**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION********Washington, D.C. 20549**

 

**FORM 10-Q**

 

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**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)**

### **OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended **JUNE 30, 2005**

 

| Commission  |   | IRS Employer                                          |       |               |
|-------------|--------|-------------------------------------------------------|------------|--------------------|
| File Number |   | Exact name of registrant as  specified in its charter |       | 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)      |

 

 

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

 

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

 

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

Not Applicable

 

Indicateby check 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 by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Act).YES ý  NO o

 

**COMMON STOCK, $.001 PAR VALUE —73,765,518 SHARESOUTSTANDING AS OF JULY 29, 2005**

 

 

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**SITELCORPORATION AND SUBSIDIARIES**

 

**TABLEOF CONTENTS**
|                                  |                                                                                                      |   |   |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------|--------|--------|
| **PART I—Financial Information** |                                                                                                      |   |
|                                  |                                                                                                      |   |   |
|                                  | Item 1 — Financial Statements                                                                        |   | 1      |
|                                  |                                                                                                      |   |   |
|                                  | Consolidated  Condensed Statements of Operations                                                          |   | 1      |
|                                  | Consolidated  Condensed Balance Sheets                                                                    |   | 2      |
|                                  | Consolidated  Condensed Statements of Cash Flows                                                          |   | 3      |
|                                  | Notes  to Consolidated Condensed Financial Statements                                                     |   | 4      |
|                                  |                                                                                                      |   |   |
|                                  | Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 19     |
|                                  |                                                                                                      |   |   |
|                                  | General                                                                                                   |   | 19     |
|                                  | General  Business Risks, Critical Accounting Policies and Estimates                                       |   | 20     |
|                                  | Results of Operations                                                                                     |   | 22     |
|                                  | Financial  Condition and Liquidity                                                                        |   | 27     |
|                                  | Other Matters                                                                                             |   | 28     |
|                                  |                                                                                                      |   |   |
|                                  | Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                 |   | 29     |
|                                  |                                                                                                      |   |   |
|                                  | Item 4 — Controls and Procedures                                                                     |   | 30     |
|                                  |                                                                                                      |   |   |
| **PART II—Other  Information**   |                                                                                                      | 30     |
|                                  |                                                                                                      |   |   |
|                                  | Item 1 — Legal Proceedings                                                                           |   | 30     |
|                                  |                                                                                                      |   |   |
|                                  | Item 4 — Submission of Matters to a Vote of Security  Holders                                        |   | 31     |
|                                  |                                                                                                      |   |   |
|                                  | Item 5 — Other Information                                                                           |   | 31     |
|                                  |                                                                                                      |   |   |
|                                  | Item 6 — Exhibits and Reports on Form 8-K                                                            |   | 32     |
|                                  |                                                                                                      |   |   |
|                                  | Signature                                                                                                 |   | 33     |
|                                  |                                                                                                      |   |   |
|                                  | Exhibit  Index                                                                                            |   | 34     |
|                                  |                                                                                                      |   |   |
|                                       |                                                                                                           |        |        |  |

 

 

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**Item 1. Financial Statements**

 

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

(in thousands, except per share data)

** **
| ** **                                           | **Three  Months Ended  June 30 ,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** **                         | **2005**   | ** **                      | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| * *                                             | * *                           | * *   | * *                        | * *   | * * | * * | * * | * * | * * |
| **Revenue**                                          |                               | $          | 251,809                         |       | $ | 240,055 |   | $ | 502,978 |   | $ | 484,123 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Operating expenses:**                              |                               |       |                            |       |   |   |   |   |   |
| Direct labor and  telecommunications expenses        |                               | 153,636    |                            | 143,032    |   | 306,112 |   | 287,160 |   |
| Subcontracted  and other services expenses           |                               | 12,886     |                            | 13,022     |   | 25,774 |   | 25,837 |   |
| Operating,  selling and administrative expenses      |                               | 80,555     |                            | 76,922     |   | 160,558 |   | 153,762 |   |
| Asset impairment  and restructuring expenses, net    |                               | (2,609     | )                               | —     |   | (2,609 | ) | — |   |
| Total operating  expenses                            |                               | 244,468    |                            | 232,976    |   | 489,835 |   | 466,759 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Operating income**                                 |                               | 7,341      |                            | 7,079      |   | 13,143 |   | 17,364 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Other income (expense):**                          |                               |       |                            |       |   |   |   |   |   |
| Interest expense                                     |                               | (2,939     | )                               | (3,099     | ) | (5,796 | ) | (6,332 | ) |
| Interest income                                      |                               | 140        |                            | 121        |   | 260 |   | 242 |   |
| Equity in  earnings (loss) of affiliates             |                               | 395        |                            | 77         |   | 288 |   | 70 |   |
| Other income  (expense), net                         |                               | (21        | )                               | (118       | ) | (31 | ) | (392 | ) |
| Total other  expense, net                            |                               | (2,425     | )                               | (3,019     | ) | (5,279 | ) | (6,412 | ) |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Income before income taxes and minority interest** |                               | 4,916      |                            | 4,060      |   | 7,864 |   | 10,952 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| Income tax expense                                   |                               | 1,392      |                            | 1,331      |   | 2,531 |   | 3,183 |   |
| Minority interest                                    |                               | 307        |                            | 210        |   | 667 |   | 424 |   |
| **Net income**                                       |                               | $          | 3,217                           |       | $ | 2,519 |   | $ | 4,666 |   | $ | 7,345 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Weighted average common shares outstanding:**      |                               |       |                            |       |   |   |   |   |   |
| Basic                                                |                               | 73,764     |                            | 73,670     |   | 73,750 |   | 73,652 |   |
| Diluted                                              |                               | 73,843     |                            | 74,174     |   | 74,090 |   | 74,077 |   |
|                                                 |                               |       |                            |       |   |   |   |   |   |
| **Earnings per share:**                              |                               |       |                            |       |   |   |   |   |   |
| Basic                                                |                               | $          | 0.04                            |       | $ | 0.03 |   | $ | 0.06 |   | $ | 0.10 |   |
| Diluted                                              |                               | $          | 0.04                            |       | $ | 0.03 |   | $ | 0.06 |   | $ | 0.10 |   |
|                                                      |                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

*See Notes to Consolidated Condensed FinancialStatements.*

 

 

1

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### **SITEL CORPORATION AND SUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
| ** **                                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December  31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                                                                                                   |       | **(Unaudited)**    |       |                    |       |
| **Assets**                                                                                                                                   |       |               |       |                    |       |
| **Current  assets:**                                                                                                                         |       |               |       |                    |       |
| Cash and cash  equivalents                                                                                                                   |       | $                  | 29,463     |                    | $          | 28,906 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $1,978 and $2,391, respectively)                                       |       | 190,309            |       | 191,391                 |       |
| Prepaid expenses  and other assets                                                                                                           |       | 13,961             |       | 15,859                  |       |
| Deferred income  taxes                                                                                                                       |       | 2,226              |       | 1,313                   |       |
| Total current  assets                                                                                                                        |       | 235,959            |       | 237,469                 |       |
|                                                                                                                                         |       |               |       |                    |       |
| **Property  and equipment, net**                                                                                                             |       | 78,077             |       | 86,057                  |       |
|                                                                                                                                         |       |               |       |                    |       |
| **Other  assets:**                                                                                                                           |       |               |       |                    |       |
| Goodwill                                                                                                                                     |       | 46,311             |       | 48,276                  |       |
| Investment in  affiliates                                                                                                                    |       | 16,853             |       | 16,466                  |       |
| Other assets                                                                                                                                 |       | 6,744              |       | 8,420                   |       |
| Deferred income  taxes                                                                                                                       |       | 1,012              |       | 843                     |       |
| **Total  assets**                                                                                                                            |       | $                  | 384,956    |                    | $          | 397,531 |   |
|                                                                                                                                         |       |               |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                |       |               |       |                    |       |
| **Current  liabilities:**                                                                                                                    |       |               |       |                    |       |
| Senior  Subordinated Notes                                                                                                                   |       | $                  | 90,000     |                    | $          | — |   |
| Revolving credit  facility and other current debt                                                                                            |       | 27,010             |       | 18,802                  |       |
| Current portion  of capital lease obligations                                                                                                |       | 2,683              |       | 3,202                   |       |
| Trade accounts  payable                                                                                                                      |       | 25,653             |       | 32,595                  |       |
| Accrued wages,  salaries and bonuses                                                                                                         |       | 46,384             |       | 43,641                  |       |
| Accrued  operating expenses                                                                                                                  |       | 38,636             |       | 46,533                  |       |
| Deferred revenue  and other                                                                                                                  |       | 7,407              |       | 8,816                   |       |
| Income taxes  payable                                                                                                                        |       | 689                |       | 1,107                   |       |
| Total current  liabilities                                                                                                                   |       | 238,462            |       | 154,696                 |       |
| **Long-term  debt and other liabilities:**                                                                                                   |       |               |       |                    |       |
| Long-term debt,  excluding current portion                                                                                                   |       | —             |       | 90,000                  |       |
| Capital lease  obligations, excluding current portion                                                                                        |       | 6,966              |       | 8,393                   |       |
| Other  liabilities                                                                                                                           |       | 8,193              |       | 8,949                   |       |
| Deferred income  taxes                                                                                                                       |       | 141                |       | 205                     |       |
| Total  liabilities                                                                                                                           |       | 253,762            |       | 262,243                 |       |
|                                                                                                                                         |       |               |       |                    |       |
| **Minority  interests**                                                                                                                      |       | 2,846              |       | 2,629                   |       |
| **Stockholders’  equity:**                                                                                                              |       |               |       |                    |       |
| Common stock,  voting, $.001 par value 200,000,000 shares authorized, 74,440,929 and  74,433,629 shares issued and outstanding, respectively |       | 74                 |       | 74                      |       |
| Additional  paid-in capital                                                                                                                  |       | 168,871            |       | 168,871                 |       |
| Accumulated  other comprehensive income (loss)                                                                                               |       | (700               | )          | 8,342                   |       |
| Accumulated  deficit                                                                                                                         |       | (38,945            | )          | (43,611                 | )          |
| Less treasury  stock, at cost, 675,411 and 707,927 common shares, respectively                                                               |       | (952               | )          | (1,017                  | )          |
| Total  stockholders’ equity                                                                                                             |       | 128,348            |       | 132,659                 |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $                  | 384,956    |                    | $          | 397,531 |   |

 

*See Notes to Consolidated Condensed FinancialStatements.*

 

2

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### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

** (UNAUDITED)**

(inthousands)

** **
| ** **                                                                        | ** ** | **Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| * *                                                                          | * *   | * *                        | * *   | * * | * * |
| **Cash flows from operating activities:**                                         |       |                            |       |   |   |
| Net income                                                                        |       | $                               | 4,666      |   | $ | 7,345 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                            |       |   |   |
| Asset impairment  and restructuring provision, net                                |       | (2,609                          | )          | — |   |
| Depreciation and  amortization                                                    |       | 17,953                          |       | 17,706 |   |
| Loss on disposal  of assets                                                       |       | 102                             |       | 27 |   |
| Provision for  deferred income taxes                                              |       | (1,387                          | )          | (26 | ) |
| Equity in  earnings of affiliates                                                 |       | (288                            | )          | (70 | ) |
| Minority  interest in net income of consolidated subsidiaries                     |       | 667                             |       | 424 |   |
| Changes in  operating assets and liabilities:                                     |       |                            |       |   |   |
| Trade accounts  receivable                                                        |       | (10,162                         | )          | (509 | ) |
| Other assets                                                                      |       | (1,615                          | )          | 1,032 |   |
| Trade accounts  payable                                                           |       | (5,908                          | )          | 1,989 |   |
| Other  liabilities                                                                |       | 2,572                           |       | 2,821 |   |
| Net cash flows from operating activities                                          |       | 3,991                           |       | 30,739 |   |
|                                                                              |       |                            |       |   |   |
| **Cash flows from investing activities:**                                         |       |                            |       |   |   |
| Purchases of property and equipment                                               |       | (14,034                         | )          | (10,546 | ) |
| Proceeds from cash surrender value of life insurance                              |       | 3,274                           |       | — |   |
| Dividends paid to minority interest holders                                       |       | (450                            | )          | — |   |
| Proceeds from the sale of property and equipment                                  |       | 40                              |       | 8 |   |
| Other                                                                             |       | —                          |       | (440 | ) |
| Net cash flows from investing activities                                          |       | (11,170                         | )          | (10,978 | ) |
|                                                                              |       |                            |       |   |   |
| **Cash flows from financing activities:**                                         |       |                            |       |   |   |
| Borrowings on debt                                                                |       | 125,824                         |       | 9,945 |   |
| Repayments of debt                                                                |       | (115,753                        | )          | (8,457 | ) |
| Repayments of capital lease obligations                                           |       | (1,614                          | )          | (1,551 | ) |
| Treasury stock reissuances                                                        |       | 66                              |       | 102 |   |
| Net cash flows from financing activities                                          |       | 8,523                           |       | 39 |   |
| Effect of exchange rates on cash                                                  |       | (787                            | )          | (134 | ) |
| **Net increase in cash**                                                          |       | 557                             |       | 19,666 |   |
| **Cash and cash equivalents, beginning of period**                                |       | 28,906                          |       | 29,850 |   |
| **Cash and cash equivalents, end of period**                                      |       | $                               | 29,463     |   | $ | 49,516 |   |
|                                                                              |       |                            |       |   |   |
| **Non-cash investing and financing activities:**                                  |       |                            |       |   |   |
| Capital lease obligations incurred                                                |       | $                               | 1,138      |   | $ | 686 |   |

 

*See Notes to ConsolidatedCondensed Financial Statements.*

** **

**3**

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**SITEL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

** **

**Note1. Basis of Consolidation and Presentation**

 

***General***

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

 

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact centers. We support the customer managementstrategies of large and medium size corporations in North America, Europe, AsiaPacific, and Latin America. We provide customer acquisition, customer care,technical support and risk management services on an outsourced basis, as wellas operational and information technology professional services for bothoutsourced and internal contact centers. We serve clients primarily in the automotive,consumer, financial services, insurance, technology, telecommunications andISP, media services, 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, 2004. All significant intercompany balances and transactions havebeen eliminated. Certain amounts in prior fiscal periods have been reclassifiedfor comparative purposes.

 

***Use of Accounting Estimates***

Management makesestimates and assumptions when preparing financial statements under accountingprinciples generally accepted in the United States of America that affect our reported amounts of assets and liabilities atthe dates of the financial statements, our disclosure of contingent assets andliabilities at the dates of the financial statements, and our reported amountsof revenue and expenses during the reporting periods. These estimates involvejudgments with respect to, among other things, future economic factors that aredifficult to predict and are beyond management’s control. As a result, actualamounts could differ from these estimates.

 

***Recently IssuedAccounting Pronouncements***

In December 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123 (R), *Share-BasedPayment*, (SFAS 123R). This standard will require the cost ofemployee compensation paid with equity instruments to be measured based ongrant-date fair values with the cost recorded as compensation expense over theperiod during which the employee is required to perform service in exchange forthe award (generally over the vesting period of the award). The proformadisclosures previously permitted under SFAS 123 will no longer be analternative to financial statement recognition. See “Stock-Based Compensation”below for the pro forma net income and net income per share amounts, for thethree and six month periods ended June 30, 2005 and 2004, as if we had used afair-value-based method similar to the methods required under SFAS 123R tomeasure compensation expense for employee stock incentive awards.  In March 2005, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,which expressed the views of the SEC regarding the interaction betweenSFAS 123R and certain SEC rules and regulations. SAB No. 107provides guidance related to the valuation of share-based payment arrangementsfor public companies, including assumptions such as expected volatility andexpected term.  In April 2005, theSEC approved a rule that delayed the effective date of SFAS 123R forpublic companies. As a result, SFAS 123R will be effective for the Companyin the first quarter of 2006 and will apply to all of our outstanding unvestedshare-based payment awards as of January 1, 2006 and all prospectiveawards.  Although we have not yet determinedwhether the adoption of SFAS 123R will result in amounts that are similarto the current pro forma disclosures under SFAS 123, we are evaluating therequirements under SFAS 123R and expect the adoption to have a significantimpact on our consolidated statements of operations and net income per share.

 

In October 2004, The American Jobs Creation Act of 2004 (AJCA) wassigned into law. The Act creates a temporary incentive for U.S. multinationalsto repatriate accumulated income earned outside the U.S. In December 2004, theFASB issued FSP 109-2, *Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004*(FSP 109-2)*. *FSP 109-2 provides additional timeto companies beyond the financial reporting period of

 

4

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enactment to evaluate the effects of the AJCA on their plans forrepatriation of foreign earnings for purposes of applying SFAS 109, *Accounting for Income Taxes*. The Companyis currently evaluating the repatriation provisions of AJCA, which ifimplemented would affect our tax provision and deferred tax assets andliabilities. Due to the complexity and uncertainty of applying the provisionsof the Act, the income tax effects of such repatriation cannot be reasonablyestimated at this time.

 

***Stock-BasedCompensation***

We apply the intrinsic-value-basedmethod of accounting prescribed by Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued to Employees* (APB No. 25)*,* and related interpretations to account for ourfixed-plan stock options. Under this method, compensation expense isrecorded on the date of grant only if the current market price of theunderlying stock exceeded the exercise price. Statement of Financial AccountingStandard No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123)*,* established accounting anddisclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans.

 

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

 
| ** **                                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| * *                                                                                                                  | * *   | **(in  thousands)**              | * *   |
| Net income:                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                               |       | $                                | 3,217      |                           | $          | 2,519 |   | $ | 4,666 |   | $ | 7,345 |   |
| Less: total  stock based employee compensation expense determined under the fair value  method for all awards, net of tax |       | (119                             | )          | (239                           | )          | (246 | ) | (498 | ) |
| Pro forma                                                                                                                 |       | $                                | 3,098      |                           | $          | 2,280 |   | $ | 4,420 |   | $ | 6,847 |   |
|                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Income per common share:                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| As reported:                                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                     |       | $                                | 0.04       |                           | $          | 0.03 |   | $ | 0.06 |   | $ | 0.10 |   |
| Diluted                                                                                                                   |       | 0.04                             |       | 0.03                           |       | 0.06 |   | 0.10 |   |
| Pro forma:                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                     |       | 0.04                             |       | 0.03                           |       | 0.06 |   | 0.09 |   |
| Diluted                                                                                                                   |       | 0.04                             |       | 0.03                           |       | 0.06 |   | 0.09 |   |

 

The fair value of options was estimated at the date of the grant usingthe Black-Scholes option-pricing model with the following weighted-averageassumptions:

 
| ** **                     | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|
| * *                       | * *   | * * | * *   |
| —Volatility factor        |       | 52.3     | %          |
| —Risk-free interest rate  |       | 3.5      | %          |
| —Expected life (in years) |       | 5        |       |
| —Expected dividend yield  |       | 0.0      | %          |

 

 

There were no options granted during the six-month period ended June30, 2005.

 

***SignificantClients***

Our******top20 clients accounted for 67.5% and 66.9% of our revenue in the three-monthperiods ended June 30, 2005 and 2004, respectively, and 68.1% and 66.9% for thesix-month periods ended June 30, 2005 and 2004, respectively, and include multiple independentlymanaged business units within the client’s affiliated group.  Hewlett-Packard Company business units were responsible for 11.9% and 11.0%of our revenue for the three-month periods ended June 30, 2005 and 2004,respectively, and were responsible for 12.1% and 11.2% of our revenue for thesix-month periods ended June 30, 2005 and 2004, respectively.  General Motors Corporation (General Motors)business units were responsible for 11.8% and 16.0% of our total revenue in thethree-month periods ended June 30, 2005 and 2004, respectively, and wereresponsible for 12.0% and 16.7% for the six-month 

 

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periods ended June 30, 2005, and 2004,respectively.  The primary General Motorscontract expires in December 2005, while a second contract terminated in June2004.  We did not have any other clientsunder common control that generated more than 10% of our revenue for theperiods presented.

 

**Note2. Comprehensive Income (Loss)**

 

Comprehensive income (loss) for the three andsix-month periods ended June 30, 2005 and 2004 are as follows (in thousands):

 
| ** **                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **2005**                          | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                       |       | $                                 | 3,217      |                           | $          | 2,519 |   | $ | 4,666 |   | $ | 7,345 |   |
| Other comprehensive loss:        |       |                              |       |                           |       |   |   |   |   |
| Currency  translation adjustment |       | (5,549                            | )          | (2,563                         | )          | (9,046 | ) | (2,562 | ) |
| Comprehensive income (loss)      |       | $                                 | (2,332     | )                              | $          | (44 | ) | $ | (4,380 | ) | $ | 4,783 |   |

 

Accumulated other comprehensiveincome (loss) included in our consolidated condensed balance sheets representsthe accumulated foreign currency translation adjustment.

** **

**Note3. Asset Impairment and Restructuring Expenses**

 

We summarize the components of the accruedrestructuring expenses recorded in our consolidated condensed balance sheet inthe following table:

 
| ** **        | ** ** | **Severance** | ** ** | **Facility  Closure or  Reduction** | ** ** | **Total** | ** ** |
|-------------------|------------|---------------|------------|-------------------------------------|------------|-----------|------------|
| December 31, 2004 |       | $             | 4.2        |                                | $          | 5.9       |       | $ | 10.1 |   |
| Expensed          |       | 0.7           |       | —                              |       | 0.7       |       |
| Paid              |       | (3.6          | )          | (0.8                                | )          | (4.4      | )          |
| Reversal          |       | —        |       | (3.3                                | )          | (3.3      | )          |
| Other             |       | (0.1          | )          | (0.1                                | )          | (0.2      | )          |
| June 30, 2005     |       | $             | 1.2        |                                | $          | 1.7       |       | $ | 2.9 |   |

 

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

 

We expect to pay the employee compensation restructuring liabilitiesduring 2005. The Company expects to utilize the remaining facility closure orreduction restructuring liabilities over the respective lease periods throughfiscal 2009.

 

During the three months ended June 30, 2005, we decided to open apreviously closed leased facility to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled undiscounted lease paymentsfor the closed facility. As a result of the decision to reopen the facility, wereversed the remaining $3.2 million restructuring liability. This reversal waspartially offset by severance related to previously announced facilityclosures, resulting in a net reversal of $2.6 million.

 

**Note4. Investments in Affiliates**

 

We have made minority interest investments for business and strategic purposesthrough the purchase of voting common and preferred stock of companies.  We periodically evaluate whether declines infair value, if any, of our investments are other-than-temporary. Thisevaluation consists of a review of qualitative and quantitative factors. Wealso consider other factors to determine whether declines in fair value areother-than-temporary, such as the investee’s financial condition, results of 

 

 

6

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operations and operating trends. We also consider the implied valuefrom any recent rounds of financing completed by the investee.

 

As of June 30, 2005 and December 31, 2004, the investment in our Indiajoint venture was approximately $4.0 million and $4.1 million,respectively.  Subcontracted expenses for services provided by our India joint venturewere $4.3 million and $3.1 million for the three-month periods ended June 30,2005 and 2004, respectively, and $8.3 million and $6.5 million for thesix-month periods ended June 30, 2005 and 2004, respectively.  The Company had payables to our India jointventure of $3.5 million and $3.0 million at June 30, 2005 and December 31,2004, respectively, which are included in trade accounts payable in the accompanyingconsolidated condensed balance sheets.

 

Subcontracted services provided by our LatinAmerica joint venture for the three-month and six-month periods ended June 30,2005 and 2004 were not material.

 

**Note 5. Stock-BasedCompensation**

 

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 June 30, 2005, there wereapproximately 5.9 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

 

Prior to the adoption of the 1999 Plan, we grantedoptions under several different plans. As of June 30, 2005, options grantedunder these plans aggregating 2.2 million remained outstanding with strikeprices ranging from $2.41 to $19.50.  Thelast of these options will expire on February 1, 2009.  We will not grant additional options underthese plans. The following table sets forth shares subject to options:

** **
| ** **              | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise Price  per Share** | ** ** |
|-------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| Balance January 1, 2005 |       | 6,808,736              |       | $                                               | 3.68       |   |
| Granted                 |       | —                 |       | —                                          |       |
| Exercised               |       | (7,300                 | )          | 1.33                                            |       |
| Canceled                |       | (345,202               | )          | 3.58                                            |       |
| Balance June 30, 2005   |       | 6,456,234              |       | $                                               | 3.59       |   |

 

The options exercisable at theend of each period were:

 
| ** **        | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise Price  per Share** | ** ** |
|-------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| December 31, 2004 |       | 3,716,345              |       | $                                               | 4.28       |   |
| June 30, 2005     |       | 3,895,124              |       | $                                               | 4.03       |   |

 

 

7

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The following tablesummarizes stock options outstanding at June30, 2005:
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-Average  Remaining  Life** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| $1.24 to $1.75                |       | 708,254                 |       | 7.7                                   |       | $                                     | 1.56       |   |
| $1.76 to $4.00                |       | 4,449,401               |       | 4.7                                   |       | $                                     | 3.07       |   |
| $4.01 to $6.33                |       | 698,404                 |       | 3.7                                   |       | $                                     | 4.84       |   |
| $6.34 to $7.22                |       | 419,775                 |       | 4.4                                   |       | $                                     | 6.70       |   |
| $7.23 to $12.66               |       | 120,400                 |       | 2.6                                   |       | $                                     | 9.76       |   |
| $12.67 to $20.00              |       | 60,000                  |       | 1.7                                   |       | $                                     | 17.35      |   |
|                               |            |                         |            |                                       |            |                                       |            |  |  |

 

The following table summarizes stock optionsexercisable at June 30, 2005:

 
| **Range of  Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| $1.24 to $1.75                |       | 311,312                 |       | $                                     | 1.56       |   |
| $1.76 to $4.00                |       | 2,317,283               |       | $                                     | 3.01       |   |
| $4.01 to $6.33                |       | 666,754                 |       | $                                     | 4.83       |   |
| $6.34 to $7.22                |       | 419,775                 |       | $                                     | 6.70       |   |
| $7.23 to $12.66               |       | 120,000                 |       | $                                     | 9.75       |   |
| $12.67 to $20.00              |       | 60,000                  |       | $                                     | 17.35      |   |

 

**Note 6. Contingencies**

 

From time to time,during the normal course of business, we may make certain indemnities,commitments and guarantees under which we may be required to make payments inrelation to certain transactions. These include for example: (i) indemnities toclients pertaining to claims based on our negligence or willful misconduct and(ii) indemnities involving the accuracy of representations and warranties incertain contracts.

 

From time to time,we are involved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, except for the items discussed below for thereasons mentioned therein, that the resolution of such matters will not have amaterial adverse effect on our consolidated financial position or results ofoperations.

 

*Bankruptcy OP Computers SPA vs. SITEL KingstonLimited* (now known as Mitre Telesales Limited) was filed in April 2004 in theCourt of Ivrea in Milan, Italy.  Thereceivers assert that Mitre, as a former supplier to Olivetti, is requiredunder Italian bankruptcy law to return €5,349,025 (approximately $6.9 million)in payments Olivetti had allegedly paid Mitre during a one-year “clawback”period, which allegedly runs from March 9, 1998 until March 9, 1999, thealleged date Olivetti filed for receivership. Mitre filed its Defence with the court in November 2004.  The Defence outlined the facts and reasonswhy Mitre did not and should not reasonably have known of Olivetti’s insolventstate during the time that Mitre was performing services for Olivetti.  The first substantive hearing held in May2005 was adjourned to November 2005.  TheCompany and its subsidiary Mitre Telesales Limited are currently unable topredict the outcome or reasonably estimate the possible loss, if any, or rangeof losses associated with this claim.

 

Two of our clientshave received letters from time to time containing an offer to license andsuggesting that the clients might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clientshave indicated that if any infringement occurred the clients 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 clients 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.

 

8

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**Note 7. Earnings Per Share**

 

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

 

The difference between the number of shares usedto calculate basic and diluted earnings per share represents the number ofshares assumed to be issued from the exercise of dilutive stock options underour stock option plans, less shares assumed to be purchased with proceeds fromthe exercise of the stock options and the related tax benefits. At June 30, 2005 and 2004, we had 5.7million and 1.9 million options, respectively, which have been excluded fromthe diluted net income per share computation because their exercise priceexceeds the fair market value.

 

**Note 8. Payroll Tax Refund**

 

During the three months ended June 30, 2004, we recorded a benefit fromthe refund of payroll tax overpayments paid in a prior year. We recorded thepayroll tax refund in the accompanying consolidated condensed statements ofoperations as a $1.3 million reduction of direct labor and telecommunicationsexpenses and a $0.4 million reduction of operating, selling and administrativeexpenses during the three months ended June 30, 2004.

 

**Note 9. Supplemental Guarantor FinancialInformation**

 

Our 9.25% Senior Subordinated Notes are guaranteed, on a full,unconditional and joint and several basis, by substantially all of our whollyowned domestic subsidiaries. Separate financial statements for each of theguarantor subsidiaries are not presented because they would not be material toinvestors. However, on the following pages we have presented the followingstatements of (a) SITEL Corporation, the parent, (b) the guarantorsubsidiaries, (c) the nonguarantor subsidiaries, and (d) SITEL Corporation on aconsolidated basis:

•            Consolidating Condensed Statements ofOperations and Comprehensive Income (Loss) for the three and six-month periodsended June 30, 2005 and 2004,

•            Consolidating Condensed Balance Sheets atJune 30, 2005 and December 31, 2004, and

•            Consolidating Condensed Statements of Cash Flows for thesix months ended June 30, 2005 and 2004.

 

9

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**Consolidating Condensed Statement ofOperations and Comprehensive Income (Loss)**
| ***Three Months Ended June 30, 2005***                       | ** ** | **Parent**         | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| **Revenue**                                                  |       | $                  | 84,572     |                       | $          | 8,316                         |       | $                | 162,421    |             | $          | (3,500 | ) | $ | 251,809 |   |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                       |       |                          |       |             |       |             |       |
| Direct labor and  telecommunications expenses                |       | 44,078             |       | 4,281                      |       | 105,277                       |       | —           |       | 153,636          |       |
| Subcontracted  and other services expenses                   |       | 11,691             |       | 1,909                      |       | 2,217                         |       | (2,931           | )          | 12,886           |       |
| Operating,  selling and administrative expenses              |       | 26,514             |       | 2,872                      |       | 51,740                        |       | (571             | )          | 80,555           |       |
| Asset impairment  and restructuring expenses, net            |       | (3,129             | )          | 199                        |       | 321                           |       | —           |       | (2,609           | )          |
| Total operating  expenses                                    |       | 79,154             |       | 9,261                      |       | 159,555                       |       | (3,502           | )          | 244,468          |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Operating income (loss)**                                  |       | 5,418              |       | (945                       | )          | 2,866                         |       | 2                |       | 7,341            |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| Interest expense                                             |       | (2,355             | )          | (1                         | )          | (583                          | )          | —           |       | (2,939           | )          |
| Interest income                                              |       | 42                 |       | —                     |       | 98                            |       | —           |       | 140              |       |
| Equity in  earnings (losses) of affiliates                   |       | (1,631             | )          | (529                       | )          | 395                           |       | 2,160            |       | 395              |       |
| Other income  (expense), net                                 |       | 1,743              |       | (158                       | )          | (1,604                        | )          | (2               | )          | (21              | )          |
| Total other  income (expense), net                           |       | (2,201             | )          | (688                       | )          | (1,694                        | )          | 2,158            |       | (2,425           | )          |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Income  (loss) before income taxes and minority interest** |       | 3,217              |       | (1,633                     | )          | 1,172                         |       | 2,160            |       | 4,916            |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| Income tax expense                                           |       | —             |       | (3                         | )          | 1,395                         |       | —           |       | 1,392            |       |
| Minority interest                                            |       | —             |       | —                     |       | 307                           |       | —           |       | 307              |       |
| **Net income (loss)**                                        |       | $                  | 3,217      |                       | $          | (1,630                        | )          | $                | (530       | )                | $          | 2,160 |   | $ | 3,217 |   |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| Currency translation adjustment                              |       | (5,549             | )          | (36                        | )          | (3,751                        | )          | 3,787            |       | (5,549           | )          |
| **Comprehensive income (loss)**                              |       | $                  | (2,332     | )                          | $          | (1,666                        | )          | $                | (4,281     | )                | $          | 5,947 |   | $ | (2,332 | ) |

 

 

10

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

 

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

 

 

11

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

 
| ***Six Months Ended June 30, 2005***                         | ** ** | **Parent**         | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| **Revenue**                                                  |       | $                  | 169,983    |                       | $          | 18,646                        |       | $                | 322,668    |             | $          | (8,319 | ) | $ | 502,978 |   |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Operating expenses:**                                      |       |               |       |                       |       |                          |       |             |       |             |       |
| Direct labor and  telecommunications expenses                |       | 89,103             |       | 8,931                      |       | 208,078                       |       | —           |       | 306,112          |       |
| Subcontracted  and other services expenses                   |       | 25,139             |       | 3,758                      |       | 4,433                         |       | (7,556           | )          | 25,774           |       |
| Operating,  selling and administrative expenses              |       | 51,634             |       | 5,654                      |       | 104,035                       |       | (765             | )          | 160,558          |       |
| Asset impairment  and restructuring expenses, net            |       | (3,129             | )          | 199                        |       | 321                           |       | —           |       | (2,609           | )          |
| Total operating  expenses                                    |       | 162,747            |       | 18,542                     |       | 316,867                       |       | (8,321           | )          | 489,835          |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Operating income (loss)**                                  |       | 7,236              |       | 104                        |       | 5,801                         |       | 2                |       | 13,143           |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Other income (expense):**                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| Interest expense                                             |       | (4,711             | )          | (2                         | )          | (1,083                        | )          | —           |       | (5,796           | )          |
| Interest income                                              |       | 87                 |       | —                     |       | 173                           |       | —           |       | 260              |       |
| Equity in  earnings (losses) of affiliates                   |       | (1,569             | )          | (1,231                     | )          | 288                           |       | 2,800            |       | 288              |       |
| Other income  (expense), net                                 |       | 3,623              |       | (417                       | )          | (3,235                        | )          | (2               | )          | (31              | )          |
| Total other  expense, net                                    |       | (2,570             | )          | (1,650                     | )          | (3,857                        | )          | 2,798            |       | (5,279           | )          |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Income  (loss) before income taxes and minority interest** |       | 4,666              |       | (1,546                     | )          | 1,944                         |       | 2,800            |       | 7,864            |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| Income tax expense                                           |       | —             |       | 23                         |       | 2,508                         |       | —           |       | 2,531            |       |
| Minority interest                                            |       | —             |       | —                     |       | 667                           |       | —           |       | 667              |       |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| **Net income (loss)**                                        |       | $                  | 4,666      |                       | $          | (1,569                        | )          | $                | (1,231     | )                | $          | 2,800 |   | $ | 4,666 |   |
|                                                         |       |               |       |                       |       |                          |       |             |       |             |       |
| Currency translation adjustment                              |       | (9,046             | )          | (101                       | )          | (5,737                        | )          | 5,838            |       | (9,046           | )          |
| **Comprehensive income (loss)**                              |       | $                  | (4,380     | )                          | $          | (1,670                        | )          | $                | (6,968     | )                | $          | 8,638 |   | $ | (4,380 | ) |

 

12

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

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

 

13

----

 

**ConsolidatingCondensed Balance Sheet**

** **
| ***At June 30, 2005***                                | ** ** | **Parent**         | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Assets**                                            |       |               |       |                       |       |                          |       |             |       |             |       |
| **Current  assets:**                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| Cash and cash  equivalents                            |       | $                  | 4,785      |                       | $          | 3,376                         |       | $                | 21,302     |             | $          | — |   | $ | 29,463 |   |
| Trade accounts  receivable, net                       |       | 122,415            |       | 3,155                      |       | 110,232                       |       | (45,493          | )          | 190,309          |       |
| Prepaid expenses  and other current assets            |       | 3,460              |       | 109                        |       | 12,618                        |       | —           |       | 16,187           |       |
| Total current  assets                                 |       | 130,660            |       | 6,640                      |       | 144,152                       |       | (45,493          | )          | 235,959          |       |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Property  and equipment, net**                      |       | 16,649             |       | 1,490                      |       | 59,938                        |       | —           |       | 78,077           |       |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Other  assets:**                                    |       |               |       |                       |       |                          |       |             |       |             |       |
| Goodwill                                              |       | 19,577             |       | 14                         |       | 26,720                        |       | —           |       | 46,311           |       |
| Deferred income  taxes                                |       | 141                |       | —                     |       | 871                           |       | —           |       | 1,012            |       |
| Investments in  affiliates                            |       | —             |       | —                     |       | 16,853                        |       | —           |       | 16,853           |       |
| Other assets                                          |       | 4,403              |       | 60                         |       | 2,281                         |       | —           |       | 6,744            |       |
| Investments in  subsidiaries                          |       | 95,070             |       | 90,326                     |       | —                        |       | (185,396         | )          | —           |       |
| **Total  assets**                                     |       | $                  | 266,500    |                       | $          | 98,530                        |       | $                | 250,815    |             | $          | (230,889 | ) | $ | 384,956 |   |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity**        |       |               |       |                       |       |                          |       |             |       |             |       |
| **Current  liabilities:**                             |       |               |       |                       |       |                          |       |             |       |             |       |
| Senior  Subordinated Notes                            |       | $                  | 90,000     |                       | $          | —                        |       | $                | —     |             | $          | — |   | $ | 90,000 |   |
| Revolving credit  facility and other current debt     |       | 203                |       | —                     |       | 26,807                        |       | —           |       | 27,010           |       |
| Current portion  of capital lease obligations         |       | 396                |       | 48                         |       | 2,239                         |       | —           |       | 2,683            |       |
| Trade accounts  payable                               |       | 12,581             |       | 2,059                      |       | 56,491                        |       | (45,478          | )          | 25,653           |       |
| Accrued expenses  and other current liabilities       |       | 29,052             |       | 1,352                      |       | 62,804                        |       | (92              | )          | 93,116           |       |
| Total current  liabilities                            |       | 132,232            |       | 3,459                      |       | 148,341                       |       | (45,570          | )          | 238,462          |       |
| **Long-term  debt and other liabilities:**            |       |               |       |                       |       |                          |       |             |       |             |       |
| Long-term debt,  excluding current portion            |       | —             |       | —                     |       | —                        |       | —           |       | —           |       |
| Capital lease  obligations, excluding current portion |       | 34                 |       | —                     |       | 6,932                         |       | —           |       | 6,966            |       |
| Other  liabilities                                    |       | 2,977              |       | —                     |       | 5,216                         |       | —           |       | 8,193            |       |
| Deferred income  taxes                                |       | 141                |       | —                     |       | —                        |       | —           |       | 141              |       |
| Total  liabilities                                    |       | 135,384            |       | 3,459                      |       | 160,489                       |       | (45,570          | )          | 253,762          |       |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Minority  interests**                               |       | —             |       | —                     |       | 2,846                         |       | —           |       | 2,846            |       |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Stockholders’  equity**                        |       | 131,116            |       | 95,071                     |       | 87,480                        |       | (185,319         | )          | 128,348          |       |
| **Total  liabilities and stockholders’ equity**  |       | $                  | 266,500    |                       | $          | 98,530                        |       | $                | 250,815    |             | $          | (230,889 | ) | $ | 384,956 |   |

** **

 

14

----

 

**ConsolidatingCondensed Balance Sheet**

** **
| ***At December 31, 2004***                            | ** ** | **Parent** | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            |       |       |       |                       |       |                          |       |             |       |             |       |
| **Assets**                                            |       |       |       |                       |       |                          |       |             |       |             |       |
| **Current  assets:**                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| Cash and cash  equivalents                            |       | $          | 9,153      |                       | $          | 2,812                         |       | $                | 16,855     |             | $          | 86 |   | $ | 28,906 |   |
| Trade accounts receivable,  net                       |       | 117,939    |       | 22,924                     |       | 116,502                       |       | (65,974          | )          | 191,391          |       |
| Prepaid expenses  and other current assets            |       | 5,479      |       | 158                        |       | 11,535                        |       | —           |       | 17,172           |       |
| Total current  assets                                 |       | 132,571    |       | 25,894                     |       | 144,892                       |       | (65,888          | )          | 237,469          |       |
|                                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| **Property  and equipment, net**                      |       | 17,887     |       | 1,850                      |       | 66,320                        |       | —           |       | 86,057           |       |
|                                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| **Other  assets:**                                    |       |       |       |                       |       |                          |       |             |       |             |       |
| Goodwill                                              |       | 19,577     |       | 14                         |       | 28,685                        |       | —           |       | 48,276           |       |
| Investments in  affiliates                            |       | —     |       | —                     |       | 16,466                        |       | —           |       | 16,466           |       |
| Other assets                                          |       | 6,054      |       | 56                         |       | 2,310                         |       | —           |       | 8,420            |       |
| Investments in  subsidiaries                          |       | 106,062    |       | 81,646                     |       | —                        |       | (187,708         | )          | —           |       |
| Deferred income  taxes                                |       | 141        |       | —                     |       | 702                           |       | —           |       | 843              |       |
| **Total  assets**                                     |       | $          | 282,292    |                       | $          | 109,460                       |       | $                | 259,375    |             | $          | (253,596 | ) | $ | 397,531 |   |
|                                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity**        |       |       |       |                       |       |                          |       |             |       |             |       |
| **Current  liabilities:**                             |       |       |       |                       |       |                          |       |             |       |             |       |
| Revolving credit  facility and other current debt     |       | $          | 405        |                       | $          | —                        |       | $                | 18,397     |             | $          | — |   | $ | 18,802 |   |
| Current portion  of capital lease obligations         |       | 342        |       | 100                        |       | 2,760                         |       | —           |       | 3,202            |       |
| Trade accounts  payable                               |       | 19,534     |       | 1,723                      |       | 77,217                        |       | (65,879          | )          | 32,595           |       |
| Accrued expenses  and other current liabilities       |       | 29,787     |       | 1,575                      |       | 68,602                        |       | 133              |       | 100,097          |       |
| Total current  liabilities                            |       | 50,068     |       | 3,398                      |       | 166,976                       |       | (65,746          | )          | 154,696          |       |
| **Long-term  debt and other liabilities:**            |       |       |       |                       |       |                          |       |             |       |             |       |
| Long-term debt, excluding  current portion            |       | 90,000     |       | —                     |       | —                        |       | —           |       | 90,000           |       |
| Capital lease  obligations, excluding current portion |       | 320        |       | —                     |       | 8,073                         |       | —           |       | 8,393            |       |
| Other  liabilities                                    |       | 6,554      |       | —                     |       | 2,616                         |       | (221             | )          | 8,949            |       |
| Deferred income  taxes                                |       | 141        |       | —                     |       | 64                            |       | —           |       | 205              |       |
| Total liabilities                                     |       | 147,083    |       | 3,398                      |       | 177,729                       |       | (65,967          | )          | 262,243          |       |
|                                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| **Minority  interests**                               |       | —     |       | —                     |       | 2,629                         |       | —           |       | 2,629            |       |
|                                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| **Stockholders’  equity**                        |       | 135,209    |       | 106,062                    |       | 79,017                        |       | (187,629         | )          | 132,659          |       |
| **Total  liabilities and stockholders’ equity**  |       | $          | 282,292    |                       | $          | 109,460                       |       | $                | 259,375    |             | $          | (253,596 | ) | $ | 397,531 |   |

** **

 

15

----

 

**ConsolidatingCondensed Statement of Cash Flows**

 

** **
| ***Six Months Ended June 30, 2005***                  | ** ** | **Parent**         | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Net  cash flows from operating activities**         |       | $                  | 2,941      |                       | $          | (19,453                       | )          | $                | 20,509     |             | $          | (6 | ) | $ | 3,991 |   |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Cash flows from investing activities:**             |       |               |       |                       |       |                          |       |             |       |             |       |
| Purchases of  property and equipment                  |       | (4,317             | )          | (122                       | )          | (9,595                        | )          | —           |       | (14,034          | )          |
| Proceeds from  cash surrender value of life insurance |       | 3,274              |       | —                     |       | —                        |       | —           |       | 3,274            |       |
| Proceeds from  the sale of property and equipment     |       | —             |       | —                     |       | 40                            |       | —           |       | 40               |       |
| Dividends paid  to minority interest shareholder      |       | —             |       | —                     |       | (450                          | )          |             |       | (450             | )          |
| Other                                                 |       | —             |       | —                     |       | —                        |       |             |       | —           |       |
| Net cash flows  from investing activities             |       | (1,043             | )          | (122                       | )          | (10,005                       | )          | —           |       | (11,170          | )          |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Cash flows from financing activities:**             |       |               |       |                       |       |                          |       |             |       |             |       |
| Borrowings on  debt                                   |       | —             |       | —                     |       | 125,824                       |       | —           |       | 125,824          |       |
| Repayments of  debt and capital lease obligations     |       | (364               | )          | (53                        | )          | (116,950                      | )          | —           |       | (117,367         | )          |
| Net borrowings  and payments in intercompany balances |       | (5,968             | )          | 20,192                     |       | (14,144                       | )          | (80              | )          | —           |       |
| Treasury stock  reissuances                           |       | 66                 |       | —                     |       | —                        |       | —           |       | 66               |       |
| Net cash flows  from financing activities             |       | (6,266             | )          | 20,139                     |       | (5,270                        | )          | (80              | )          | 8,523            |       |
| Effect of exchange rates on cash                      |       | —             |       | —                     |       | (787                          | )          | —           |       | (787             | )          |
| **Net increase in cash**                              |       | (4,368             | )          | 564                        |       | 4,447                         |       | (86              | )          | 557              |       |
| **Cash  and cash equivalents, beginning of period**   |       | 9,153              |       | 2,812                      |       | 16,855                        |       | 86               |       | 28,906           |       |
| **Cash  and cash equivalents, end of period**         |       | $                  | 4,785      |                       | $          | 3,376                         |       | $                | 21,302     |             | $          | — |   | $ | 29,463 |   |

 

16

----

 

**ConsolidatingCondensed Statement of Cash Flows**

** **
| ***Six Months Ended June 30, 2004***                  | ** ** | **Parent**         | ** ** | **Guarantor Subsidiaries** | ** ** | **Nonguarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Net  cash flows from operating activities**         |       | $                  | 961        |                       | $          | 5,828                         |       | $                | 23,960     |             | $          | (10 | ) | $ | 30,739 |   |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Cash flows from investing activities:**             |       |               |       |                       |       |                          |       |             |       |             |       |
| Purchases of property  and equipment                  |       | (2,936             | )          | (139                       | )          | (7,471                        | )          | —           |       | (10,546          | )          |
| Proceeds from  the sale of property and equipment     |       | 8                  |       | —                     |       | —                        |       | —           |       | 8                |       |
| Other                                                 |       | —             |       | —                     |       | (440                          | )          | —           |       | (440             | )          |
| Net cash flows  from investing activities             |       | (2,928             | )          | (139                       | )          | (7,911                        | )          | —           |       | (10,978          | )          |
|                                                  |       |               |       |                       |       |                          |       |             |       |             |       |
| **Cash flows from financing activities:**             |       |               |       |                       |       |                          |       |             |       |             |       |
| Borrowings on  debt                                   |       | —             |       | —                     |       | 9,945                         |       | —           |       | 9,945            |       |
| Repayments of  debt and capital lease obligations     |       | (2,145             | )          | —                     |       | (7,863                        | )          | —           |       | (10,008          | )          |
| Net borrowings  and payments in intercompany balances |       | 15,616             |       | (4,553                     | )          | (11,073                       | )          | 10               |       | —           |       |
| Treasury stock  reissuances                           |       | 102                |       | —                     |       | —                        |       | —           |       | 102              |       |
| Net cash flows  from financing activities             |       | 13,573             |       | (4,553                     | )          | (8,991                        | )          | 10               |       | 39               |       |
| Effect of  exchange rates on cash                     |       | —             |       | —                     |       | (134                          | )          | —           |       | (134             | )          |
| **Net  increase in cash**                             |       | 11,606             |       | 1,136                      |       | 6,924                         |       | —           |       | 19,666           |       |
| **Cash  and cash equivalents, beginning of period**   |       | 12,010             |       | 3,090                      |       | 14,750                        |       | —           |       | 29,850           |       |
| **Cash  and cash equivalents, end of period**         |       | $                  | 23,616     |                       | $          | 4,226                         |       | $                | 21,674     |             | $          | — |   | $ | 49,516 |   |

 

 

**Note10.  Subsequent Events**

 

***Restructuring***

During 2004, we initiated a profit improvement plan comprised of a set of initiatives. One of the initiatives was cost reduction.

 

On July 7, 2005, in continuation of the previously announced profit improvement plan, we committed to additional actions to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The additional actions include closing and consolidating certain facilities in Northern Europe and reducing net headcount by a total of approximately 60 employees. We expect approximately 20 positions will be reduced by attrition and the remainder by severance. As a result of the facility closures, we will no longer be able to maintain certain minimum employment levels required to retain government grants received and that were recorded as a reduction of operating expenses in previous periods. Consequently, we will record a charge to establish a liability for the obligation to repay such amounts. The actions also include disposing of certain capital equipment. We expect to complete these activities by the end of fiscal year 2005.

 

In connection with these actions, we estimate that we will record a total of $7.0 million to $9.0 million of costs. We expect a majority of the charge to be recognized in the third quarter of fiscal year 2005 with the remainder recorded by the end of fiscal year 2005. The majority of the severance costs are expected to be paid out during our fourth quarter of fiscal year 2005, and the facilities costs are expected to be paid out over the remaining lease terms, which range from several months to approximately 5 years.

 

 

17

 

 

The following table illustrates the anticipated costs by major categories (in millions):

 
| **Description**         | ** ** | **Estimated Range** |
|-------------------------|------------|---------------------|
| Cash charges:           |       |                |   |   |   |   |   |
| Employee  severance     |       | $                   | 1.4 |   | to |   | $ | 1.7 |   |
| Facilities  leases      |       | 2.0                 |   | to |   | 2.7 |   |
| Grant  reimbursement    |       | 2.8                 |   | to |   | 3.6 |   |
| Total cash  charges     |       | 6.2                 |   | to |   | 8.0 |   |
|                    |       |                |   |   |   |   |   |
| Non-cash charges:       |       |                |   |   |   |   |   |
| Fixed asset  disposals  |       | 0.8                 |   | to |   | 1.0 |   |
| Total non-cash  charges |       | 0.8                 |   | to |   | 1.0 |   |
|                    |       |                |   |   |   |   |   |
| Total charges           |       | $                   | 7.0 |   | to |   | $ | 9.0 |   |
|                    |       |                |   |   |   |   |   |

 

 

***SeniorSubordinated Notes Redemption***

OnJuly 27, 2005, we acquired $6.2 million of our outstanding 9.25% SeniorSubordinated Notes (the Notes) due 2006 through open market purchases.

 

 

18

 

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

 

##### **General**

 

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

 

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact center solutions. We support the customermanagement strategies of large and medium size corporations in North America,Europe, Asia Pacific, and Latin America. We provide customer acquisition,customer care, technical support and risk management services on an outsourcedbasis, as well as operational and information technology professional servicesfor both outsourced and in-house contact centers. We serve clients primarily inthe automotive, consumer, financial services, insurance, technology,telecommunications and ISP, media services, and utilities sectors.

 

In Management’s Discussion and Analysis, we provide information aboutour general business risks, critical accounting policies and estimates, resultsof operations, financial condition and liquidity, and certain other mattersaffecting our operating results for the periods covered by this report.

 

As you read this discussion and analysis, refer to our ConsolidatedCondensed Statements of Operations, which present the results of our operationsfor the three and six month periods ended June 30, 2005 and 2004, and aresummarized on the following pages. We analyze and explain the differencesbetween periods for the components of operations in the following sections. Ouranalysis is important in making decisions about your investment in SITELCorporation.

 

During 2004, we initiated a profit improvement plan comprised of a setof initiatives.  These initiativesinclude a plan to rationalize underutilized facilities, eliminate losses frombusiness units that are underperforming, right size support functions to betterutilize human and physical assets, reduce and further leverage IT andtelecommunication costs, and improve the operating performance of all of ourfacilities through enhanced efficiency. We will continue to focus on ourperformance-based pricing initiatives, invoice and contract management, andstatement of work change controls.

 

**SubsequentEvents**

 

***Restructuring***

During 2004, we initiated a profit improvement plan comprised of a set of initiatives. One of the initiatives was cost reduction.

 

On July 7, 2005, in continuation of the previously announced profit improvement plan, we committed to additional actions to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The additional actions include closing and consolidating certain facilities in Northern Europe and reducing net headcount by a total of approximately 60 employees. We expect approximately 20 positions will be reduced by attrition and the remainder by severance. As a result of the facility closures, we will no longer be able to maintain certain minimum employment levels required to retain government grants received and that were recorded as a reduction of operating expenses in previous periods. Consequently, we will record a charge to establish a liability for the obligation to repay such amounts. The actions also include disposing of certain capital equipment. We expect to complete these activities by the end of fiscal year 2005.

 

In connection with these actions, we estimate that we will record a total of $7.0 million to $9.0 million of costs. We expect a majority of the charge to be recognized in the third quarter of fiscal year 2005 with the remainder recorded by the end of fiscal year 2005. The majority of the severance costs are expected to be paid out during our fourth quarter of fiscal year 2005, and the facilities costs are expected to be paid out over the remaining lease terms, which range from several months to approximately 5 years.

 

 

19

 

 The following table illustrates the anticipated costs by major categories (in millions):

 
| **Description**         | ** ** | **Estimated Range** |
|-------------------------|------------|---------------------|
| Cash charges:           |       |                |   |   |   |   |   |
| Employee  severance     |       | $                   | 1.4 |   | to |   | $ | 1.7 |   |
| Facilities  leases      |       | 2.0                 |   | to |   | 2.7 |   |
| Grant  reimbursement    |       | 2.8                 |   | to |   | 3.6 |   |
| Total cash  charges     |       | 6.2                 |   | to |   | 8.0 |   |
|                    |       |                |   |   |   |   |   |
| Non-cash charges:       |       |                |   |   |   |   |   |
| Fixed asset  disposals  |       | 0.8                 |   | to |   | 1.0 |   |
| Total non-cash  charges |       | 0.8                 |   | to |   | 1.0 |   |
|                    |       |                |   |   |   |   |   |
| Total charges           |       | $                   | 7.0 |   | to |   | $ | 9.0 |   |
|                    |       |                |   |   |   |   |   |

 

***SeniorSubordinated Notes Redemption***

On July 27, 2005, we acquired $6.2 million ofour outstanding 9.25% Senior Subordinated Notes (the Notes) due 2006 throughopen market purchases.

 

##### **GeneralBusiness Risks, Critical Accounting Policies and Estimates**

 

**General BusinessRisks**

Our business success depends on our ability toefficiently deploy our human and capital resources in the delivery of servicesto our clients. Consequently, the needs of our clients may significantly impactour results of operations, financial condition, and liquidity.

 

Our results of operations and operating cash flowsmay vary with periodic wins, expansions, and losses of client contracts andwith changes in the scope of client requirements. Our******top 20 clients accounted for 67.5% and 66.9% of ourrevenue for the three-month periods ended June 30, 2005 and 2004, respectively,and 68.1% and 66.9% for the six-month periods ended June 30, 2005 and 2004,respectively, and includemultiple independently managed business units within the client’s affiliatedgroup.  Hewlett-Packard Company business units were responsible for 11.9% and 11.0% ofour revenue for the three-month period ended June 30, 2005 and 2004,respectively, and 12.1% and 11.2% for the six-month period ended June 30, 2005and 2004, respectively.  General MotorsCorporation (General Motors) business units were responsible for 11.8% and 16.0% of ourrevenue for the three-month periods ended June 30, 2005 and 2004, respectively,and 12.0% and 16.7% for the six-month periods ended June 30, 2005 and 2004,respectively.On April 21, 2004, we announced thesigning of a new contract with General Motors to continue to provide customersupport services for General Motors’ North American Vehicle Sales, Service, andMarketing Group through December 31, 2005. An existing agreement under which wesupported OnStar operations terminated effective June 22, 2004. We did not have any other clients under common control that generatedmore than 10% of our revenue for the periods presented.  The financial failure of any ofthese clients or the loss of any or all of their business could have an adverseimpact on our operating results.

 

Our liquidity, including our ability to complywith restrictive debt covenants, may be adversely affected if we were to lose asignificant client or as a result of significant changes in client demand if weare unable to efficiently re-deploy our human and capital resources.

 

In the following sections, we also discuss theimportance of our critical accounting policies and the use of accountingestimates, and their potential impacts on our results of operations.

 

**Critical Accounting Policies andEstimates**

The process of preparing financial statementsrequires the use of estimates on the part of management. These estimatesinvolve judgments with respect to, among other things, future economic factorsthat are difficult to predict and are beyond management’s control. As a result,actual results could differ from these estimates.

 

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We have identified the following to be critical accounting policiesbecause they are the most important to the portrayal of our results ofoperations and financial condition, and they require management’s mostdifficult, subjective, or complex judgments:

***Revenue Recognition***

We recognize revenue in accordance with applicable accountingstandards, including Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 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 is recognized as therelated consumer debts are collected and is calculated based upon a percentageof cash collected or other agreed upon contractual parameters.

 

***Trade Accounts Receivable***

We report our trade accounts receivable net of an allowance fordoubtful accounts, which represents management’s estimates of the amount of ourreceivables that may not be collectible, net of recoveries of amountspreviously written off. These estimates are based on a detailed aging analysisof accounts receivable, historical bad debts, client credit-worthiness, andchanges in our client payment terms. The financial condition of our clients maydeteriorate, which may require us to increase our allowance for doubtfulaccounts. We would record an increase in the allowance for doubtful accounts asoperating, selling, and administrative expense in our consolidated statementsof operations, which would reduce our results of operations.

 

***Property and Equipment***

We record property and equipment at cost, and calculate depreciationusing the straight-line method over the estimated useful lives of the assets,which generally range from 2 to 25 years. We amortize leaseholdimprovements and assets under capital leases on a straight-line basis over theshorter of the lease term or the estimated useful life of the asset. If theactual useful lives of these assets are less than the estimated depreciablelives, we would record additional depreciation expense or losses on disposal tothe extent the net book value of such asset is not recovered upon sale.

 

***Asset Impairment***

We evaluate long-lived assets for impairment whenever events or changesin circumstances indicate the carrying amount of an asset may not berecoverable.  Triggering events include asignificant change in the extent or manner in which long-lived assets are beingused or in its physical condition, in legal factors, or in the business climatethat could affect the value of the long-lived assets. The interpretation ofsuch events requires judgment from management as to whether such an event hasoccurred.

 

Upon the occurrence of a triggering event, the carrying amount of a long-livedasset is reviewed to assess whether the recoverable amount has declined belowits carrying amount.  The recoverableamount is the estimated net future cash flows that we expect to recover fromthe future use of the asset, undiscounted and without interest, plus the asset’sresidual value on disposal. Where the recoverable amount of the long-livedasset is less than the carrying value, an impairment loss would be recognizedto write down the asset to its fair value, which is based on discounted estimatedcash flows from the future use of the asset.

 

The estimated cash flows arising from future use of the asset that areused in the impairment analysis requires judgment regarding what we wouldexpect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use ofthe asset or the residual value of the asset on disposal based on changes inthe market conditions, changes in the use of the assets, management’s plans,and the determination of the useful life of the assets could significantlychange the recoverable amount of the asset or the calculation of the fair valueand the resulting impairment loss, which could significantly affect the resultsof operations.

 

***Goodwill***

At least annually, or more frequently as changes in circumstancesindicate, we will evaluate the estimated fair value of our goodwill. On theseevaluation dates, to the extent that the carrying value of the net assets ofany of our reporting units having goodwill is greater than their estimated fairvalue, we will be required to take additional goodwill impairment charges. Weare required to make certain assumptions and estimates regarding the fair valueof goodwill when assessing for impairment. Changes in the fact patternsunderlying such assumptions and estimates could ultimately result in therecognition of additional impairment losses.

 

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***Deferred Income Taxes***

We record deferred tax assets and liabilities using enacted tax ratesin the jurisdictions in which we operate for the effect of temporarydifferences between the book and tax basis of assets and liabilities inaccordance with Statement of Financial Accounting Standards, No. 109, *Accounting for Income Taxes*. If enactedtax rates change, we would adjust the deferred tax assets and liabilities,through the provision for income taxes in the period of change, to reflect theenacted tax rate expected to be in effect when the deferred tax items reverse.To the extent that we believe that recovery is not likely, we establish avaluation allowance to reduce the deferred tax assets to the amount that ismore likely than not to be realized. The valuation allowance is based on ourestimates of future taxable income by jurisdiction in which we operate and theperiod over which the deferred tax assets can be recovered. A review of allavailable positive and negative evidence needs to be considered, including ourcurrent and past performance, the market environment in which we operate, theutilization of past tax credits, length of carryback and carryforward periods,and existing or prospective contracts that will result in future profits.

 

Forminga conclusion that a valuation allowance is not needed is difficult when thereis negative evidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign taxjurisdictions. We expect to continue to record a valuation allowance on futuretax benefits in certain tax jurisdictions until an appropriate level ofprofitability is sustained.

 

***Self-Insurance Reserves***

We are self-insured in North America for workers’ compensation andhealth care claims for eligible participating employees, subject to certaindeductibles and limitations. The costs include an estimate of expectedsettlements on pending claims and a provision for claims incurred but not reported.These estimates are based on our assessment of potential liability using ananalysis of available information with respect to pending claims, historicalexperience, and current cost trends. Actual claims results could differ fromthese estimates.

 

***Contingencies***

We consider the likelihood of various loss contingencies, including taxand legal contingencies arising in the ordinary course of business, and ourability to reasonably estimate the amount of loss in determining losscontingencies. An estimated loss contingency is accrued when it is probablethat a 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 and Six Month Periods Ended June 30, 2005 Comparedwith the Same Periods of 2004**

 

In this section, we discuss ouroperating results and the factors affecting them. We describe our generalbusiness risks, critical accounting policies, and estimates that are importantto our operating results on the previous pages. Please refer to that discussion as you read this section.

 

 

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**Components of Operations**

 

The following table summarizes our statements ofoperations data on a percentage-of-revenue basis.
| ** **                                            | ** **   | **Three Months Ended June 30,** | ** **   | **Six Months Ended June 30,** | ** **   |
|-------------------------------------------------------|--------------|---------------------------------|--------------|-------------------------------|--------------|
| ** **                                            | ** **   | **2005**                        | ** **   | **2004**                      | ** **   | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** **   | **$**                           | ** **   | **%**                         | ** **   | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *** ***                                          | *** *** | **(in thousands)**              | ** **   | **(in thousands)**            | *** *** |
| **Revenue**                                           |         | $                               | 251,809      | *** ***                  | ***100.0***  | ***%*** | $ | 240,055 | *** *** | ***100.0*** | ***%*** | $ | 502,978 | *** *** | ***100.0*** | ***%*** | $ | 484,123 | *** *** | ***100.0*** | ***%*** |
|                                                  |         |                            |         |                          | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Direct labor and  telecommunications expenses         |         | 153,636                         |         | ***61.0***                    | ***%***      | 143,032 |   | ***59.6*** | ***%*** | 306,112 |   | ***60.9*** | ***%*** | 287,160 |   | ***59.3*** | ***%*** |
| Subcontracted  and other services expenses            |         | 12,886                          |         | ***5.1***                     | ***%***      | 13,022 |   | ***5.4*** | ***%*** | 25,774 |   | ***5.1*** | ***%*** | 25,837 |   | ***5.3*** | ***%*** |
| Operating,  selling and administrative expenses       |         | 80,555                          |         | ***32.0***                    | ***%***      | 76,922 |   | ***32.0*** | ***%*** | 160,558 |   | ***31.9*** | ***%*** | 153,762 |   | ***31.8*** | ***%*** |
| Asset impairment  and restructuring expenses, net     |         | (2,609                          | ***)***      | ***-1.0***                    | ***%***      | — |   | ***0.0*** | ***%*** | (2,609 | ***)*** | ***-0.5*** | ***%*** | — |   | ***0.0*** | ***%*** |
| **Operating  income**                                 |         | 7,341                           | *** *** | ***2.9***                     | ***%***      | 7,079 | *** *** | ***2.9*** | ***%*** | 13,143 | *** *** | ***2.6*** | ***%*** | 17,364 | *** *** | ***3.6*** | ***%*** |
|                                                  |         |                            |         |                          | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Interest expense                                      |         | (2,939                          | ***)***      | ***-1.2***                    | ***%***      | (3,099 | ***)*** | ***-1.3*** | ***%*** | (5,796 | ***)*** | ***-1.2*** | ***%*** | (6,332 | ***)*** | ***-1.3*** | ***%*** |
| Interest income                                       |         | 140                             | *** *** | ***0.1***                     | ***%***      | 121 | *** *** | ***0.1*** | ***%*** | 260 | *** *** | ***0.1*** | ***%*** | 242 | *** *** | ***0.0*** | ***%*** |
| Equity in  earnings (loss) of affiliates              |         | 395                             | *** *** | ***0.2***                     | ***%***      | 77 | *** *** | ***0.0*** | ***%*** | 288 | *** *** | ***0.1*** | ***%*** | 70 | *** *** | ***0.0*** | ***%*** |
| Other expense,  net                                   |         | (21                             | ***)***      | ***0.0***                     | ***%***      | (118 | ***)*** | ***0.0*** | ***%*** | (31 | ***)*** | ***0.0*** | ***%*** | (392 | ***)*** | ***-0.1*** | ***%*** |
| **Income  before income taxes and minority interest** |         | 4,916                           |         | ***2.0***                     | ***%***      | 4,060 |   | ***1.7*** | ***%*** | 7,864 |   | ***1.6*** | ***%*** | 10,952 |   | ***2.3*** | ***%*** |
|                                                  |         |                            |         |                          | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Income tax  expense                                   |         | 1,392                           | *** *** | ***0.6***                     | ***%***      | 1,331 | *** *** | ***0.6*** | ***%*** | 2,531 | *** *** | ***0.5*** | ***%*** | 3,183 | *** *** | ***0.7*** | ***%*** |
| Minority  interest                                    |         | 307                             | *** *** | ***0.1***                     | ***%***      | 210 | *** *** | ***0.1*** | ***%*** | 667 | *** *** | ***0.1*** | ***%*** | 424 | *** *** | ***0.1*** | ***%*** |
| **Net  income**                                       |         | $                               | 3,217        | * *                      | ***1.3***    | ***%*** | $ | 2,519 | *** *** | ***1.0*** | ***%*** | $ | 4,666 | * * | ***0.9*** | ***%*** | $ | 7,345 | *** *** | ***1.5*** | ***%*** |

# * *

# ***Three MonthsEnded June 30, 2005 Compared to the Same Period of 2004***

 

***Revenue***

Revenue increased $11.7 million, or 4.9%, in thethree months ended June 30, 2005 compared to the same period of 2004. Thechanges in revenue by geographic region are shown in the following table:

 
| **Three months Ended June 30,** | ** **   | **2005**          | ** **   | **2004** | ** ** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|--------------|-------------------|--------------|----------|------------|------------|---------------|------------|---------------|------------|
| *** ***                    | *** *** | **(in millions)** | *** *** |
| North America                   | ** **   | **$**             | **123.6**    |     | $          | 123.7      |          | $          | (0.1          | )          | -0.1 | % |
| Europe                          | ** **   | **106.1**         |         | 99.4     |       | 6.7        |          | 6.7        | %             |
| Asia Pacific                    | ** **   | **12.6**          |         | 9.8      |       | 2.8        |          | 28.6       | %             |
| Latin America                   | ** **   | **9.5**           |         | 7.2      |       | 2.3        |          | 31.9       | %             |
| Totals                          | ** **   | **$**             | **251.8**    |     | $          | 240.1      |          | $          | 11.7          |       | 4.9 | % |

 

North American revenue  for the three months ended June 30, 2005 wasconsistent with the same period in 2004.

 

European revenue increased $6.7 million for thethree months ended June 30, 2005 compared to the same period in 2004.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $2.3 million for the three monthsended June 30, 2005 compared to the same period in 2004.  The weakening of the U.S. dollar versus theBritish pound and Euro accounted for the remaining $4.4 million of theincrease.

 

Asia Pacific revenue increased $2.8 million forthe three months ended June 30, 2005 compared to the same period in 2004.  Higher sales volumes with existing clientsresulted in an increase in revenue of $1.5 million, while the weakening of theU.S. dollar versus the New Zealand and Australian dollars resulted in theremaining $1.3 million of the increase.

 

 

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Latin America revenue increased $2.3 million for the three months endedJune 30, 2005 compared to the same period in 2004.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $1.1 million, while the weakeningof the US dollar versus the Brazilian Real resulted in the remaining $1.2million of the increase.

 

***Direct Labor andTelecommunications Expenses***

Direct labor and telecommunications expensesinclude the compensation of our customer service professionals and their firstline supervisors and telephone usage expenses directly related to theproduction of revenue.

 

Direct labor and telecommunications expenses as apercentage of revenue can vary based on the nature of the contract, the natureof the work, and the market in which the services are provided. Accordingly,direct labor and telecommunications expenses as a percentage of revenue canvary, sometimes significantly, from period to period.

 

Direct labor and telecommunications expensesincreased $10.6 million, or 7.4%, for the three months ended June 30, 2005compared to the same period of 2004.  Asa percentage of revenue, direct labor and telecommunications expenses increasedto 61.0% for thethree months ended June 30, 2005 compared to 59.6% in same period in 2004.  During thethree months ended June 30, 2004, we recorded a benefit from the refund of $1.3million of payroll tax overpayments paid in a prior year as a reduction ofdirect labor and telecommunications expenses. Excluding the impact of the payroll tax refund, direct labor andtelecommunications expenses as a percentage of revenue was 60.1% for thethree months ended June 30, 2004.Theincrease was primarily the result of higher ramp-up costs of new clientprograms, particularly in Europe, reduced pricing on a major client contract,and a change in the mix of services provided in the three months ended June 30,2005 compared to the same period in 2004.

 

***Subcontracted and Other ServicesExpenses***

Subcontracted and otherservices expenses included services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expenses remained consistent for thethree months ended June 30, 2005 compared to the same period of 2004.

 

Subcontracted expenses for services provided byour India joint venture for the three months ended June 30, 2005 and 2004 were$4.3 million and $3.1 million, respectively.

 

***Operating, Selling andAdministrative 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 and administrative expensesincreased $3.6 million, or 4.7%, for the three months ended June 30, 2005compared to the same period of 2004.  Theweakening of the US dollar compared to the primary currency in thejurisdictions that we operate accounted for an increase of $2.5 million inoperating, selling and administrative expenses for the three months ended June30, 2005 compared to the same period in 2004. As a percentage of revenue, operating, selling and administrativeexpenses were consistent at 32.0% for the three months ended June 30, 2005 and2004.

 

***AssetImpairment and Restructuring Expenses, net***

During the three months ended June 30, 2005, we decided to open apreviously closed leased facility to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled undiscounted lease paymentsfor the closed facility. As a result of the decision to reopen the facility, wereversed the remaining $3.2 million restructuring liability. This reversal waspartially offset by severance related to previously announced facilityclosures, resulting in a net reversal of $2.6 million.

 

***Operating Income***

Operating income increased $0.3 million for thethree months ended June 30, 2005 compared to the same period of 2004 due to thefactors discussed above.

 

***Interest Expense***

Interest expense decreased $0.2 million or 5.2%for the three months ended June 30, 2005 compared to the same period in 2004,as a result of lower borrowings.

 

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***Interest Income***

Interest income remained consistent for the three months ended June 30,2005 compared to the same period in 2004.

 

***Equity in Earnings (loss) ofAffiliates***

Equity in earnings (loss) of affiliates increased$0.3 million for the three months ended June 30, 2005 compared to the sameperiod in 2004 primarily due to higher revenue along with lower training andramp-up costs resulting in higher operating margins from one of our jointventures.

 

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

Other income (expense), net decreased $0.1 millionfor the three months ended June 30, 2005 compared to the same period in 2004primarily 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***

Income tax expense as a percentageof income before income taxes and minority interest was 28.3% and 32.8% for thethree-months ended June 30, 2005 and 2004, respectively. The differencebetween these rates and the statutory U.S. Federal rate of 35% was primarilydue to the utilization of net operating loss carryforwards in certainsubsidiaries for which a full valuation allowance had previously been providedagainst the net deferred tax asset and due to income tax expense incurred incertain non-US subsidiaries.

 

**SixMonths Ended June 30, 2005 Compared to the Same Period of 2004**

 

***Revenue***

Revenue increased $18.9 million, or 3.9%, for thesix months ended June 30, 2005 compared to the same period of 2004. The changesin revenue by geographic region are shown in the following table:

 
| **Six months Ended June 30,** | ** **   | **2005**          | ** **   | **2004** | ** ** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------|--------------|-------------------|--------------|----------|------------|------------|---------------|------------|---------------|------------|
| *** ***                  | *** *** | **(in millions)** | *** *** |
| North America                 | ** **   | **$**             | **246.6**    |     | $          | 252.9      |          | $          | (6.3          | )          | -2.5 | % |
| Europe                        | ** **   | **213.9**         |         | 197.9    |       | 16.0       |          | 8.1        | %             |
| Asia Pacific                  | ** **   | **24.9**          |         | 19.5     |       | 5.4        |          | 27.7       | %             |
| Latin America                 | ** **   | **17.6**          |         | 13.8     |       | 3.8        |          | 27.5       | %             |
| Totals                        | ** **   | **$**             | **503.0**    |     | $          | 484.1      |          | $          | 18.9          |       | 3.9 | % |

 

North American revenue decreased $6.3 million or2.5% for the six months ended June 30, 2005 compared to the same period in 2004primarily due to a $24.9 million decrease in customer care, customeracquisition and risk management services offset by a $18.1 million increase intechnical support services.  Theweakening of the U.S. dollar versus the Canadian dollar offset $0.6 million ofthe decrease.

 

European revenue increased $16.0 million or 8.1%for the six months ended June 30, 2005 compared to the same period in2004.  Higher sales volumes from new andexisting clients resulted in an increase in revenue of $6.9 million for the sixmonths ended June 30, 2005 compared to the same period in 2004.  The weakening of the U.S. dollar versus theBritish pound and Euro accounted for the remaining $9.1 million of theincrease.

 

Asia Pacific revenue increased $5.4 or 27.7%million for the six months ended June 30, 2005 compared to the same period in2004.  Higher sales volume with existingclients resulted in an increase in revenue of $3.6 million, while the weakeningof the U.S. dollar versus the New Zealand and Australian dollars resulted inthe remaining $1.8 million of the increase.

 

Latin America revenue increased $3.8 million or 27.5% for the sixmonths ended June 30, 2005 compared to the same period in 2004.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $2.2 million, while the weakeningof the US dollar versus the Brazilian Real accounted for the remaining $1.6million of the increase.

 

 

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***Direct Labor andTelecommunications Expenses***

Direct labor and telecommunications expensesincreased $19.0 million, or 6.6%, for the six months ended June 30, 2005compared to the same period of 2004.  Asa percentage of revenue, direct labor and telecommunications expenses increasedto 60.9% for the sixmonths ended June 30, 2005 compared to 59.3% in same period in 2004.  During thesix months ended June 30, 2004, we recorded a benefit from the refund of $1.3million of payroll tax overpayments paid in a prior year as a reduction ofdirect labor and telecommunications expenses. Excluding the impact of the payroll tax refund, direct labor andtelecommunications expenses as a percentage of revenue was 59.6% for thesix months ended June 30, 2004. The increase was primarily the result ofhigher ramp-up costs of new client programs, particularly in Europe, reducedpricing on a major client contract, and a change in the mix of servicesprovided in the six months ended June 30, 2005 compared to the same period in2004.

 

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expenses includedservices provided to clients through subcontractors and other out-of-pocketexpenses.  Subcontracted and otherservices expenses remained consistent for the six months ended June 30, 2005compared to the same period of 2004.

 

Subcontracted expenses for services provided byour India joint venture for the six months ended June 30, 2005 and 2004 were$8.3 million and $6.5 million, respectively.

 

***Operating, Selling andAdministrative Expenses***

Operating, selling and administrative expensesrepresent expenses incurred to directly support and manage the business,including costs of management, administration, technology, facilities,depreciation and amortization, maintenance, sales and marketing, and clientsupport services.

 

Operating, selling and administrative expensesincreased $6.8 million, or 4.4%, for the six months ended June 30, 2005compared to the same period in 2004.  Theweakening of the U.S. dollar compared to the currencies in the primaryjurisdictions that we operate in accounted for an increase of $4.9 million forthe six months ended June 30, 2005 compared with the same period in 2004.  As a percentage of revenue, operating,selling and administrative expenses increased to 31.9% for the six months endedJune 30, 2005 compared to 31.8% for the same period of 2004.

 

***AssetImpairment and Restructuring Expenses, net***

During the six months ended June 30, 2005, we decided to open apreviously closed leased facility to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled undiscounted lease paymentsfor the closed facility. As a result of the decision to reopen the facility, wereversed the remaining $3.2 million restructuring liability. This reversal waspartially offset by severance related to previously announced facilityclosures, resulting in a net reversal of $2.6 million.

 

***Operating Income***

Operating incomedecreased $4.2 million for the six months ended June 30, 2005 due to thefactors discussed above.

 

***Interest Expense***

Interest expense decreased $0.5 million, or 8.5%,for the six months ended June 30, 2005 compared to the same period in 2004, asa result of lower borrowings.

 

***Interest Income***

Interest income remained consistent for the first quarter of 2005compared to the same period in 2004.

 

***Equity in Earnings (Losses) ofAffiliates***

Equity in earnings(losses) of affiliates increased by $0.2 million for the six months ended June30, 2005 as compared to the same period in 2004 primarily due to higher revenuealong with lower training and ramp-up costs resulting in higher operatingmargins from one of our joint ventures.

 

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

Other income (expense), net decreased $0.4 millionfor the six months ended June 30, 2005 compared to the same period in2004.  The decrease was primarily as aresult of fluctuations in foreign currency remeasurement gains (losses) arisingfrom monetary assets and liabilities denominated in currencies other than abusiness unit’s functional currency.

 

 

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***Income Tax Expense***

Income tax expense as a percentageof income before income taxes and minority interest was 32.2% and 29.1% for thesix months ended June 30, 2005 and 2004, respectively. The differencebetween these rates and the statutory U.S. Federal rate of 35% was primarilydue to the utilization of net operating loss carryforwards in certainsubsidiaries for which a full valuation allowance had previously been providedagainst the net deferred tax asset and due to income tax expense incurred incertain non-US subsidiaries.

 

**Financial Condition and Liquidity**

 

In this section, we discuss ourfinancial condition and liquidity and the factors affecting them. We separatelydiscuss cash flows, capital resources, and contractual obligations andcommitments. We describe our general business risks, critical accountingpolicies, and estimates that are important to our financial condition andliquidity earlier in this report. Please refer to that discussion as you read thissection.

 

# ***Cash Flows***

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

 
| ***Six Months Ended June 30,*** | ** **   | **2005**           | ** **   | **2004** | ** ** |
|---------------------------------|--------------|--------------------|--------------|----------|------------|
| *** ***                    | *** *** | **(in thousands)** | *** *** |
| **Net cash flows from:**        |         |               |         |     |       |
| Operating  activities           |         | $                  | 3,991        |     | $          | 30,739 |   |
| Investing  activities           |         | (11,170            | )            | (10,978  | )          |
| Financing  activities           |         | 8,523              |         | 39       |       |
|                                 |              |                    |              |          |            |  |  |

 

**2005**

**In the six months ended June 30, 2005, cash provided byoperating activities resulted primarily from income before depreciation andamortization, and other charges of $19.1 million and a $2.6 million increase inother liabilities, partially offset by a $11.8 million increase in tradeaccounts receivable and other assets and a $5.9 million decrease in tradeaccounts payable.**

** **

**In the six months ended June 30, 2005, we used cash forinvesting activities to purchase $14.0 million of property and equipment and$0.5 million for dividends paid to a minority interest shareholder.  This was partially offset by $3.3 million inproceeds from the cash surrender value of life insurance.**

** **

**In the six months ended June 30, 2005, cash provided byfinancing activities resulted in net borrowings of debt and other obligationsof $8.5 million.**

** **

**2004**

In the six months ended June 30,2004, cash provided by operating activities resulted primarily from incomebefore depreciation and amortization, and other charges of $25.4 million and$4.8 million of increases in trade accounts payable and other liabilities and a$1.0 million decrease in other assets offset by increases in tradeaccounts receivable of $0.5 million.

 

In the six months ended June 30, 2004, we used cash forinvesting activities to purchase $10.5 million of property and equipment andused $0.8 million to increase investments in affiliates, offset partially byreceipts on notes receivable of $0.4 million.

 

In the six months ended June 30,2004, cash used in financing activities resulted in net repayments of debtand other obligations of $0.1 million offset by cash receipts from thereissuances of treasury stock.

** **

**CapitalResources**

We have historically used fundsgenerated from operations, leases of property and equipment, equity capital,senior subordinated notes, and borrowings under credit facilities with banks tofinance business acquisitions, capital expenditures and working capitalrequirements.

 

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We have a three-year $50 million revolving creditfacility that expires in December 2005. The credit facility is secured by accounts receivable in the UnitedStates, Canada and the United Kingdom. We intend to utilize the facility, as needed, for ongoing workingcapital requirements and general corporate purposes. At June 30, 2005, we had$40.7 million of available borrowings under the credit facility, and we were incompliance with all financial covenants of the facility.

Our 9.25% Senior Subordinated Notes (the Notes) are due in March2006.  As the Notes are due within oneyear, the Company has reclassified the remaining $90.0 million of outstandingbonds to a current liability as of June 30, 2005. We are currently in theprocess of refinancing the Notes and our revolving credit facility.

 

We expect to finance our currentoperations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash andavailable funds under our credit facility in addition to lease financing forproperty and equipment. Weexpect capital expenditures in the third quarter of 2005 to be in the range of$8 million to $12 million, as we continue to cover maintenance and technologyupgrades, asset replacements, efficiency investments, and investment forcontinued growth. Future acquisitions, if any, may requireadditional debt or equity financing.

 

Under a stock repurchase program that wasauthorized by our Board of Directors in February 2001, we may repurchase up to$10 million of our shares from time to time in the open market or in privatelynegotiated transactions, depending on general business and market conditions.Through the date of this report, we had repurchased a total of 881,700 sharesat a total cost of $1.5 million.

# * *

# ***ContractualObligations and Commitments***

We summarize various contractual obligations andcommitments in the Notes to our Consolidated Financial Statements in our Reporton Form 10-K for the year ended December 31, 2004.  These contractual obligations and commitmentsinclude:

•            $90.0 million of SeniorSubordinated Notes as shown in our consolidated condensed balance sheet at June30, 2005,

•            $27.0 million of revolving creditfacility and other local short-term debt as shown in our consolidated condensedbalance sheet at June 30, 2005,

•            $9.6 million of capital leaseobligations as shown in our consolidated condensed balance sheet at June 30,2005, and

•            operating lease obligations forproperty and certain equipment under noncancelable operating leasearrangements, which expire at various dates through 2018.

 

**Off-Balance Sheet Arrangements**

We do not have any obligationsthat meet the definition of an off-balance sheet arrangement and that have orare reasonably likely to have a material effect on our consolidated financialstatements.

 

**Other Matters**

 

***QuarterlyResults and Seasonality***

We have experienced, and expect to continue toexperience, quarterly variations in our results of operations mostly due to:

•                  the timing of our clients’customer relationship management initiatives and customer acquisition andloyalty campaigns,

•                  the commencement of new contractsand the discontinuance and termination of existing contracts,

•                  revenue mix,

•                  the timing ofadditional operating, selling, and administrative expenses to support newbusiness, and

•                  the timing ofrecognition 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’ outsourced customer management activities. Inaddition, our business generally can be slower in the third quarter due tosummer holidays in Europe.

 

***Effects of Inflation***

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

 

***Related PartyTransactions***

We have mademinority interest investments for business and strategic purposes through thepurchase of voting common and preferred stock of companies.  These investments are included in investmentsin affiliates in consolidated financial statements.  As of June 30, 2005 and December 31, 2004,the investment in our India joint venture was approximately 

 

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$4.0 million and$4.1 million, respectively.  Subcontracted services provided by our India jointventure for the three months ended June 30, 2005 and 2004 were $4.3 million and$3.1 million, respectively, and for the six months ended June 30, 2005 and 2004were $8.3 million and $6.5 million, respectively and are included insubcontracted and other services expenses in the accompanying consolidatedstatements of operations. The Company had payables to our India joint ventureof $3.5 million and $3.0 million at June 30, 2005 and December 31, 2004,respectively, which are included in trade accounts payable in the consolidatedfinancial statements.

 

As of June 30, 2005 and December 31, 2004, the investment in certainLatin America affiliates was approximately $12.9 million and $12.4 million,respectively. Of the investment in certain Latin America affiliates, approximately$7.7 million is equity method goodwill. This equity method goodwill is notamortized.  Subcontracted servicesprovided by our Latin America joint ventures for the three and six monthperiods ended June 30, 2005 and 2004 were not material.

 

***Recently IssuedAccounting Pronouncements***

In December 2004, the Financial Accounting Standards Board (FASB)issued SFAS No. 123 (R), *Share-Based Payment*,(SFAS 123R). This standard will require the cost of employee compensation paidwith equity instruments to be measured based on grant-date fair values with thecost recorded as compensation expense over the period during which the employeeis required to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” in Note 1 to the consolidatedfinancial statements for the pro forma net income and net income per shareamounts, for the three and six month periods ended June 30, 2005 and 2004, asif we had used a fair-value-based method similar to the methods required underSFAS 123R to measure compensation expense for employee stock incentiveawards.  In March 2005, the Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin(SAB) No. 107, which expressed the views of the SEC regarding theinteraction between SFAS 123R and certain SEC rules and regulations.SAB No. 107 provides guidance related to the valuation of share-basedpayment arrangements for public companies, including assumptions such asexpected volatility and expected term. In April 2005, the SEC approved a rule that delayed the effectivedate of SFAS 123R for public companies. As a result, SFAS 123R willbe effective for the Company in the first quarter of 2006 and will apply to allof our outstanding unvested share-based payment awards as of January 1,2006 and all prospective awards. Although we have not yet determined whether the adoption of SFAS 123Rwill result in amounts that are similar to the current pro forma disclosuresunder SFAS 123, we are evaluating the requirements under SFAS 123Rand expect the adoption to have a significant impact on our consolidatedstatements of income and net income per share.

 

In October 2004, The American Jobs Creation Act of 2004 (the Act) wassigned into law. The Act creates a temporary incentive for U.S. multinationalsto repatriate accumulated income earned outside the U.S. In December 2004, theFASB issued FSP 109-2, *Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004*(FSP 109-2)*. *FSP 109-2 provides additional timeto companies beyond the financial reporting period of enactment to evaluate theeffects of the AJCA on their plans for repatriation of foreign earnings forpurposes of applying SFAS 109, *Accountingfor Income Taxes*. The Company is currently evaluating therepatriation provisions of AJCA, which if implemented would affect our taxprovision and deferred tax assets and liabilities. Due to the complexity anduncertainty of applying the provisions of the Act, the income tax effects ofsuch repatriation cannot be reasonably estimated at this time.

 

 

**Item 3. Quantitative and Qualitative Disclosures about MarketRisk**

*** ***

***Foreign Currency Risk***

We are exposed to market risksassociated primarily with changes in foreign currency exchange rates. We haveoperations in many parts of the world; however, both revenue and expenses ofthose operations are typically denominated in the currency of the country ofoperations, providing a natural hedge.

 

Ourfinancial statements are presented in U.S. dollars and can be impacted byforeign exchange fluctuations through both (i) translation risk, which isthe risk that the financial statements for a particular period or as of acertain date depend on the prevailing exchange rates of the various currenciesagainst the U.S. dollar, and (ii) transaction risk, which is the risk thatthe currency impactof transactions denominated in currencies other than the business unit’sfunctional currency may vary according to currency fluctuations.

 

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With respect to translation risk, even though thefluctuations of currencies against the U.S. dollar can be substantial andtherefore significantly impact comparisons with prior periods, the translationimpact is included in accumulated other comprehensive income, a component of stockholders’ equity, anddoes not affect the underlying results of operations. Gains and losses related to transactions denominated in a currency otherthan the functional currency of the countries in which we operate includingshort-term intercompany accounts are included in the determination of net income.

 

***Interest Rate Risk***

We are also exposed to changes in interest rates on our variable rateborrowings. Interest rates on our Senior Subordinated Notes and capital leaseobligations are fixed, but rates on borrowings under our bank credit facilityare variable. During the three-month and six-month periods ended June 30, 2005,our average borrowings under our revolving credit facility were $14.6 millionand $12.8 million, respectively.  Basedon our projected cash needs for the foreseeable future, we do not expect thatour exposure to changes in interest rates for these borrowings will have amaterial impact on our interest expense.

 

***Investment Risk***

We do not use derivative financial or commodity instruments.  Our financial instruments included cash andcash equivalents, accounts receivable, accounts payable, current and long-termdebt.  Our cash and cash equivalents,accounts receivable, accounts payable, and current debt balances are short-termin nature and do not expose us to material investment risk.  Our Senior Subordinated Notes had a bookvalue of $90 million at June 30, 2005 and December 31, 2004.

 

**Item 4. Controls and Procedures**

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on this evaluation, our Chief Executive Officer andour Chief Financial Officer have concluded that our disclosure controls andprocedures are effective to ensure that information we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

There was no change in our internal control over financial reportingthat occurred during the period covered by this Quarterly Report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

We do not expect that our disclosure controls and procedures or ourinternal controls over financial reporting will prevent all error and allfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within SITEL have been detected.

 

**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time,during the normal course of business, we may make certain indemnities,commitments and guarantees under which we may be required to make payments inrelation to certain transactions.  Theseinclude, for example:  (i) indemnities toclients pertaining to claims based on our negligence or willful misconduct, and(ii) indemnities involving the accuracy of representations and warranties incertain contracts.

 

From time to time, we are involved in litigation incidental to ourbusiness. We cannot predict the ultimate outcome of such litigation withcertainty, but management believes, after consultation with counsel, except forthe items discussed below for the reasons mentioned therein, that the resolutionof such matters will not have a material adverse effect on our consolidatedfinancial position or results of operations.

 

*BankruptcyOP Computers SPA vs. SITEL Kingston Limited* (now known as MitreTelesales Limited) was filed in April 2004 in the Court of Ivrea in Milan,Italy.  The receivers assert that Mitre,as a former supplier to Olivetti, is required under Italian bankruptcy law toreturn €5,349,025 (approximately $6.9 million) in payments Olivetti had allegedlypaid Mitre during a one-year “clawback” period, which allegedly runs from March9, 1998 until March 9, 1999, the alleged 

 

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date Olivetti filed for receivership.  Mitre filed its Defence with the court inNovember 2004.  The Defence outlined thefacts and reasons why Mitre did not and should not reasonably have known ofOlivetti’s insolvent state during the time that Mitre was performing servicesfor Olivetti.  The first substantivehearing held in May 2005 was adjourned to November 2005.  The Company and its subsidiary MitreTelesales Limited are currently unable to predict the outcome or reasonablyestimate the possible loss, if any, or range of losses associated with thisclaim.

 

Two of our clients have received letters from time to time containingan offer to license and suggesting that the clients might be infringing certainpatents related to computerized telephonic voice response systems without thelicense. The clients have indicated that if any infringement occurred theclient would seek contractual indemnity from us. In such an event, we wouldexpect to seek contractual indemnity from certain of our vendors. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving such matter. We might also seek a licenseunder the patents. Any such license may not be available under commerciallyreasonable terms. Any license costs would increase the cost of doing businessin the future and may or may not be fully reflected in our pricing. To ourknowledge, no litigation has been initiated against our clients or usconcerning this matter. At this stage, due to the inherent uncertainties, weare unable to predict whether this matter may have a material adverse effect onour business or on our financial condition or results of operation.

 

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

 

(a)          **Dateand Type of Meeting**

The Company held itsAnnual Meeting of Stockholders on May 12, 2005.

 

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

There were 56,590,826shares of Common Stock represented at the meeting in person or by proxy. Oneproposal was presented to the stockholders for the election of two directorsfor three-year terms.  The voting on theproposal was as follows:

 

| ** **       | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Rohit M. Desai   |       | 55,229,111 |       | 1,361,715    |       |
| Nigel T. Gourlay |       | 55,393,171 |       | 1,197,655    |       |

 

 

**Item 5. Other Information**

 

**Forward-LookingStatements**

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, unanticipated labor, contract or technical difficulties,delays in ramp up of services under contracts, reliance on major subcontractorsand strategic partners, risks associated with managing a global business,fluctuations in operating results, relianceon telecommunications and computer technology, dependence on laborforce, industry regulation, general and local economic conditions, competitivepressures in our industry, risks associated with litigation and claims, foreigncurrency risks, the effects of leverage, dependency on credit availability,restrictions imposed by the terms of indebtedness, and dependence on key personnel and control by management.

 

Given these uncertainties, you should not place undue reliance on theseforward-looking statements. Please see the other sections of this report andour other periodic reports filed with the Securities and Exchange Commissionfor more information on these factors.

 

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** **

**Item 6. Exhibits**

 

(a)      Exhibits:

 

Exhibit No.

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

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

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

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

 

 

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### **SIGNATURE**

 

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

|   |           |   |                         |
|--------|----------------|--------|------------------------------|
|   |           |   | SITEL Corporation            |
|   |           |   | **(Registrant)**             |
|   |           |   |                         |
| Date:  | August 9, 2005 |   | By /s/ *Jorge A. Celaya*     |
|   |           |   | **Jorge A.  Celaya**         |
|   |           |   | *Chief  Financial Officer*   |
|   |           |   | (Duly Authorized Officer and |
|   |           |   | Principal Financial Officer) |

** **

 

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**EXHIBIT INDEX**

 

 

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

 

 

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