by (used in):** |       |              |       |     |       |
| Operating activities                | ** ** | **$**             | **30.9**   |     | $          | 6.4 |   |
| Investing activities                | ** ** | **(15.7**         | **)**      | (19.0    | )          |
| Financing activities                | ** ** | **(3.5**          | **)**      | 6.6      |       |
|                                     |            |                   |            |          |            |  |  |

 

**2004**

In the nine months ended September 30, 2004, cashprovided by operating activities resulted primarily from $31.7 million inincome before depreciation and amortization, and other charges, a $2.1 milliondecrease in other assets and a $6.9 million increase in other liabilities,partially offset by a $2.4 million increase in trade accounts receivable and a$7.4 million decrease in trade accounts payable.

 

In the nine months endedSeptember 30, 2004, we used cash for investing activities to purchase $17.1million of property and equipment and used $0.8 million to increase investmentsin affiliates, offset partially by a dividend from an affiliate of $1.7 millionand receipts on notes receivable of $0.5 million.

 

In the ninemonths ended September 30, 2004, cash used in financing activities resulted innet repayments of debt and other obligations of $3.7 million partially offsetby $0.2 million of cash receipts from the proceeds on stock options exercised,net of tax.

 

**2003**

 In the ninemonths ended September 30, 2003, cash provided by operating activities resultedprimarily from income before asset impairment and restructuring expenses,depreciation and amortization, and other charges of $20.4 million and $13.3million of increases in trade accounts payable and other liabilities partiallyoffset by increases in trade accounts receivable and other assets of $27.3million.

 

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

 

In the ninemonths ended September 30, 2003, we used cash for financing activities to repay$1.9 million of capital lease obligations. In addition, we used cash topurchase a total of $1.1 million of common stock under our existing stockpurchase program. These payments were partially offset by additional borrowingsnet of repayments of $9.6 million.

 

**Capital Resources**

We havehistorically used funds generated from operations, leases of property andequipment, equity capital, senior subordinated notes, and borrowings undercredit facilities with banks to finance business acquisitions, capitalexpenditures and working capital requirements.

 

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. AtSeptember 30, 2004, we had $37.8 million of available borrowings under thecredit facility, and we were in compliance with all financial covenants of thefacility.

 

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We expect tofinance our current operations, planned capital expenditures, and internalgrowth for the foreseeable future using funds generated from operations,existing cash and available funds under our credit facility in addition tolease financing for property and equipment. We expect capital expenditures inthe fourth quarter of 2004 to be in the range of $8 million to $12 million, aswe continue to cover maintenance and technology upgrades, asset replacements,efficiency investments, and investment for continued growth including the buildout of our new contact centers in Canada and Philippines. Future acquisitions,if any, may require additional debt or equity financing.

 

Under a stock repurchaseprogram that was authorized by our Board of Directors in February 2001, we mayrepurchase up to $10 million of our shares from time to time in the open marketor in privately negotiated transactions, depending on general business andmarket conditions. Through the date of this report, we had repurchased a totalof 881,700 shares at a total cost of $1.5 million.

 

On October 26, 2004, the Company gave noticeto the holders of its 9.25% Senior Subordinated Notes (the Notes) due 2006 of a$10 million partial redemption of notes effective December 1, 2004.  The Company will use cash to redeem this portionof the Notes.  Repayment of the $10million of notes is the initial phase of a plan to refinance the entire $100million of the Notes. The Notes are redeemable at a redemption price of101.542% plus accrued and unpaid interest, if any, to the date of redemption.

 

# ***ContractualObligations and Commitments***

We summarize variouscontractual obligations and commitments in the Notes to our ConsolidatedFinancial Statements in our Report on Form 10-K for the year ended December 31,2003.  These contractual obligations andcommitments include:

 

•                                          $100million of long-term debt as shown in our consolidated condensed balance sheetat September 30, 2004,

•                                          $21.8million of revolving credit facility and other local short-term debt as shownin our consolidated condensed balance sheet at September 30, 2004,

•                                          $10.9million of capital lease obligations as shown in our consolidated condensedbalance sheet at September 30, 2004, and

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

 

**Other Matters**

 

***Quarterly Results andSeasonality***

We have experienced, and expectto continue to experience, quarterly variations in our results of operationsmostly 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 periodic fluctuations in our results of operationsrelated to both the start-up costs associated with expansion and theimplementation of clients’ CRM activities. In addition, our business generallycan be slower in the third quarter due to summer holidays in Europe.

 

***Effects of Inflation***

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

 

***Recently Issued Accounting Pronouncements***

In January 2003, the FASBreleased 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 after January 31,2003 and to VIE’s in which an enterprise obtains an interest after that date.It applies in the first fiscal year or interim period beginning after June 15,2003 to VIE’s in which an enterprise holds a variable interest it acquiredbefore February 1, 2003. In December 2003, the FASB published a revision to FIN46 (FIN 46R) to clarify some of the provisions of the interpretation and todefer the effective date of implementation for certain entities. The remainingprovisions of FIN 46R were effective January 1, 2004.  The adoption of FIN 46R did not have amaterial impact on our consolidated financial statements.

 

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**Item 3****. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

***Foreign Currency Risk***

We are exposed to market risks associated primarilywith changes in foreign currency exchange rates. We have operations in manyparts of the world; however, both revenue and expenses of those operations aretypically denominated in the currency of the country of operations, providing anatural hedge.

 

Our financial statements are presented in U.S. dollars andcan be impacted by foreign exchange fluctuations through both(i) translation risk, which is the risk that the financial statements fora particular period or as of a certain date depend on the prevailing exchangerates of the various currencies against the U.S. dollar, and(ii) transaction risk, which is the risk that the functional currency ofcosts and liabilities fluctuates in relation to the currency of our revenue andassets, which fluctuation may adversely affect operating margins.

 

With respect to translationrisk, even though the fluctuations of currencies against the U.S. dollar can besubstantial and therefore significantly impact comparisons with prior periods,the translation impact is recorded as a component of stockholders’ equity anddoes not affect the underlying results of operations. Remeasurement gains andlosses related to transactions denominated in a currency other than thefunctional currency of the countries in which we operate, including short-termintercompany accounts, are included in the determination of net income.

 

***Interest Rate Risk***

We are also exposed to changesin interest rates on our variable rate borrowings. Interest rates on our SeniorSubordinated Notes and capital lease obligations are fixed, but rates onborrowings under our bank credit facility are variable. During the three-monthand nine-month periods ended September 30, 2004, our average borrowings underour revolving credit facility were $11.2 million and $9.4 million,respectively.  Based on our projectedcash needs for the foreseeable future, we do not expect that our exposure tochanges in interest rates for these borrowings will have a material impact onour interest expense.

 

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

Our management evaluated, withthe 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 thisevaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

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

 

**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

One of our clients has receivedletters from time to time containing an offer to license and suggesting thatthe client might be infringing certain patents related to computerizedtelephonic voice response systems without the license. The client has indicatedthat if any infringement occurred the client would seek contractual indemnityfrom us. In such an event, we would expect to seek contractual indemnity fromcertain of our vendors. Any such contractual indemnity we might obtain may notbe sufficient to cover all of the costs of investigating and resolving suchmatter. We might also seek a license under the patents. Any such license maynot be available under commercially reasonable terms. Any license costs wouldincrease the cost of doing business in the future and may or may not be fullyreflected in our pricing. To our knowledge, no litigation has been initiatedagainst our client or us concerning this matter. At this stage, due to theinherent uncertainties, we are unable to predict whether this matter may have amaterial adverse effect on our business or on our financial condition orresults of operation.

 

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**Item 5. Other Informatio****n**

 

**Forward-Looking Statements**

We make statements in this report that are consideredforward-looking statements within the meaning of the Securities Exchange Act of1934. Sometimes these statements will contain words such as “believes,” “expects,”“intends,” “should,” “will,” “plans,” and other similar words. These statementsare not guarantees of our future performance and are subject to risks,uncertainties, and other important factors that could cause our actualperformance or achievements to be materially different from those we project.These risks, uncertainties, and factors include, but are not limited to:reliance on major clients, conditions affecting clients’ industries, clients’budgets and plans, effectiveness of cost control initiatives, effectiveness ofrevenue enhancement initiatives, unanticipated labor, contract or technicaldifficulties, delays in ramp up of services under contracts, reliance on majorsubcontractors and strategic partners, risks associated with managing a globalbusiness, fluctuations in operating results, reliance on telecommunications andcomputer technology, dependence on labor force, industry regulation, generaland local economic conditions, competitive pressures in our industry, foreigncurrency risks, the effects of leverage, dependency on credit availability,restrictions imposed by the terms of indebtedness, and dependence on keypersonnel and control by management.

 

Given these uncertainties, youshould not place undue reliance on these forward-looking statements. Please seethe other sections of this report and our other periodic reports filed with theSecurities and Exchange Commission for more information on these factors.

 

**Item6. Exhibits and Reports on Form 8-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 |
|       |                                                                                                                                                                                                         |   |
| (b)        | Reports on Form 8-K:                                                                                                                                                                                         |
|       |                                                                                                                                                                                                         |
|       | The Company filed a Current  Report on form 8-K dated July 29, 2004, which reported under Items 7 and 12  the issuance of a press release.  The  press release was filed as an exhibit to the Form 8-K. |

 

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### **SIGNATURE**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|       |             |   |   | SITEL Corporation            |
|------------|------------------|--------|--------|------------------------------|
| ** ** |             |   |   | **(Registrant)**             |
|       |             |   |   |                         |
|       |             |   |   |                         |
| Date:      | November 9, 2004 |   | By /s/ | *Jorge A. Celaya*            |
| ** ** | ** **       |   |   | **Jorge A. Celaya**          |
| * *   | * *         |   |   | *Chief Financial Officer*    |
|       |             |   |   | (Duly Authorized Officer and |
|       |             |   |   | Principal Financial Officer) |

 

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**EXHIBITINDEX**

 

| **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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