**UNITED STATESSECURITIES 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**

 

**Forthe quarterly period ended JUNE 30, 2003**

 

| Commission File  Number                                                                                                                |                                      | Exact name of  registrant as specified in its charter |   | IRS Employer  Identification No. |
|----------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|-------------------------------------------------------|--------|----------------------------------|
| **1-12577**                                                                                                                            |                                      | **SITEL CORPORATION**                                 |   | **47-0684333**                   |
|                                                                                                                                   |
| **MINNESOTA**                                                                                                                          |
| (State or Other  Jurisdiction of Incorporation or Organization)                                                                        |
|                                                                                                                                   |
| **111 S. CALVERT STREET, SUITE  1900      BALTIMORE, MARYLAND      21202** |
|                                                                                                                                   | (Address of Principal  Executive Offices) | (Zip Code)                                            |
|                                                                                                                                   |
| **(410) 246-1505**                                                                                                                     |
| (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:

**NotApplicable**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days. YES  ý  NO  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).

YES  ý  NO  o

 

**COMMONSTOCK, $.001 PAR VALUE – 73,570,537 SHARES OUTSTANDING AS OF JULY 31, 2003**

 

 

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

 

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**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INC****OME (LOSS)**

**(UNAUDITED)**

(in thousands, except per share data)

 
|                                                                                      |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|-------------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                                      |   | **2003**                         |       | **2002**                       |       | **2003** |   | **2002** |   |
|                                                                                      |   |                             | * *   |                           | * *   |   | * * |   | * * |
| **Revenues**                                                                              |   | $                                | 204,566    |                           | $          | 196,747 |   | $ | 398,661 |   | $ | 389,779 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Operating expenses:**                                                                   |   |                             |       |                           |       |   |   |   |   |
| Direct labor and telecommunications expenses                                              |   | 121,664                          |       | 110,651                        |       | 232,435 |   | 222,667 |   |
| Subcontracted and other services expenses                                                 |   | 12,904                           |       | 13,898                         |       | 26,554 |   | 25,491 |   |
| Operating, selling and administrative expenses                                            |   | 70,711                           |       | 63,335                         |       | 136,387 |   | 125,095 |   |
| Asset impairment and restructuring expenses                                               |   | —                           |       | —                         |       | 796 |   | — |   |
| Total operating expenses                                                                  |   | 205,279                          |       | 187,884                        |       | 396,172 |   | 373,253 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Operating income (loss)**                                                               |   | (713                             | )          | 8,863                          |       | 2,489 |   | 16,526 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Other income (expense):**                                                               |   |                             |       |                           |       |   |   |   |   |
| Interest expense, net                                                                     |   | (2,874                           | )          | (2,805                         | )          | (5,598 | ) | (5,536 | ) |
| Equity in earnings of affiliates                                                          |   | 322                              |       | 1,012                          |       | 939 |   | 1,347 |   |
| Other income (expense), net                                                               |   | 1,393                            |       | (35                            | )          | 735 |   | (223 | ) |
| Total other expense, net                                                                  |   | (1,159                           | )          | (1,828                         | )          | (3,924 | ) | (4,412 | ) |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (1,872                           | )          | 7,035                          |       | (1,435 | ) | 12,114 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| Income tax expense                                                                        |   | 1,269                            |       | 2,743                          |       | 1,439 |   | 4,724 |   |
| Minority interest                                                                         |   | 102                              |       | 781                            |       | 308 |   | 1,141 |   |
| **Income (loss) before change in  accounting method**                                     |   | (3,243                           | )          | 3,511                          |       | (3,182 | ) | 6,249 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| Cumulative effect of a change in accounting for  goodwill                                 |   | —                           |       | —                         |       | — |   | (18,399 | ) |
| **Net income (loss)**                                                                     |   | $                                | (3,243     | )                              | $          | 3,511 |   | $ | (3,182 | ) | $ | (12,150 | ) |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Weighted average common shares  outstanding:**                                          |   |                             |       |                           |       |   |   |   |   |
| Basic                                                                                     |   | 74,072                           |       | 74,221                         |       | 74,165 |   | 74,219 |   |
| Diluted                                                                                   |   | 74,072                           |       | 74,572                         |       | 74,165 |   | 74,423 |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Earnings per share:**                                                                   |   |                             |       |                           |       |   |   |   |   |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Basic:**                                                                                |   |                             |       |                           |       |   |   |   |   |
| Income (loss) before change in accounting method                                          |   | $                                | (0.04      | )                              | $          | 0.05 |   | $ | (0.04 | ) | $ | 0.08 |   |
| Cumulative effect of change in accounting for  goodwill                                   |   | —                           |       | —                         |       | — |   | (0.25 | ) |
| **Net income (loss)**                                                                     |   | $                                | (0.04      | )                              | $          | 0.05 |   | $ | (0.04 | ) | $ | (0.16 | ) |
|                                                                                      |   |                             |       |                           |       |   |   |   |   |
| **Diluted:**                                                                              |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Income (loss) before change in accounting method                                          |   | $                                | (0.04      | )                              | $          | 0.05 |   | $ | (0.04 | ) | $ | 0.08 |   |
| Cumulative effect of change in accounting for  goodwill                                   |   | —                           |       | —                         |       | — |   | (0.25 | ) |
| **Net income (loss)**                                                                     |   | $                                | (0.04      | )                              | $          | 0.05 |   | $ | (0.04 | ) | $ | (0.16 | ) |

 

*See Notes to Consolidated Condensed Financial Statements*

 

1

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**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
|                                                                                                                                         |   | **June 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                                         |   | **(Unaudited)**    |    |                   |   |
| **Assets**                                                                                                                                   |   |               |    |                   |   |
| **Current assets:**                                                                                                                          |   |               |    |                   |   |
| Cash  and cash equivalents                                                                                                                   |   | $                  | 31,497  |                   | $      | 34,142 |   |
| Trade  accounts receivable (net of allowance for doubtful accounts of $3,664 and  $4,011, respectively)                                      |   | 139,565            |    | 128,643                |   |
| Prepaid  expenses                                                                                                                            |   | 10,094             |    | 7,173                  |   |
| Deferred  income taxes                                                                                                                       |   | 5,194              |    | 5,141                  |   |
| Other  assets                                                                                                                                |   | 8,662              |    | 8,557                  |   |
| Total  current assets                                                                                                                        |   | 195,012            |    | 183,656                |   |
|                                                                                                                                         |   |               |    |                   |   |
| **Property and equipment, net**                                                                                                              |   | 89,477             |    | 86,883                 |   |
|                                                                                                                                         |   |               |    |                   |   |
| **Other assets:**                                                                                                                            |   |               |    |                   |   |
| Goodwill                                                                                                                                     |   | 52,041             |    | 49,724                 |   |
| Deferred  income taxes                                                                                                                       |   | 6,200              |    | 6,191                  |   |
| Investment  in affiliates                                                                                                                    |   | 19,488             |    | 18,461                 |   |
| Other  assets                                                                                                                                |   | 7,365              |    | 7,062                  |   |
| **Total assets**                                                                                                                             |   | $                  | 369,583 |                   | $      | 351,977 |   |
|                                                                                                                                         |   |               |    |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                |   |               |    |                   |   |
| **Current liabilities:**                                                                                                                     |   |               |    |                   |   |
| Current  portion of long-term debt                                                                                                           |   | $                  | 5,255   |                   | $      | 5,404 |   |
| Current  portion of capital lease obligations                                                                                                |   | 1,884              |    | 1,951                  |   |
| Trade  accounts payable                                                                                                                      |   | 31,241             |    | 28,612                 |   |
| Income  taxes payable                                                                                                                        |   | 2,761              |    | 1,788                  |   |
| Accrued  wages, salaries and bonuses                                                                                                         |   | 31,433             |    | 28,283                 |   |
| Accrued  operating expenses                                                                                                                  |   | 37,947             |    | 30,129                 |   |
| Deferred  revenue and other                                                                                                                  |   | 5,903              |    | 6,871                  |   |
| Total  current liabilities                                                                                                                   |   | 116,424            |    | 103,038                |   |
| **Long-term debt and other liabilities:**                                                                                                    |   |               |    |                   |   |
| Long-term  debt, excluding current portion                                                                                                   |   | 100,000            |    | 100,000                |   |
| Capital  lease obligations, excluding current portion                                                                                        |   | 8,006              |    | 7,307                  |   |
| Deferred  compensation                                                                                                                       |   | 1,428              |    | 1,394                  |   |
| Deferred  income taxes                                                                                                                       |   | 345                |    | 296                    |   |
| Total  liabilities                                                                                                                           |   | 226,203            |    | 212,035                |   |
|                                                                                                                                         |   |               |    |                   |   |
| **Minority interests**                                                                                                                       |   | 1,088              |    | 780                    |   |
| **Stockholders’ equity:**                                                                                                               |   |               |    |                   |   |
| Common  stock, voting, $.001 par value 200,000,000 shares authorized, 73,776,537 and  74,363,431 shares issued and outstanding, respectively |   | 74                 |    | 74                     |   |
| Additional  paid-in capital                                                                                                                  |   | 168,708            |    | 168,706                |   |
| Accumulated  other comprehensive loss                                                                                                        |   | (10,178            | )       | (17,262                | )      |
| Accumulated  deficit                                                                                                                         |   | (15,415            | )       | (12,193                | )      |
| Less  treasury stock, at cost, 586,894 and 120,663 common shares, respectively                                                               |   | (897               | )       | (163                   | )      |
|                                                                                                                                         |   |               |    |                   |   |
| Total  stockholders’ equity                                                                                                             |   | 142,292            |    | 139,162                |   |
| **Total liabilities and stockholders’ equity**                                                                                          |   | $                  | 369,583 |                   | $      | 351,977 |   |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

2

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**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CAS****H FLOWS**

**(UNAUDITED)**

(in thousands)

** **
|                                                                            |   | **Six Months Ended  June 30,** |     |
|---------------------------------------------------------------------------------|--------|--------------------------------|----------|
|                                                                            |   | **2003**                       |     | **2002** |   |
|                                                                            |   |                           | * * |   | * * |
| **Cash flows from operating  activities:**                                      |   |                           |     |   |   |
| Net loss                                                                        |   | $                              | (3,182   | ) | $ | (12,150 | ) |
| Adjustments to reconcile net loss to net cash flows  from operating activities: |   |                           |     |   |   |
| Cumulative effect of change in accounting method                                |   | —                         |     | 18,399 |   |
| Asset impairment and restructuring provision                                    |   | 796                            |     | — |   |
| Depreciation and amortization                                                   |   | 18,358                         |     | 17,106 |   |
| Loss on disposal of assets                                                      |   | 20                             |     | 69 |   |
| Provision for deferred income taxes                                             |   | (13                            | )        | 483 |   |
| Equity in earnings of affiliates                                                |   | (939                           | )        | (1,347 | ) |
| Impairment of equity investments                                                |   | 500                            |     | — |   |
| Changes in operating assets and liabilities:                                    |   |                           |     |   |   |
| Trade accounts receivable                                                       |   | (8,767                         | )        | (3,621 | ) |
| Other assets                                                                    |   | (986                           | )        | (19 | ) |
| Trade accounts payable                                                          |   | 4,529                          |     | 2,656 |   |
| Other liabilities                                                               |   | 4,116                          |     | 3,035 |   |
| Net cash flows from operating activities                                        |   | 14,432                         |     | 24,611 |   |
|                                                                            |   |                           |     |   |   |
| **Cash flows from investing  activities:**                                      |   |                           |     |   |   |
| Purchases of property and equipment                                             |   | (14,124                        | )        | (17,559 | ) |
| Proceeds from sales of property and equipment                                   |   | —                         |     | 4 |   |
| Increase in other assets                                                        |   | —                         |     | (53 | ) |
| Investment in affiliates                                                        |   | (1,000                         | )        | — |   |
| Net cash flows from investing activities                                        |   | (15,124                        | )        | (17,608 | ) |
|                                                                            |   |                           |     |   |   |
| **Cash flows from financing  activities:**                                      |   |                           |     |   |   |
| Borrowings on debt                                                              |   | 6,013                          |     | 33,915 |   |
| Repayments of debt                                                              |   | (6,060                         | )        | (33,915 | ) |
| Repayments of capital lease obligations                                         |   | (1,122                         | )        | (1,339 | ) |
| Treasury stock reissuances (repurchases), net                                   |   | (835                           | )        | 30 |   |
| Other                                                                           |   | —                         |     | (13 | ) |
| Net cash flows from financing activities                                        |   | (2,004                         | )        | (1,322 | ) |
| Effect of exchange rates on cash                                                |   | 51                             |     | 938 |   |
| **Net increase (decrease) in cash**                                             |   | (2,645                         | )        | 6,619 |   |
| **Cash and cash equivalents,  beginning of period**                             |   | 34,142                         |     | 22,156 |   |
| **Cash and cash equivalents, end of  period**                                   |   | $                              | 31,497   |   | $ | 28,775 |   |

 

*See Notes to Consolidated Condensed Financial Statements*

 

3

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**SITELCORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED CONDENSED FINANCIA****L STATEMENTS**

 

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

 

***General***

References in the Notesto Consolidated Condensed Financial Statements to “we” and “our” are to SITELCorporation and its subsidiaries, collectively.

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of largecorporations in North America, Europe, Asia Pacific, and Latin America. Weprovide customer acquisition, customer care, technical support and riskmanagement services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and internalcontact centers. We serve clients primarily in the automotive, consumerproducts, financial services, insurance, telecommunications, ISP and cable, andutilities sectors.

 

The accompanyingunaudited consolidated condensed financial statements reflect all normal andrecurring adjustments which are, in the opinion of management, necessary for afair presentation of the results of operations, financial position, and cashflows for the interim periods presented. The consolidated condensed financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto, together with management’s discussion andanalysis of financial condition and results of operations, contained in ourAnnual Report on Form 10-K for the year ended December 31, 2002. Allsignificant intercompany balances and transactions have been eliminated.Certain amounts in prior fiscal periods have been reclassified for comparativepurposes.

 

***Use of Accounting Estimates***

Management makesestimates and assumptions when preparing financial statements under accountingprinciples generally accepted in the United States of America that affect ourreported amounts of assets and liabilities at the dates of the financialstatements, our disclosure of contingent assets and liabilities at the dates ofthe financial statements, and our reported amounts of revenues and expensesduring the reporting periods. These estimates involve judgments with respectto, among other things, future economic factors that are difficult to predictand are beyond management’s control. As a result, actual amounts could differfrom these estimates.

 

***Recently Issued Accounting Pronouncements***

In June 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard (SFAS) No. 143, “Accounting for Asset RetirementObligations” (SFAS 143). SFAS 143 requires that we record the fair value of anasset retirement obligation as a liability in the period in which we incur alegal obligation associated with the retirement of tangible long-lived assetsthat result from the acquisition, construction, development and/or normal useof assets. We are also required to record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. We adopted SFAS 143 onJanuary 1, 2003. The adoption of SFAS 143 did not have a material effecton our consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146), which is effective for fiscal years beginningafter December 31, 2002. SFAS 146 supercedes Emerging Issues Task Force(EITF) Issue No. 94-3, “Liabilities Recognized for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” We adopted SFAS 146 on January 1,2003. See Note 4 to the consolidated condensed financial statements fordisclosure of asset impairment and restructuring expenses recorded during thefirst quarter of 2003.

 

In November 2002, theEITF reached a consensus on Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables’’ (EITF 00-21). EITF 00-21 addresses certain aspects ofthe accounting by a vendor for arrangements under which the vendor will performmultiple revenue generating activities. EITF 00-21 will be effectiveprospectively for new or modified contracts beginning July 1, 2003. We donot expect the adoption of EITF 00-21 to have a material impact on ourfinancial position or results of operations.

 

In November 2002, theFASB issued Interpretation No. 45 “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57, and 107

 

4

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and a rescission of FASBInterpretation No. 34” (FIN 45). FIN 45 elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under guarantees issued. FIN 45 also clarifies that a guarantor isrequired to recognize, at inception of a guarantee, a liability for the fairvalue of the obligation undertaken. The initial recognition and measurementprovisions of FIN 45 are applicable to guarantees issued or modified afterDecember 31, 2002 and have not had a material effect on our consolidatedfinancial statements.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedin FIN 46. FIN 46 applies immediately to variable interests in variableinterest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.FIN 46 applies as of July 1, 2003 for existing arrangements. We are currentlyassessing the impact, if any, the application of FIN 46 is expected to have onour consolidated financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities” (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities”(SFAS 133). Except for the provisions of SFAS 149 that relate to SFAS 133Implementation Issues that have been effective for fiscal quarters that beganprior to June 15, 2003, SFAS 149 is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. The application of SFAS 149 is not expected to have a materialeffect on our consolidated financial statements.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (SFAS 150). The provisions ofSFAS 150, which also include a number of new disclosure requirements, areeffective for instruments entered into or modified after May 31, 2003 and forpre-existing instruments as of the beginning of the first interim period thatcommences after June 15, 2003. The Company adopted the provisions of thestatement on its effective date and does not anticipate a material impact toits consolidated financial statements.

 

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

 

Comprehensive income(loss) for the three and six-month periods ended June 30, 2003 and 2002 are asfollows (in thousands):

** **
|                               |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                               |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net income (loss)                  |   | $                                | (3,243 | )                              | $      | 3,511 |   | $ | (3,182 | ) | $ | (12,150 | ) |
| Other comprehensive income (loss): |   |                             |   |                           |   |   |   |   |   |
| Currency translation adjustment    |   | 4,186                            |   | 10,392                         |   | 7,084 |   | 7,453 |   |
| Comprehensive income (loss)        |   | $                                | 943    |                           | $      | 13,903 |   | $ | 3,902 |   | $ | (4,697 | ) |

 

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

 

**Note 3.Goodwill**

 

As of January 1, 2002, weadopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”(SFAS 142), and we ceased amortizing goodwill, including equity methodgoodwill, beginning January 1, 2002. SFAS No. 142 also required the Company to complete a transitionalimpairment analysis of the Company’s goodwill based upon the estimated fairvalues of the Company’s goodwill as of January 1, 2002.  The Company completed the transitionalimpairment analysis prior to the issuance of the annual 2002 consolidatedfinancial statements and, as a result, recorded a goodwill impairment loss of $18.4million (net of tax).  The transitionalimpairment loss was recorded as a cumulative effect of an accounting change asof January 1, 2002, in the annual 2002 consolidated financial statements.  The accompanying consolidated condensedstatements of income (loss) and cash flows for the six-months ended June 30,2002 have been restated to include the January 1, 2002 impairment charge as acumulative effect of a change in accounting.

 

5

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

 

**Note4.  Asset Impairment and RestructuringExpenses**

 

As a result of certainclient contract negotiations that concluded during the first quarter of 2003,we re-assessed our facilities requirements and determined that a certainfacility subject to an operating lease was no longer needed. As a result, werecorded asset impairment and restructuring expenses of $0.8 million during thesix-months ended June 30, 2003 related to the write-off of abandoned leaseholdimprovements of $0.4 million and $0.4 million for scheduled payments ofoperating leases for which we will receive no future economic benefit. Ourestimates are based upon many factors including projections of sublease ratesand the time period required to locate tenants.

 

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

 

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

 
|                           |   | **Accrual  Balance  December 31,  2002** |   | **Expensed  in  2003** |   | **Paid  in  2003** |   | **Other** |   | **Accrual  Balance  June 30,  2003** |   |
|--------------------------------|--------|------------------------------------------|--------|------------------------|--------|--------------------|--------|-----------|--------|--------------------------------------|--------|
|                           |   | **(in  millions)**                       |   |
|                           |   |                                     |   |                   |   |               |   |      |   |                                 |   |
| Severance                      |   | $                                        | 0.3    |                   | $      | —             |   | $         | — |                                 | $      | — |   | $ | 0.3 |   |
| Facility  closure or reduction |   | 6.4                                      |   | 0.4                    |   | (1.5               | )      | 0.1       |   | 5.4                                  |   |
| Other                          |   | 0.3                                      |   | —                 |   | (0.1               | )      | 0.1       |   | 0.3                                  |   |
| Total                          |   | $                                        | 7.0    |                   | $      | 0.4                |   | $         | (1.6   | )                                    | $      | 0.2 |   | $ | 6.0 |   |

 

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

 

**Note 5.Investments in Affiliates**

 

We have made minority interest investments for business and strategicpurposes through the purchase of voting common and preferred stock ofcompanies. These investments are included in investments in affiliates in theconsolidated condensed balance sheets. We periodically evaluate whetherdeclines in fair value, if any, of our investments are other-than-temporary.This evaluation consists of a review of qualitative and quantitative factors.We also consider other factors to determine whether declines in fair value areother-than-temporary, such as the investee’s financial condition, results ofoperations and operating trends. We also consider the implied value from anyrecent rounds of financing completed by the investee. Based upon an evaluationof the facts and circumstances during the first quarter of 2003, we determinedthat an other-than-temporary impairment existed for one of our investments. Animpairment charge of $0.5 million has been recorded in other income(expense), net in the consolidated condensed statement of income (loss) for thesix-months ended June 30, 2003.

 

Subcontracted expenses for services provided by our India joint venturefor the three-month periods ended June 30, 2003 and 2002 were $2.9 million and$4.0 million, respectively. Subcontracted expenses for services provided by ourIndia joint venture for the six-month periods ended June 30, 2003 and 2002 were$6.3 million and $5.7 million, respectively. The Company had payables of $2.4million and $2.5 million at June 30, 2003 and December 31, 2002, respectively,which are included in trade accounts payable in the accompanying consolidatedcondensed balance sheets.

 

6

----

 

**Note 6. Stock-Based Compensation**

 

We provide stock optionawards to our employees and directors as an integral component of ourcompensation plan.  Vesting terms mayvary by grant and by plan, and the maximum term of stock options is limited bygoverning plan documents.  Option pricesare set at the fair value of our common stock on the date of grant.  Consequently, under the intrinsic valuemethod of accounting, we do not record any compensation expense for the grantsof stock options to employees or directors.

 

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

 
|                                                                                                                      |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                                      |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                      |   | **(in  thousands)**              |   |                           |   |   |   |   |   |
| Net  income (loss):                                                                                                       |   |                             |   |                           |   |   |   |   |   |
| As  reported                                                                                                              |   | $                                | (3,243 | )                              | $      | 3,511 |   | $ | (3,182 | ) | $ | (12,150 | ) |
| Less:  total stock based employee compensation expense determined under the fair  value method for all awards, net of tax |   | (360                             | )      | (599                           | )      | (708 | ) | (1,198 | ) |
| Pro  forma                                                                                                                |   | $                                | (3,603 | )                              | $      | 2,912 |   | $ | (3,890 | ) | $ | (13,348 | ) |
|                                                                                                                      |   |                             |   |                           |   |   |   |   |   |
| Income  (loss) per common share:                                                                                          |   |                             |   |                           |   |   |   |   |   |
| As  reported:                                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                                                                     |   | $                                | (0.04  | )                              | $      | 0.05 |   | $ | (0.04 | ) | $ | (0.16 | ) |
| Diluted                                                                                                                   |   | (0.04                            | )      | 0.05                           |   | (0.04 | ) | (0.16 | ) |
| Pro  forma:                                                                                                               |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                                                                     |   | (0.05                            | )      | 0.04                           |   | (0.05 | ) | (0.18 | ) |
| Diluted                                                                                                                   |   | (0.05                            | )      | 0.04                           |   | (0.05 | ) | (0.18 | ) |

 

The per shareweighted-average fair value of stock options granted for the six months endedJune 30, 2003 and 2002 was $0.76 and $1.61, respectively. The per shareweighted-average fair value of stock options granted was determined on the dateof grant using the Black-Scholes option-pricing model with an expected dividendyield of 0.0%, and the following weighted-average assumptions for the sixmonths ended June 30:

 
| **Year** |   | **Volatility Factor** |   | **Risk-Free  Interest Rate** |   | **Expected  Life (Years)** |   |
|----------|--------|-----------------------|--------|------------------------------|--------|----------------------------|--------|
|     |   |                  |   |                         |   |                       |   |
| 2003     |   | 64.0                  | %      | 3.0                          | %      | 5.0                        |   |
| 2002     |   | 69.2                  | %      | 2.0                          | %      | 5.0                        |   |

 

7

----

 

Prior to the adoption ofthe 1999 Plan, we granted options under several different plans. As of June 30,2003, options granted under these plans aggregating 2,906,556 remainedoutstanding with strike prices ranging from $2.34 to $12.65. The last of theseoptions will expire on February 1, 2009. We will not grant additional optionsunder these plans. The following table sets forth shares subject to options:

 
| **Year**                |   | **Number  of Options** |   | **Weighted-  Average  Exercise  Price per Share** |   |
|-------------------------|--------|------------------------|--------|---------------------------------------------------|--------|
|                    |   |                   |   |                                              |   |
| Balance January 1, 2003 |   | 8,805,281              |   | $                                                 | 3.83   |   |
| Granted                 |   | 321,300                |   | 1.36                                              |   |
| Exercised               |   | —                 |   | —                                            |   |
| Canceled                |   | (902,654               | )      | 3.76                                              |   |
| Balance, June 30, 2003  |   | 8,223,927              |   | $                                                 | 3.76   |   |

 

Theoptions exercisable at the end of each period were:

 
| **Year**          |   | **Number  of Options** |   | **Weighted-  Average  Exercise  Price per Share** |   |
|-------------------|--------|------------------------|--------|---------------------------------------------------|--------|
|              |   |                   |   |                                              |   |
| December 31, 2002 |   | 2,611,204              |   | $                                                 | 4.77   |   |
| June 30, 2003     |   | 3,301,215              |   | $                                                 | 4.63   |   |

 

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

 
| **Range of  Exercise Prices** |   | **Number  Outstanding** |   | **Weighted-  Average  Remaining  Life** |   | **Weighted-  Average  Exercise  Price** |   |
|-------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                          |   |                    |   |                                    |   |                                    |   |
| $1.24 to $1.75                |   | 499,402                 |   | 8.9                                     |   | $                                       | 1.51   |   |
| $1.76 to $4.00                |   | 5,638,466               |   | 8.1                                     |   | $                                       | 3.05   |   |
| $4.01 to $6.33                |   | 1,194,984               |   | 7.3                                     |   | $                                       | 4.82   |   |
| $6.34 to $7.22                |   | 639,865                 |   | 6.4                                     |   | $                                       | 6.68   |   |
| $7.23 to $12.66               |   | 201,210                 |   | 4.6                                     |   | $                                       | 9.77   |   |
| $12.67 to $20.00              |   | 60,000                  |   | 3.7                                     |   | $                                       | 17.35  |   |

 

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

 
| **Range of  Exercise Prices** |   | **Number  Exercisable** |   | **Weighted-  Average  Exercise  Price** |   |
|-------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|
|                          |   |                    |   |                                    |   |
| $1.24 to $1.75                |   | 37,620                  |   | $                                       | 1.75   |   |
| $1.76 to $4.00                |   | 1,789,135               |   | $                                       | 3.13   |   |
| $4.01 to $6.33                |   | 792,855                 |   | $                                       | 4.80   |   |
| $6.34 to $7.22                |   | 421,605                 |   | $                                       | 6.70   |   |
| $7.23 to $12.66               |   | 200,000                 |   | $                                       | 9.75   |   |
| $12.67 to $20.00              |   | 60,000                  |   | $                                       | 17.35  |   |

 

8

----

 

 

**Note 7. Contingencies**

 

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of suchlitigation with certainty, but management believes, after consultation withcounsel, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

 

One of our clients has received letters from time totime containing an offer to license and suggesting that the client might beinfringing certain patents related to computerized telephonic voice responsesystems without the license. The client has indicated that if any infringementoccurred the client would seek contractual indemnity from us. In such an event,we would expect to seek contractual indemnity from certain of our vendors. Anysuch contractual indemnity we might obtain likely would not be sufficient tocover all of the costs of investigating and resolving such matter. We might alsoseek a license under the patents. Any such license may not be available undercommercially reasonable terms. Any license costs would increase the cost ofdoing business in the future and may or may not be fully reflected in ourpricing. To our knowledge, no litigation has been initiated against our clientor us concerning this matter. At this stage, due to the inherent uncertainties,we are unable to predict whether this matter may have a material adverse effecton our business or on our financial condition or results of operation.

 

**Note 8. Supplemental Guarantor Financial Information**

 

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

 

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

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

•                                          ConsolidatingCondensed Statements of Cash Flows for the six months ended June 30, 2003 and2002.

 

9

----

 

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

 
| **Three Months Ended June 30, 2003**                                                      |   | **Parent**          |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|---------|------------------|--------|
|                                                                                      |   | **(in  thousands)** |   |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| **Revenues**                                                                              |   | $                   | 88,439 |                        | $      | 9,659                          |   | $                | 107,894 |             | $      | (1,426 | ) | $ | 204,566 |   |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| **Operating expenses:**                                                                   |   |                |   |                        |   |                           |   |             |    |             |   |
| Direct labor and telecommunications expenses                                              |   | 48,743              |   | 5,841                       |   | 67,080                         |   | —           |    | 121,664          |   |
| Subcontracted and other services expenses                                                 |   | 12,196              |   | 639                         |   | 1,340                          |   | (1,271           | )       | 12,904           |   |
| Operating, selling and administrative expenses                                            |   | 28,811              |   | 2,863                       |   | 39,192                         |   | (155             | )       | 70,711           |   |
| Asset impairment and restructuring expenses                                               |   | —              |   | —                      |   | —                         |   | —           |    | —           |   |
| Total operating expenses                                                                  |   | 89,750              |   | 9,343                       |   | 107,612                        |   | (1,426           | )       | 205,279          |   |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| **Operating income (loss)**                                                               |   | (1,311              | )      | 316                         |   | 282                            |   | —           |    | (713             | )      |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| **Other income (expense):**                                                               |   |                |   |                        |   |                           |   |             |    |             |   |
| Interest expense, net                                                                     |   | (2,553              | )      | (3                          | )      | (318                           | )      | —           |    | (2,874           | )      |
| Equity in earnings (losses) of affiliates                                                 |   | (135                | )      | (699                        | )      | 322                            |   | 834              |    | 322              |   |
| Other income (expense), net                                                               |   | 756                 |   | 251                         |   | 386                            |   | —           |    | 1,393            |   |
| Total other income (expense), net                                                         |   | (1,932              | )      | (451                        | )      | 390                            |   | 834              |    | (1,159           | )      |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (3,243              | )      | (135                        | )      | 672                            |   | 834              |    | (1,872           | )      |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| Income tax expense                                                                        |   | —              |   | —                      |   | 1,269                          |   | —           |    | 1,269            |   |
| Minority interest                                                                         |   | —              |   | —                      |   | 102                            |   | —           |    | 102              |   |
| **Income (loss) before change in  accounting method**                                     |   | (3,243              | )      | (135                        | )      | (699                           | )      | 834              |    | (3,243           | )      |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| Cumulative effect of a change in accounting method                                        |   | —              |   | —                      |   | —                         |   | —           |    | —           |   |
| **Net income (loss)**                                                                     |   | $                   | (3,243 | )                           | $      | (135                           | )      | $                | (699    | )                | $      | 834 |   | $ | (3,243 | ) |
|                                                                                      |   |                |   |                        |   |                           |   |             |    |             |   |
| Currency translation adjustment                                                           |   | 4,186               |   | 69                          |   | 728                            |   | (797             | )       | 4,186            |   |
| **Comprehensive income (loss)**                                                           |   | $                   | 943    |                        | $      | (66                            | )      | $                | 29      |             | $      | 37 |   | $ | 943 |   |

 

10

----

 
| **Three Months Ended June 30, 2002**                                                      |   | **Parent**          |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|-------------------------------------------------------------------------------------------|--------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |   | **(in  thousands)** |       |
|                                                                                      |   |                | ** ** |                        | ** ** |                           | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                              |   | $                   | 99,989     |                        | $          | 11,939                         |       | $                | 86,097     |             | $          | (1,278 | ) | $ | 196,747 |   |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |   |                |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |   | 51,639              |       | 6,886                       |       | 52,126                         |       | —           |       | 110,651          |       |
| Subcontracted and other services expenses                                                 |   | 11,436              |       | 676                         |       | 1,786                          |       | —           |       | 13,898           |       |
| Operating, selling and administrative expenses                                            |   | 30,991              |       | 3,067                       |       | 30,555                         |       | (1,278           | )          | 63,335           |       |
| Asset impairment and restructuring expenses                                               |   | —              |       | —                      |       | —                         |       | —           |       | —           |       |
| Total operating expenses                                                                  |   | 94,066              |       | 10,629                      |       | 84,467                         |       | (1,278           | )          | 187,884          |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                               |   | 5,923               |       | 1,310                       |       | 1,630                          |       | —           |       | 8,863            |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| Interest expense, net                                                                     |   | (2,467              | )          | (226                        | )          | (112                           | )          | —           |       | (2,805           | )          |
| Equity in earnings (losses) of affiliates                                                 |   | 204                 |       | (390                        | )          | 1,012                          |       | 186              |       | 1,012            |       |
| Other income (expense), net                                                               |   | 35                  |       | —                      |       | (70                            | )          | —           |       | (35              | )          |
| Total other income (expense), net                                                         |   | (2,228              | )          | (616                        | )          | 830                            |       | 186              |       | (1,828           | )          |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | 3,695               |       | 694                         |       | 2,460                          |       | 186              |       | 7,035            |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |   | (70                 | )          | 490                         |       | 2,323                          |       | —           |       | 2,743            |       |
| Minority interest                                                                         |   | 254                 |       | —                      |       | 527                            |       | —           |       | 781              |       |
| **Income (loss) before change in  accounting method**                                     |   | 3,511               |       | 204                         |       | (390                           | )          | 186              |       | 3,511            |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting method                                        |   | —              |       | —                      |       | —                         |       | —           |       | —           |       |
| **Net income (loss)**                                                                     |   | $                   | 3,511      |                        | $          | 204                            |       | $                | (390       | )                | $          | 186 |   | $ | 3,511 |   |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |   | 10,392              |       | 7,410                       |       | 8,710                          |       | (16,120          | )          | 10,392           |       |
| **Comprehensive income (loss)**                                                           |   | $                   | 13,903     |                        | $          | 7,614                          |       | $                | 8,320      |             | $          | (15,934 | ) | $ | 13,903 |   |

 

11

----

 
| **Six Months Ended June 30, 2003**                                                        |   | **Parent**          |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|-------------------------------------------------------------------------------------------|--------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |   | **(in  thousands)** |       |
|                                                                                      |   |                | ** ** |                        | ** ** |                           | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                              |   | $                   | 175,969    |                        | $          | 21,441                         |       | $                | 204,225    |             | $          | (2,974 | ) | $ | 398,661 |   |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |   |                |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |   | 95,618              |       | 11,743                      |       | 125,074                        |       | —           |       | 232,435          |       |
| Subcontracted and other services expenses                                                 |   | 23,807              |       | 1,311                       |       | 2,707                          |       | (1,271           | )          | 26,554           |       |
| Operating, selling and administrative expenses                                            |   | 58,094              |       | 5,650                       |       | 74,346                         |       | (1,703           | )          | 136,387          |       |
| Asset impairment and restructuring expenses                                               |   | —              |       | —                      |       | 796                            |       | —           |       | 796              |       |
| Total operating expenses                                                                  |   | 177,519             |       | 18,704                      |       | 202,923                        |       | (2,974           | )          | 396,172          |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                               |   | (1,550              | )          | 2,737                       |       | 1,302                          |       | —           |       | 2,489            |       |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| Interest expense, net                                                                     |   | (5,091              | )          | (8                          | )          | (499                           | )          | —           |       | (5,598           | )          |
| Equity in earnings (losses) of affiliates                                                 |   | 2,099               |       | (716                        | )          | 939                            |       | (1,383           | )          | 939              |       |
| Other income (expense), net                                                               |   | 1,360               |       | 86                          |       | (711                           | )          | —           |       | 735              |       |
| Total other expense, net                                                                  |   | (1,632              | )          | (638                        | )          | (271                           | )          | (1,383           | )          | (3,924           | )          |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (3,182              | )          | 2,099                       |       | 1,031                          |       | (1,383           | )          | (1,435           | )          |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |   | —              |       | —                      |       | 1,439                          |       | —           |       | 1,439            |       |
| Minority interest                                                                         |   | —              |       | —                      |       | 308                            |       | —           |       | 308              |       |
| **Income (loss) before change in  accounting method**                                     |   | (3,182              | )          | 2,099                       |       | (716                           | )          | (1,383           | )          | (3,182           | )          |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting method                                        |   | —              |       | —                      |       | —                         |       | —           |       | —           |       |
| **Net income (loss)**                                                                     |   | $                   | (3,182     | )                           | $          | 2,099                          |       | $                | (716       | )                | $          | (1,383 | ) | $ | (3,182 | ) |
|                                                                                      |   |                |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |   | 7,084               |       | 117                         |       | 3,756                          |       | (3,873           | )          | 7,084            |       |
| **Comprehensive income (loss)**                                                           |   | $                   | 3,902      |                        | $          | 2,216                          |       | $                | 3,040      |             | $          | (5,256 | ) | $ | 3,902 |   |

 

12

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| **Six Months Ended June 30, 2002**                                                        |   | **Parent**          | ** ** | **Guarantor   Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |   | **(in  thousands)** | ** ** |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| **Revenues**                                                                              |   | $                   | 199,504    |                         | $          | 23,975                         |       | $                | 168,233    |             | $          | (1,933 | ) | $ | 389,779 |   |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |   |                |       |                         |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |   | 108,655             |       | 13,022                       |       | 100,990                        |       | —           |       | 222,667          |       |
| Subcontracted and other services expenses                                                 |   | 20,902              |       | 1,330                        |       | 3,259                          |       | —           |       | 25,491           |       |
| Operating, selling and administrative expenses                                            |   | 61,248              |       | 6,148                        |       | 59,632                         |       | (1,933           | )          | 125,095          |       |
| Asset impairment and restructuring expenses                                               |   | —              |       | —                       |       | —                         |       | —           |       | —           |       |
| Total operating expenses                                                                  |   | 190,805             |       | 20,500                       |       | 163,881                        |       | (1,933           | )          | 373,253          |       |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                               |   | 8,699               |       | 3,475                        |       | 4,352                          |       | —           |       | 16,526           |       |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |   |                |       |                         |       |                           |       |             |       |             |       |
| Interest expense, net                                                                     |   | (5,204              | )          | (139                         | )          | (193                           | )          | —           |       | (5,536           | )          |
| Equity in earnings (losses) of affiliates                                                 |   | 3,440               |       | 1,405                        |       | 1,347                          |       | (4,845           | )          | 1,347            |       |
| Other income (expense), net                                                               |   | 40                  |       | —                       |       | (263                           | )          | —           |       | (223             | )          |
| Total other expense, net                                                                  |   | (1,724              | )          | 1,266                        |       | 891                            |       | (4,845           | )          | (4,412           | )          |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | 6,975               |       | 4,741                        |       | 5,243                          |       | (4,845           | )          | 12,114           |       |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |   | 375                 |       | 1,301                        |       | 3,048                          |       | —           |       | 4,724            |       |
| Minority interest                                                                         |   | 351                 |       | —                       |       | 790                            |       | —           |       | 1,141            |       |
| **Income (loss) before change in  accounting method**                                     |   | 6,249               |       | 3,440                        |       | 1,405                          |       | (4,845           | )          | 6,249            |       |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting method                                        |   | —              |       | —                       |       | (18,399                        | )          | —           |       | (18,399          | )          |
| **Net income (loss)**                                                                     |   | $                   | 6,249      |                         | $          | 3,440                          |       | $                | (16,994    | )                | $          | (4,845 | ) | $ | (12,150 | ) |
|                                                                                      |   |                |       |                         |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |   | 7,453               |       | 5,314                        |       | 6,247                          |       | (11,561          | )          | 7,453            |       |
| **Comprehensive income (loss)**                                                           |   | $                   | 13,702     |                         | $          | 8,754                          |       | $                | (10,747    | )                | $          | (16,406 | ) | $ | (4,697 | ) |

 

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**ConsolidatingCondensed Balance Sheet**

 
| **At June 30, 2003**                                  |   | **Parent**          | ** ** | **Guarantor    Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|--------|---------------------|------------|-------------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                  |   | **(in  thousands)** | ** ** |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Assets**                                            |   |                |       |                          |       |                           |       |             |       |             |       |
| **Current assets:**                                   |   |                |       |                          |       |                           |       |             |       |             |       |
| Cash and cash equivalents                             |   | $                   | 15,742     |                          | $          | 3,209                          |       | $                | 12,546     |             | $          | — |   | $ | 31,497 |   |
| Trade accounts receivable, net                        |   | 80,747              |       | 24,450                        |       | 85,579                         |       | (51,211          | )          | 139,565          |       |
| Prepaid expenses and other current assets             |   | 6,930               |       | 53                            |       | 16,967                         |       | —           |       | 23,950           |       |
| Total current assets                                  |   | 103,419             |       | 27,712                        |       | 115,092                        |       | (51,211          | )          | 195,012          |       |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Property and equipment, net**                       |   | 22,208              |       | 2,183                         |       | 65,086                         |       | —           |       | 89,477           |       |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Other assets:**                                     |   |                |       |                          |       |                           |       |             |       |             |       |
| Goodwill                                              |   | 19,577              |       | 14                            |       | 32,450                         |       | —           |       | 52,041           |       |
| Deferred income taxes                                 |   | 6,100               |       | —                        |       | 100                            |       | —           |       | 6,200            |       |
| Investments in affiliates                             |   | 1,345               |       | —                        |       | 17,244                         |       | 899              |       | 19,488           |       |
| Other assets                                          |   | 6,185               |       | 56                            |       | 1,124                          |       | —           |       | 7,365            |       |
| Investments in subsidiaries                           |   | 125,115             |       | 98,443                        |       | —                         |       | (223,558         | )          | —           |       |
| **Total assets**                                      |   | $                   | 283,949    |                          | $          | 128,408                        |       | $                | 231,096    |             | $          | (273,870 | ) | $ | 369,583 |   |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity**        |   |                |       |                          |       |                           |       |             |       |             |       |
| **Current liabilities:**                              |   |                |       |                          |       |                           |       |             |       |             |       |
| Current portion of long-term debt                     |   | $                   | (18        | )                             | $          | —                         |       | $                | 5,273      |             | $          | — |   | $ | 5,255 |   |
| Current portion of capital lease obligations          |   | 854                 |       | 116                           |       | 914                            |       | —           |       | 1,884            |       |
| Trade accounts payable                                |   | 12,443              |       | 1,024                         |       | 68,983                         |       | (51,209          | )          | 31,241           |       |
| Accrued expenses and other current liabilities        |   | 26,641              |       | 1,994                         |       | 49,487                         |       | (78              | )          | 78,044           |       |
| Total current liabilities                             |   | 39,920              |       | 3,134                         |       | 124,657                        |       | (51,287          | )          | 116,424          |       |
| **Long-term debt and other liabilities:**             |   |                |       |                          |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion             |   | 100,000             |       | —                        |       | —                         |       | —           |       | 100,000          |       |
| Capital lease obligations, excluding current  portion |   | 196                 |       | 159                           |       | 7,651                          |       | —           |       | 8,006            |       |
| Deferred compensation                                 |   | 1,428               |       | —                        |       | —                         |       | —           |       | 1,428            |       |
| Deferred income taxes                                 |   | —              |       | —                        |       | 345                            |       | —           |       | 345              |       |
| Total liabilities                                     |   | 141,544             |       | 3,293                         |       | 132,653                        |       | (51,287          | )          | 226,203          |       |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Minority interests**                                |   | —              |       | —                        |       | 1,088                          |       | —           |       | 1,088            |       |
|                                                  |   |                |       |                          |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                         |   | 142,405             |       | 125,115                       |       | 97,355                         |       | (222,583         | )          | 142,292          |       |
| **Total liabilities and  stockholders’ equity**  |   | $                   | 283,949    |                          | $          | 128,408                        |       | $                | 231,096    |             | $          | (273,870 | ) | $ | 369,583 |   |

 

14

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| **At December 31, 2002**                              |   | **Parent**         | ** ** | **Guarantor   Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|--------|--------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                  |   | **(in thousands)** |       |
| **Assets**                                            |   |               |       |                         |       |                           |       |             |       |             |       |
| **Current assets:**                                   |   |               |       |                         |       |                           |       |             |       |             |       |
| Cash and cash equivalents                             |   | $                  | 16,615     |                         | $          | 2,855                          |       | $                | 14,672     |             | $          | — |   | $ | 34,142 |   |
| Trade accounts receivable, net                        |   | 90,679             |       | 21,512                       |       | 69,062                         |       | (52,610          | )          | 128,643          |       |
| Prepaid expenses and other current assets             |   | 6,954              |       | 138                          |       | 13,779                         |       | —           |       | 20,871           |       |
| Total current assets                                  |   | 114,248            |       | 24,505                       |       | 97,513                         |       | (52,610          | )          | 183,656          |       |
|                                                  |   |               |       |                         |       |                           |       |             |       |             |       |
| **Property and equipment, net**                       |   | 25,768             |       | 1,875                        |       | 59,240                         |       | —           |       | 86,883           |       |
|                                                  |   |               |       |                         |       |                           |       |             |       |             |       |
| **Other assets:**                                     |   |               |       |                         |       |                           |       |             |       |             |       |
| Goodwill                                              |   | 19,576             |       | —                       |       | 30,148                         |       | —           |       | 49,724           |       |
| Deferred income taxes                                 |   | 6,100              |       | —                       |       | 91                             |       | —           |       | 6,191            |       |
| Investments in affiliates                             |   | 1,000              |       | —                       |       | 17,461                         |       | —           |       | 18,461           |       |
| Other assets                                          |   | 6,205              |       | 70                           |       | 787                            |       | —           |       | 7,062            |       |
| Investments in subsidiaries                           |   | 123,826            |       | 100,588                      |       | —                         |       | (224,414         | )          | —           |       |
| **Total assets**                                      |   | $                  | 296,723    |                         | $          | 127,038                        |       | $                | 205,240    |             | $          | (277,024 | ) | $ | 351,977 |   |
|                                                  |   |               |       |                         |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity**        |   |               |       |                         |       |                           |       |             |       |             |       |
| **Current liabilities:**                              |   |               |       |                         |       |                           |       |             |       |             |       |
| Current portion of long-term debt                     |   | $                  | 5,404      |                         | $          | —                         |       | $                | —     |             | $          | — |   | $ | 5,404 |   |
| Current portion of capital lease obligations          |   | 1,065              |       | —                       |       | 886                            |       | —           |       | 1,951            |       |
| Trade accounts payable                                |   | 11,835             |       | 890                          |       | 68,118                         |       | (52,231          | )          | 28,612           |       |
| Accrued expenses and other current liabilities        |   | 29,271             |       | 2,322                        |       | 35,936                         |       | (458             | )          | 67,071           |       |
| Total current liabilities                             |   | 47,575             |       | 3,212                        |       | 104,940                        |       | (52,689          | )          | 103,038          |       |
| **Long-term debt and other  liabilities:**            |   |               |       |                         |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion             |   | 100,000            |       | —                       |       | —                         |       | —           |       | 100,000          |       |
| Capital lease obligations, excluding current  portion |   | 520                |       | —                       |       | 6,787                          |       | —           |       | 7,307            |       |
| Deferred compensation                                 |   | 1,394              |       | —                       |       | —                         |       | —           |       | 1,394            |       |
| Deferred income taxes                                 |   | —             |       | —                       |       | 296                            |       | —           |       | 296              |       |
| Total liabilities                                     |   | 149,489            |       | 3,212                        |       | 112,023                        |       | (52,689          | )          | 212,035          |       |
|                                                  |   |               |       |                         |       |                           |       |             |       |             |       |
| **Minority interests**                                |   | —             |       | —                       |       | 780                            |       | —           |       | 780              |       |
|                                                  |   |               |       |                         |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                         |   | 147,234            |       | 123,826                      |       | 92,437                         |       | (224,335         | )          | 139,162          |       |
| **Total liabilities and  stockholders’ equity**  |   | $                  | 296,723    |                         | $          | 127,038                        |       | $                | 205,240    |             | $          | (277,024 | ) | $ | 351,977 |   |

 

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**ConsolidatingCondensed Statement of Cash Flows**

 
| **Six Months Ended June 30, 2003**                    |   | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                  |   | **(in thousands)** | ** ** |
|                                                  |   |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating  activities**         |   | $                  | 8,126      |                        | $          | 4,215                          |       | $                | 2,091      |             | $          | — |   | $ | 14,432 |   |
|                                                  |   |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**            |   |               |       |                        |       |                           |       |             |       |             |       |
| Investment in subsidiaries                            |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Purchases of property and equipment                   |   | (3,300             | )          | (409                        | )          | (10,415                        | )          | —           |       | (14,124          | )          |
| Proceeds from sales of property and equipment         |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Increase in other assets                              |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Investment in affiliates                              |   | (1,000             | )          | —                      |       | —                         |       | —           |       | (1,000           | )          |
| Net cash flows from investing activities              |   | (4,300             | )          | (409                        | )          | (10,415                        | )          | —           |       | (15,124          | )          |
|                                                  |   |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**            |   |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |   | 656                |       | —                      |       | 5,357                          |       | —           |       | 6,013            |       |
| Repayments of debt and capital lease obligations      |   | (6,647             | )          | —                      |       | (535                           | )          | —           |       | (7,182           | )          |
| Net capital contribution from parent                  |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Net borrowings and payments in intercompany  balances |   | 2,503              |       | (3,452                      | )          | 949                            |       | —           |       | —           |       |
| Treasury stock reissuances                            |   | (835               | )          | —                      |       | —                         |       | —           |       | (835             | )          |
| Other                                                 |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Net cash flows from financing activities              |   | (4,323             | )          | (3,452                      | )          | 5,771                          |       | —           |       | (2,004           | )          |
| Effect of exchange rates on cash                      |   | (376               | )          | —                      |       | 427                            |       | —           |       | 51               |       |
| **Net increase (decrease) in cash**                   |   | (873               | )          | 354                         |       | (2,126                         | )          | —           |       | (2,645           | )          |
| **Cash and cash equivalents,  beginning of period**   |   | 16,615             |       | 2,855                       |       | 14,672                         |       | —           |       | 34,142           |       |
| **Cash and cash equivalents, end of  period**         |   | $                  | 15,742     |                        | $          | 3,209                          |       | $                | 12,546     |             | $          | — |   | $ | 31,497 |   |

 

16

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| **Six Months Ended June 30, 2002**                   |   | **Parent**         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                 |   | **(in thousands)** | ** ** |
|                                                 |   |               |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating  activities**        |   | $                  | 14,923     |                        | $          | (3,014                         | )          | $                | 12,702     |             | $          | — |   | $ | 24,611 |   |
|                                                 |   |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**           |   |               |       |                        |       |                           |       |             |       |             |       |
| Investment in subsidiaries                           |   | 1,782              |       | 6,160                       |       | —                         |       | (7,942           | )          | —           |       |
| Purchases of property and equipment                  |   | (8,220             | )          | —                      |       | (9,339                         | )          | —           |       | (17,559          | )          |
| Proceeds from sales of property and equipment        |   | 4                  |       | —                      |       | —                         |       | —           |       | 4                |       |
| Increase in other assets                             |   | (47                | )          | —                      |       | (6                             | )          | —           |       | (53              | )          |
| Investment in affiliates                             |   | —             |       | —                      |       | —                         |       | —           |       | —           |       |
| Net cash flows from investing activities             |   | (6,481             | )          | 6,160                       |       | (9,345                         | )          | (7,942           | )          | (17,608          | )          |
|                                                 |   |               |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**           |   |               |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                   |   | 31,750             |       | —                      |       | 2,165                          |       | —           |       | 33,915           |       |
| Repayments of debt and capital lease obligations     |   | (32,857            | )          | —                      |       | (2,397                         | )          | —           |       | (35,254          | )          |
| Net capital contribution from parent                 |   | —             |       | (1,782                      | )          | (6,160                         | )          | 7,942            |       | —           |       |
| Net borrowings and payments in intercompany balances |   | 338                |       | —                      |       | (338                           | )          | —           |       | —           |       |
| Treasury stock reissuances                           |   | 30                 |       | —                      |       | —                         |       | —           |       | 30               |       |
| Other                                                |   | (13                | )          | —                      |       | —                         |       | —           |       | (13              | )          |
| Net cash flows from financing activities             |   | (752               | )          | (1,782                      | )          | (6,730                         | )          | 7,942            |       | (1,322           | )          |
| Effect of exchange rates on cash                     |   | (733               | )          | —                      |       | 1,671                          |       | —           |       | 938              |       |
| **Net increase (decrease) in cash**                  |   | 6,957              |       | 1,364                       |       | (1,702                         | )          | —           |       | 6,619            |       |
| **Cash and cash equivalents,  beginning of period**  |   | 6,814              |       | 2,202                       |       | 13,140                         |       | —           |       | 22,156           |       |
| **Cash and cash equivalents, end of  period**        |   | $                  | 13,771     |                        | $          | 3,566                          |       | $                | 11,438     |             | $          | — |   | $ | 28,775 |   |

 

17

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

 

##### **General**

 

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

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of largecorporations in North America, Europe, Asia Pacific, and Latin America. We providecustomer acquisition, customer care, technical support and risk managementservices on an outsourced basis, as well as professional services for bothoutsourced and internal contact centers. We serve clients primarily in theautomotive, consumer products, financial services, insurance,telecommunications, ISP and cable, and utilities sectors.

 

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

 

As you read this discussion and analysis, refer to our consolidatedcondensed statements of income (loss), which present the results of ouroperations for the three and six-month periods ended June 30, 2003 and 2002,and are summarized on the following pages. We analyze and explain thedifferences between periods for the components of net income (loss) in thefollowing sections. Our analysis is important in making decisions about yourinvestment in SITEL Corporation.

 

**GeneralBusiness Risks, Critical Account****ing Policies and Estimates**

 

**GeneralBusiness Risks**

Our business successdepends on our ability to efficiently deploy our human and capital resources inthe delivery of services to our clients. Consequently, the needs of our clientsmay significantly impact our results of operations, financial condition, andliquidity.

 

Our results of operationsand operating cash flows may vary with periodic wins and losses of clientcontracts and with changes in the scope of client requirements. Our******top 20 clients accounted for 73.0% and 68.6% of ourrevenues for the three-month periods ended June 30, 2003 and 2002,respectively, and 71.0% and 68.2% for the six-month periods ended June 30, 2003and 2002, respectively, and include multiple independently managed businessunits of General Motors Corporation. These General Motors business units wereresponsible for 21.1% and 23.0% of our revenues for the three-monthperiods ended June 30, 2003 and 2002, respectively, and 21.3% and 23.7% for thesix-month periods ended June 30, 2003 and 2002, respectively. Two of the primaryGeneral Motors contracts expire in January 2004. We are in the process offinalizing an agreement with General Motors for a one year extension of ourrelationship past the January 2004 expiration date. We did not have any otherclients under common control that generated more than 10% of our revenues. Thefinancial failure of any of these clients or the loss of any or all of theirbusiness could have an adverse impact on our operating results.

 

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

 

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

 

**CriticalAccounting Policies and Estimates**

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

 

Our significantaccounting policies and practices are described in Note 1 to the ConsolidatedFinancial Statements, which are included in our Annual Report on Form 10-K forthe year ended December 31, 2002. Of those policies, we have identified the

 

18

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following to be criticalaccounting policies because they are the most important to the portrayal of ourresults of operations and financial condition, and they require management’smost difficult, subjective, or complex judgments:

 

***Trade Accounts Receivable***

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

 

***Property and Equipment***

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

 

***Asset Impairment***

We evaluate long-livedassets for impairment whenever events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable.  Triggering events include a significant change in the extent ormanner in which long-lived assets are being used or in its physical condition,in legal factors, or in the business climate that could affect the value of thelong-lived assets. The interpretation of such events requires judgment frommanagement as to whether such an event has occurred.

 

Upon the occurrence of atriggering event, the carrying amount of a long-lived asset is reviewed toassess whether the recoverable amount has declined below its carrying amount.  The recoverable amount is the estimated netfuture cash flows that we expect to recover from the future use of the asset,undiscounted and without interest, plus the asset’s residual value on disposal.Where the recoverable amount of the long-lived asset is less than the carryingvalue, an impairment loss would be recognized to write down the asset to itsfair value, which is based on discounted estimated cash flows from the futureuse of the asset.

 

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

 

***Goodwill***

We adopted the provisionsof SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142)*,* as of January 1, 2002. As a resultof the adoption of this standard, we stopped amortizing our goodwill, includingequity method goodwill, and completed the required impairment review. As aresult of the impairment review, we determined that the goodwill in certainreporting units was impaired and we recorded a goodwill impairment loss of$18.4 million as a cumulative effect of an accounting change as of January1, 2002.

 

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

 

***Deferred Income Taxes***

We record deferred taxassets and liabilities using enacted tax rates in the jurisdictions in which weoperate for the effect of temporary differences between the book and tax basisof assets and liabilities. If enacted tax rates change, we would adjust thedeferred tax assets and liabilities, through the provision for income taxes inthe period of change, to reflect the enacted tax rate

 

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

 

Forming a conclusion thata valuation allowance is not needed is difficult when there is negativeevidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign taxjurisdictions for the three and six-month periods ended June 30, 2003. Weexpect to continue to record a valuation allowance on future tax benefits incertain tax jurisdictions until an appropriate level of profitability issustained. Until an appropriate level of profitability is reached, we do notexpect to recognize any significant tax benefits in future results ofoperations. If future taxable income is lower than expected or if expected taxplanning strategies are not available as anticipated, we may record additionalvaluation allowance through income tax expense in the period such determinationis made.

 

***Contingencies***

We consider the likelihoodof various loss contingencies, including tax and legal contingencies arising inthe ordinary course of business, and our ability to reasonably estimate theamount of loss in determining loss contingencies. An estimated loss contingencyis accrued when it is probable that a liability has been incurred and theamount of loss can be reasonably estimated. We regularly evaluate currentinformation available to us to determine whether such accruals should beadjusted.

 

##### **Resultsof Operations** for theThree and Six Month Periods Ended June 30, 2003 Compared with the Same Periodsof 2002

 

In this section, wediscuss our operating results and the factors affecting them. We describe ourgeneral business 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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**Componentsof Net Income**

 

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

 
|                                                                                      |   | **Three  Months Ended June 30,** |         | **Six  Months Ended June 30,** |         |
|-------------------------------------------------------------------------------------------|--------|----------------------------------|--------------|--------------------------------|--------------|
|                                                                                      |   | **2003**                         | ** **   | **2002**                       | ** **   | **2003** | ** ** | **2002** | ** ** |
|                                                                                      |   | **$**                            |         | **%**                          |         | **$** |   | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** |   | **%** | ** ** |
|                                                                                      |   | ***(in thousands)***             | *** *** | ***(in thousands******)***     | *** *** |
| **Revenues**                                                                              |   | $                                | 204,566      | * *                       | ***100.0***  | ***%*** | $ | 196,747 | *** *** | ***100.0*** | ***%*** | $ | 398,661 | *** *** | ***100.0*** | ***%*** | $ | 389,779 | *** *** | ***100.0*** | ***%*** |
|                                                                                      |   |                             |         |                           | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Direct labor and telecommunications expenses                                              |   | 121,664                          |         | ***59.5***                     | ***%***      | 110,651 | *** *** | ***56.2*** | ***%*** | 232,435 | *** *** | ***58.3*** | ***%*** | 222,667 | *** *** | ***57.1*** | ***%*** |
| Subcontracted and other services expenses                                                 |   | 12,904                           |         | ***6.3***                      | ***%***      | 13,898 | *** *** | ***7.1*** | ***%*** | 26,554 | *** *** | ***6.7*** | ***%*** | 25,491 | *** *** | ***6.5*** | ***%*** |
| Operating, selling and administrative expenses                                            |   | 70,711                           |         | ***34.6***                     | ***%***      | 63,335 | *** *** | ***32.2*** | ***%*** | 136,387 | *** *** | ***34.2*** | ***%*** | 125,095 | *** *** | ***32.1*** | ***%*** |
| Asset impairment and restructuring expenses                                               |   | —                           |         | ***0.0***                      | ***%***      | — | *** *** | ***0.0*** | ***%*** | 796 |   | ***0.2*** | ***%*** | — |   | ***0.0*** | ***%*** |
| **Operating income (loss)**                                                               |   | (713                             | )            | ***-0.4***                     | ***%***      | 8,863 | *** *** | ***4.5*** | ***%*** | 2,489 |   | ***0.6*** | ***%*** | 16,526 |   | ***4.2*** | ***%*** |
|                                                                                      |   |                             |         |                           | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Interest expense, net                                                                     |   | (2,874                           | )            | ***-1.4***                     | ***%***      | (2,805 | ) | ***-1.4*** | ***%*** | (5,598 | ) | ***-1.4*** | ***%*** | (5,536 | ) | ***-1.4*** | ***%*** |
| Equity in earnings of affiliates                                                          |   | 322                              |         | ***0.2***                      | ***%***      | 1,012 | ** ** | ***0.5*** | ***%*** | 939 |   | ***0.2*** | ***%*** | 1,347 |   | ***0.4*** | ***%*** |
| Other expense, net                                                                        |   | 1,393                            |         | ***0.7***                      | ***%***      | (35 | ) | ***0.0*** | ***%*** | 735 |   | ***0.2*** | ***%*** | (223 | ) | ***-0.1*** | ***%*** |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (1,872                           | )            | ***-0.9***                     | ***%***      | 7,035 | ** ** | ***3.6*** | ***%*** | (1,435 | ) | ***-0.4*** | ***%*** | 12,114 |   | ***3.1*** | ***%*** |
|                                                                                      |   |                             |         |                           | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |
| Income tax expense                                                                        |   | 1,269                            |         | ***0.6***                      | ***%***      | 2,743 | *** *** | ***1.4*** | ***%*** | 1,439 |   | ***0.4*** | ***%*** | 4,724 |   | ***1.2*** | ***%*** |
| Minority interest                                                                         |   | 102                              |         | ***0.1***                      | ***%***      | 781 | *** *** | ***0.4*** | ***%*** | 308 |   | ***0.1*** | ***%*** | 1,141 |   | ***0.3*** | ***%*** |
| **Income (loss) before change in  accounting method**                                     |   | (3,243                           | )            | ***-1.6***                     | ***%***      | 3,511 | *** *** | ***1.8*** | ***%*** | (3,182 | ) | ***-0.8*** | ***%*** | 6,249 |   | ***1.6*** | ***%*** |
|                                                                                      |   |                             |         |                           | *** *** |   | *** *** |   | *** *** |   |   |   | *** *** |   |   |   | *** *** |
| Cumulative effect of change in accounting                                                 |   | —                           |         | ***0.0***                      | ***%***      | — | *** *** | ***0.0*** | ***%*** | — |   | ***0.0*** | ***%*** | (18,399 | ) | ***-4.7*** | ***%*** |
| **Net income (loss)**                                                                     |   | $                                | (3,243       | )                              | ***-1.6***   | ***%*** | $ | 3,511 | *** *** | ***1.8*** | ***%*** | $ | (3,182 | ) | ***-0.8*** | ***%*** | $ | (12,150 | ) | ***-3.1*** | ***%*** |

 

**Three Months Ended June 30, 2003Compared to the Same Period of 2002**

 

***Revenues***

Revenues increased $7.9million, or 4.0%, in the three months ended June 30, 2003 compared to the sameperiod of 2002. The changes in revenues by geographic region are shown in thefollowing table:

 
| **Three Months  Ended June 30,** |   | **2003**            | ** ** | **2002** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|----------------------------------|--------|---------------------|------------|----------|------------|---------------|------------|---------------|------------|
|                             |   | ***(in millions)*** |       |
|                             |   |                |       |     |       |          |       |          |       |
| North  America                   |   | **$**               | **112.1**  |     | $          | 124.9         |       | $             | (12.8      | ) | (10.2 | )% |
| Europe                           |   | **81.6**            |       | 49.2     |       | 32.4          |       | 65.9          | %          |
| Asia  Pacific                    |   | **7.5**             |       | 7.6      |       | (0.1          | )          | (1.1          | )%         |
| Latin  America                   |   | **3.3**             |       | 15.0     |       | (11.7         | )          | (78.0         | )%         |
| Totals                           |   | **$**               | **204.6**  |     | $          | 196.7         |       | $             | 7.9        |   | 4.0 | % |

 

The decrease in NorthAmerica revenues for the three months ended June 30, 2003 compared to the sameperiod in 2002 was primarily due to a $14.4 million decline in customer care,customer acquisition, and technical support services we provided to a number ofour large global clients partially offset by a $1.5 million increase inrevenues by our risk management business. The primary reason for the decrease in revenues is due to pricing pressure resulting from excesscapacity in North America, created primarily by the movement of businessoffshore.The transfer of certain business to lower cost labor markets

 

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offshorealso results in lower revenues for the same volume of business.  In addition, revenues were lower in thethree months ended June 30, 2003 compared to the same period in 2002 due to adecline in outbound acquisition programs.

 

European revenues for thethree months ended June 30, 2003 increased $32.4 million compared to the sameperiod in 2002. The increase was due in part to a $19.2 million, or 59%,increase from higher sales volumes from existing clients and the implementationof multiple pan-European client accounts that commenced in early 2003. Theweakening of the U.S. dollar versus the British pound and Euro accounted for$13.2 million, or 41%, of the increase.

 

The weakening of the U.S.dollar accounted for a $1.1 million increase in Asia Pacific revenues in thesix months ended June 30, 2003 compared to the same period in 2002 offset by$1.2 million decrease in revenue as a result of lower sale volumes.

 

The decrease in LatinAmerican revenues was primarily due to the change in how we reported ourinvestment in certain Latin America affiliates. As a result of certain revisionsin the governance of a joint venture, we reported our investment in certainLatin America affiliates using the equity method of accounting, rather than theconsolidation method, effective October 1, 2002. As a result of this change,our Latin America revenues no longer include the revenues associated with thejoint venture resulting in a $12.4 million decline in revenues in the threemonths ended June 30, 2003 compared to the same period in 2002. Thestrengthening of the U.S. dollar accounted for a $0.6 million decrease in LatinAmerican revenues in the three months ended June 30, 2003 compared to the sameperiod in 2002. Excluding the impact of the change in accounting and the impactof changes in foreign currency, Latin American revenues in the three monthsended June 30, 2003 increased $1.3 million compared to the same period in 2002as a result of higher sale volumes.

 

***Direct Labor and TelecommunicationsExpenses***

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

 

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

 

As a percentage ofrevenues, direct labor and telecommunications expenses increased to 59.5%during the three months ended June 30, 2003 compared to 56.2% in the sameperiod of 2002. However, as we discuss in the following section, we subcontractcertain client services to our India joint venture. We do not incur directlabor and telecommunication expenses for these subcontracted services, as suchcosts are incurred by the joint venture. Excluding the revenues we haverecorded from clients where we have subcontracted the services to our India jointventure, direct labor and telecommunications expenses as a percentage ofrevenues increased to 60.6% during the three months ended June 30, 2003compared to 57.6% in the same period of 2002. Ramp up costs of some new programs in NorthAmerica and Europe was the primary reason for the increase in the threemonths ended June 2003 compared to the same period in 2002.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand through our India joint venture, and other out-of-pocket expenses.Subcontracted and other services expenses decreased $1.0 million, or 7.2%, inthe three months ended June 30, 2003 compared to the same period of 2002primarily due to lower subcontracted service volume provided by our India jointventure. Subcontracted expenses for services provided by our India jointventure for the three months ended June 30, 2003 and 2002 were $2.9 million and$4.0 million, respectively.  Amountspayable to our India joint venture were $2.4 million and $2.5 million as ofJune 30, 2003 and December 31, 2002, respectively, and are included in tradeaccounts payable in the consolidated condensed balance sheets.

 

***Operating, Selling and AdministrativeExpenses***

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

 

Operating, selling andadministrative expenses increased $7.4 million, or 11.7%, in the three monthsended June 30, 2003 compared to the same period of 2002.  Excluding the impact of the change inaccounting of certain Latin American affiliates as described previously,operating, selling and administrative expenses increased $10.0 million, or15.8%, in the three months ended June 30, 2003 compared to the same period of2002. The weakening of the U.S. dollar compared to the primary currency in thejurisdictions in which we operate accounted for $4.5 million of the increase.As a percentage of

 

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revenues, operating,selling and administrative expenses increased to 34.6% in the three monthsended June 30, 2003 compared to 32.2% in the same period of 2002 primarily as aresult of increased investments in infrastructure to support Europeanexpansions and increased costs associated with expanded sales and marketingprograms.

 

***Operating Income (Loss)***

Operatingincome (loss) decreased $9.6 million in the three months ended June 30, 2003compared to the same period of 2002 due to the factors discussed above.

 

***Interest Expense, Net***

Interest expense, net ofinterest income, remained consistent in the three months ended June 30, 2003compared to the same period in 2002.

 

***Equity in Earnings of Affiliates***

The decrease in equity inearnings of affiliates in the three months ended June 30, 2003 compared to thesame period in 2002 primarily relates to reduced earnings from our India jointventure.

 

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

Other income (expense),increased to $1.4 million of other income in the three months ended June 30,2003 compared to the same period in 2002 primarily as a result of foreigncurrency remeasurement gains arising from monetary assets and liabilitiesdenominated in currencies other than a business unit’s functional currency.

 

***Income Tax Expense***

As discussed in moredetail under “Critical Accounting Policies and Estimates,” the effective taxrate for the three months ended June 30, 2003 was significantly more than theU.S. statutory rate which was primarily the result of not reflecting anysignificant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

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

 

**SixMonths Ended June 30, 2003 Compared to the Same Period of 2002**

 

***Revenues***

Revenues increased $8.9million, or 2.3%, in the six months ended June 30, 2003 compared to the sameperiod of 2002. The changes in revenues by geographic region are shown in thefollowing table:

 
| **Six Months  Ended June 30,** |   | **2003**            |      | **2002** |   | **Change** |   | **Change** |   |
|--------------------------------|--------|---------------------|-----------|----------|--------|------------|--------|------------|--------|
|                           |   | ***(in millions)*** |      |
| North  America                 |   | **$**               | **226.5** |     | $      | 248.2      |   | $          | (21.6  | ) | (8.7 | )% |
| Europe                         |   | **151.5**           |      | 97.7     |   | 53.8       |   | 55.1       | %      |
| Asia  Pacific                  |   | **15.0**            |      | 13.9     |   | 1.1        |   | 7.7        | %      |
| Latin  America                 |   | **5.6**             |      | 30.0     |   | (24.4      | )      | 81.3       | %      |
| Totals                         |   | **$**               | **398.7** |     | $      | 389.8      |   | $          | 8.9    |   | 2.3 | % |

 

The decrease in NorthAmerica revenues for the six months ended June 30, 2003 compared to the sameperiod in 2002 was due primarily to a $27.8 million decline in customer care,customer acquisition, and technical support services we provided to a number ofour large global clients offset by a $5.7 million increase in revenues by ourrisk management business.  The primaryreason for the decrease in revenues is due to pricing pressure resulting from excesscapacity in North America, created primarily by the movement of businessoffshore. The transfer of certain business to lower cost labor markets offshorealso results in lower revenues for the same volume of business.

 

European revenues for thesix months ended June 30, 2003 increased $53.8 million compared to the sameperiod in 2002. The increase was due in part to a $29.4 million, or 55%,increase from higher sales volumes from existing clients and the implementationof multiple pan-European client accounts that commenced in early 2003. Theweakening of the U.S. dollar versus the British pound and Euro accounted for$24.5 million, or 45%, of the increase.

 

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The weakening of the U.S.dollar accounted for a $2.6 million increase in Asia Pacific revenues in thesix months ended June 30, 2003 compared to the same period in 2002. Excludingthe impact of changes in foreign currency, revenues in the six months endedJune 30, 2003 decreased $1.6 million compared to the same period in 2002 as aresult of lower Asia Pacific sale volumes.

 

As a result of the changein accounting as previously discussed, Latin America revenues declined $25.0million in the six months ended June 30, 2003 compared to the same period in2002. The strengthening of the U.S. dollar accounted for a $1.6 milliondecrease in Latin American revenues in the six months ended June 30, 2003compared to the same period in 2002. Excluding the impact of the change inaccounting and the impact of changes in foreign currency, Latin Americanrevenues in the six months ended June 30, 2003 increased $2.2 million comparedto the same period in 2002 as a result of higher sale volumes.

 

***Direct Labor and TelecommunicationsExpenses***

As a percentage ofrevenues, direct labor and telecommunications expenses increased to 58.3% duringthe six months ended June 30, 2003 compared to 57.1% in the same period of2002. However, as we discuss in the following section, we subcontract certainclient services to our India joint venture. We do not incur direct labor andtelecommunication expenses for these subcontracted services, as such costs areincurred by the joint venture. Excluding the revenues we have recorded fromclients where we have subcontracted the services to our India joint venture,direct labor and telecommunications expenses as a percentage of revenuesincreased to 59.5% during the six months ended June 30, 2003 compared to 58.1%in the same period of 2002. Rampup costs of some new programs in North America and Europe was the primaryreason for the increase in the six months ended June 2003 compared tothe same period in 2002.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses increased $1.1 million, or 4.2%, in the six months ended June30, 2003 compared to the same period of 2002 primarily due to highersubcontracted service volume provided by our India joint venture. Subcontractedexpenses for services provided by our India joint venture for the six monthsended June 30, 2003 and 2002 were $6.3 million and $5.7 million, respectively.

 

***Operating, Selling and AdministrativeExpenses***

Operating, selling andadministrative expenses increased $11.3 million, or 9.0%, in the six monthsended June 30, 2003 compared to the same period of 2002.  The change in accounting of certain LatinAmerican affiliates as described previously, reduced operating, selling andadministrative expenses $5.1 million in the six months ended June 30, 2003compared to the same period of 2002. The weakening of the U.S. dollar comparedto the primary currency in the jurisdictions in which we operate accounted foran $8.5 million increase in the six months ended June 30, 2003 compared to thesame period in 2002.  As a percentage ofrevenues, operating, selling and administrative expenses increased to 34.2% inthe six months ended June 30, 2003 compared to 32.1% in the same period of 2002primarily as a result increased investments in infrastructure to supportEuropean expansions and increased costs associated with expanded sales andmarketing programs

 

***Asset Impairment and Restructuring Expenses***

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

 

***Operating Income (Loss)***

Operatingincome decreased $14.0 million in the six months ended June 30, 2003 comparedto the same period of 2002 due to the factors discussed above.

 

***Interest Expense, Net***

Interest expense, net ofinterest income, remained consistent in the six months ended June 30, 2003compared to the same period in 2002.

 

***Equity in Earnings of Affiliates***

The decrease in equity inearnings of affiliates in the six months ended June 30, 2003 compared to thesame period in 2002 primarily relates to reduced earnings from our India jointventure.

 

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

Other income (expense),net, increased $1.0 million of other income in the six months ended June 30,2003 compared to the same period in 2002. The increase was primarily a resultof foreign currency remeasurement gains arising from monetary assets andliabilities denominated in currencies other than a business unit’s functional currencyoffset by an impairment charge of $0.5 million to reduce our basis in aninvestment to fair value. Based upon our review of an investee’s financialcondition, results of operations and operating trends and the implied valuefrom recent rounds of financing completed by the investee, we determined thatan other-than-temporary impairment existed for one of our investments.

 

***Income Tax Expense***

As discussed in moredetail under “Critical Accounting Policies and Estimates,” the effective taxrate for the six months ended June 30, 2003 was significantly more than theU.S. statutory rate which was primarily the result of not reflecting anysignificant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

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

 

**Financial Condition and Liquidity**

 

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

 

# ***Cash Flows***

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

 
| **Six Months Ended June 30,**        |   | **2003**            |     | **2002** |   |
|--------------------------------------|--------|---------------------|----------|----------|--------|
|                                 |   | ***(in millions)*** |     |
| **Net  cash provided by (used in):** |   |                |     |     |   |
| Operating activities                 |   | **$**               | **14.4** |     | $      | 24.6 |   |
| Investing activities                 |   | **(15.1**           | **)**    | (17.6    | )      |
| Financing activities                 |   | **(2.0**            | **)**    | (1.3     | )      |
|                                      |        |                     |          |          |        |  |  |

 

**2003**

In the six months endedJune 30, 2003, cash provided by operating activities resulted primarily fromincome before asset impairment and restructuring expenses, depreciation andamortization, and other charges of $15.5 million and $8.6 million of increasesin trade accounts payable and other liabilities offset by increases in tradeaccounts receivable and other assets of $9.7 million.

 

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

 

In the six months endedJune 30, 2003, we used cash for financing activities to repay $1.1 million ofborrowings. In addition, we used cash to purchase a total of $0.8 million ofcommon stock under our existing stock purchase program.

 

**2002**

In the six months endedJune 30, 2002, cash provided by operating activities came from income beforenon-cash expenses of $23.4 million.

 

In the six months endedJune 30, 2002, we used cash for investing activities to purchase $17.6 millionof property and equipment.

 

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In the six months endedJune 30, 2002, we used cash for financing activities to repay $1.3 million ofcapital lease obligations.

 

**CapitalResources**

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

 

We have a three-year $50million revolving credit facility which expires in December 2005.  The credit facility is secured by accountsreceivable in the United States, Canada and the United Kingdom.  We intend to utilize the facility, asneeded, for ongoing working capital requirements and general corporatepurposes. At June 30, 2003, we had $46.5 million of available borrowings underthe new credit facility, and we were in compliance with all financial covenantsof the facility.

 

We expect to finance ourcurrent operations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash, leasesof property and equipment, and the funds available under our credit facility.We estimate that our third quarter of 2003 capital expenditures will range from$5 million to $8 million tocover technology upgrades, asset replacement and new business initiatives.  Future acquisitions, if any, mayrequire additional debt or equity financing.

 

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

# * *

# ***ContractualObligations and Commitments***

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

 

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

•                                          $9.9 millionof capital lease obligations as shown in our consolidated condensed balancesheet at June 30, 2003, and

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

 

**Other Matters**

 

***Quarterly Results and Seasonality***

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

 

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

•                  thecommencement and terms of new contracts,

•                  revenuemix,

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

•                  thetiming of recognition of incentive fees.

 

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

 

***Effects 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.

 

***Recently Issued Accounting Pronouncements***

In June 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard (SFAS) No. 143, “Accounting for Asset RetirementObligations” (SFAS 143). SFAS 143 requires that we record the fair

 

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value of an assetretirement obligation as a liability in the period in which we incur a legalobligation associated with the retirement of tangible long-lived assets thatresult from the acquisition, construction, development and/or normal use ofassets. We are also required to record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. We adopted SFAS 143 onJanuary 1, 2003. The adoption of SFAS 143 did not have a material effecton our consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146), which is effective for fiscal years beginningafter December 31, 2002. SFAS 146 supercedes Emerging Issues Task Force(EITF) Issue No. 94-3, “Liabilities Recognized for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” We adopted SFAS 146 on January 1,2003. See Note 4 to the consolidated condensed financial statements fordisclosure of asset impairment and restructuring expenses recorded during thefirst quarter of 2003.

 

In November 2002, theEITF reached a consensus on Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables’’ (EITF 00-21). EITF 00-21 addresses certain aspects ofthe accounting by a vendor for arrangements under which the vendor will performmultiple revenue generating activities. EITF 00-21 will be effectiveprospectively for new or modified contracts beginning July 1, 2003. We donot expect the adoption of EITF 00-21 to have a material impact on ourfinancial position or results of operations.

 

In November 2002, theFASB issued Interpretation No. 45 “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57, and 107 and arescission of FASB Interpretation No. 34” (FIN 45). FIN 45 elaborates onthe disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued. FIN 45 also clarifiesthat a guarantor is required to recognize, at inception of a guarantee, aliability for the fair value of the obligation undertaken. The initialrecognition and measurement provisions of FIN 45 are applicable to guaranteesissued or modified after December 31, 2002 and have not had a materialeffect on our consolidated financial statements.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedin FIN 46. FIN 46 applies immediately to variable interests in variableinterest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.FIN 46 applies as of July 1, 2003 for existing arrangements. We are currentlyassessing the impact, if any, the application of FIN 46 is expected to have onour consolidated financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities” (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities”(SFAS 133). Except for the provisions of SFAS 149 that relate to SFAS 133Implementation Issues that have been effective for fiscal quarters that beganprior to June 15, 2003, SFAS 149 is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. The application of SFAS 149 is not expected to have a materialeffect on our consolidated financial statements.

 

In May 2003, the FASBissued SFAS No. 150 “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (SFAS 150). The provisions ofSFAS 150, which also include a number of new disclosure requirements, areeffective for instruments entered into or modified after May 31, 2003 and forpre-existing instruments as of the beginning of the first interim period thatcommences after June 15, 2003. The Company adopted the provisions of thestatement on its effective date and does not anticipate a material impact toits consolidated financial statements.

 

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**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

We are exposed to marketrisks associated primarily with changes in foreign currency exchange rates. Wehave operations in many parts of the world; however, both revenues and expensesof those operations are typically denominated in the currency of the country ofoperations, providing a natural hedge. From time to time, we enter into certainhedging transactions designed to hedge foreign currency exchange risk relatedto short-term intercompany loans and specific foreign currency transactions,however the amounts involved have not been material.

 

We are also exposed tochanges in interest rates on our variable rate borrowings. Interest rates onour Senior Subordinated Notes and capital lease obligations are fixed, butrates on borrowings under our bank credit facility are variable. During thethree and six-month periods ended June 30, 2003, our average borrowings underour bank credit facility were $3.2 million and $3.8 million respectively. Basedon our projected cash needs for the foreseeable future, we do not expect thatour exposure to changes in interest rates will have a material impact on ourinterest expense.

 

**Item 4. Controls and Procedures**

 

Our principal executiveofficer and principal financial officer have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as definedunder Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, asamended) as of a date within ninety days of the filing date of this report.Based upon that evaluation, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures areadequate and effective. There were no significant changes in our internalcontrols or in other factors that could significantly affect our internalcontrols subsequent to the date of such evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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**PARTII – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we areinvolved in litigation incidental to our business. We cannot predict the ultimateoutcome of such litigation with certainty, but management believes, afterconsultation with counsel, that the resolution of such matters will not have amaterial adverse effect on our consolidated financial position or results ofoperations.

 

One of our clients hasreceived letters from time to time containing an offer to license andsuggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clienthas indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain likely would 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 business inthe future and may or may not be fully reflected in our pricing. To ourknowledge, no litigation has been initiated against our client or us concerningthis matter. At this stage, due to the inherent uncertainties, we are unable topredict whether this matter may have a material adverse effect on our businessor on our financial condition or results of operation.

 

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

 

(a)          **Date and Type of Meeting**

TheCompany held its Annual Meeting of Stockholders on May 2, 2003.

 

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

Therewere 68,210,743 shares of Common Stock represented at the meeting in person orby proxy. Three proposals were presented to the stockholders and all wereapproved.  The voting on the proposalswas as follows:

 

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

 
|            |   | **FOR**    |   | **WITHHELD** |   |
|-----------------|--------|------------|--------|--------------|--------|
| Kelvin C Berens |   | 64,482,235 |   | 3,728,508    |   |
| George J. Kubat |   | 64,517,112 |   | 3,693,631    |   |

 

2.               Approval of Amendment to 1999 Stock IncentivePlan

 
| Number of Affirmative Votes Cast |   | 38,570,093 |   |
|----------------------------------|--------|------------|--------|
| Number of Negative Votes Cast    |   | 29,502,613 |   |
| Number  of Abstentions           |   | 138,036    |   |

 

3.               Ratification of the selection of KPMG LLP asindependent accountants for the year ended December 31, 2003:

 
| Number of Affirmative Votes Cast |   | 67,072,622 |   |
|----------------------------------|--------|------------|--------|
| Number of Negative Votes Cast    |   | 1,090,160  |   |
| Number of Abstentions            |   | 47,960     |   |

 

**Item 5. Other Information**

 

**Forward-Looking Statements**

We make statements inthis report that are considered forward-looking statements within the meaningof the Securities Exchange Act of 1934. Sometimes these statements will containwords such as “believes,” “expects,” “intends,” “should,” “will,” “plans,”“estimate” and other similar words. These statements are not guarantees of ourfuture performance and are subject to risks, uncertainties, and other importantfactors that could cause our actual performance or achievements to bematerially different from those we project. These risks, uncertainties, andfactors include, but are not limited to: reliance on major clients, conditionsaffecting clients’ industries, clients’ budgets and plans, unanticipated labor,contract or technical difficulties, delays in ramp up of services undercontracts, reliance on major subcontractors and strategic partners, risksassociated with managing a global business, fluctuations in operating results,reliance on

 

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telecommunications andcomputer technology, dependence on labor force, industry regulation, generaland local economic conditions, competitive pressures in our industry, foreigncurrency risks, the effects of leverage, dependency on credit availability,restrictions imposed by the terms of indebtedness, and dependence on keypersonnel and control by management.

 

Given these uncertainties, 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.

 

**Item 6. Exhibits and Reports on Form 8-K**

 

(a)          Exhibits:

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

 

(b)   Reports on Form 8-K:

The Company filed aCurrent Report on Form 8-K dated April 30, 2003, which reported under Items 5,7 and 9 the issuance of three press releases. All three press releases werefiled as exhibits to the Form 8-K.

 

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### **SIGNATURE**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

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

 

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**SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

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