**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

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

 

 

**FORM 10-Q**

 

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

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

 

 

For the quarterly period ended **MARCH 31, 2005**

 

 

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

 

 

### **MINNESOTA**

(State or Other Jurisdiction ofIncorporation or Organization)

 

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

 

**(402) 963-6810**

(Registrant’s Telephone Number, Including AreaCode)

 

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

 

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

 

 

 

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

Not Applicable

 

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.   YES     ý   NO     o

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Act).

YES     ý   NO     o

 

 

### **COMMON STOCK, $.001 PAR VALUE — 73,743,490 SHARESOUTSTANDING AS OF APRIL 29, 2005**

 

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| ** **                              | Page          |
|-----------------------------------------|---------------|
| **PART I — Financial Information** |          |
|                                    |          |
|                                    | Item 1        | — | Financial Statements |   |
|                                    |          |   |   |   |
|                                    |          |   | Consolidated Condensed  Statements of Operations | 2 |
|                                    |          |   | Consolidated Condensed Balance Sheets | 3 |
|                                    |          |   | Consolidated Condensed  Statements of Cash Flows | 4 |
|                                    |          |   | Notes  to Consolidated Condensed Financial Statements | 5 |
|                                    |          |   |   |   |
|                                    | Item  2       | — | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                    |          |   |   |   |
|                                    |          |   | General | 17 |
|                                    |          |   | General  Business Risks, Critical Accounting Policies and Estimates | 17 |
|                                    |          |   | Results of Operations | 20 |
|                                    |          |   | Financial Condition  and Liquidity | 22 |
|                                    |          |   | Other Matters | 23 |
|                                    |          |   |   |   |
|                                    | Item  3       | — | Quantitative  and Qualitative Disclosures About Market Risk | 25 |
|                                    |          |   |   |   |
|                                    | Item  4       | — | Controls  and Procedures | 25 |
|                                    |          |   |   |   |
| **PART II — Other Information**    |          |
|                                    |          |   |   |   |
|                                    | Item  1       | — | Legal  Proceedings | 26 |
|                                    |          |   |   |   |
|                                    | Item  5       | — | Other  Information | 26 |
|                                    |          |   |   |   |
|                                    | Item  6       | — | Exhibits  and Reports on Form 8-K | 27 |
|                                    |          |   |   |   |
|                                    | Signature     | 28 |
|                                    |          |   |
|                                    | Exhibit Index | 29 |

 

1

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**PART I****— FINANCIAL INFORMATION**

 

### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

(in thousands, except per share data)
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **March 31,**          | ** ** |
| ** **                                            | ** ** | **2005**               | ** ** | **2004** | ** ** |
| * *                                              | * *   | * *               | * *   | * * | * * |
| **Revenue**                                           |       | $                      | 251,169    |   | $ | 244,068 |   |
|                                                  |       |                   |       |   |   |
| **Operating  expenses:**                              |       |                   |       |   |   |
| Direct labor and  telecommunications expenses         |       | 152,476                |       | 144,128 |   |
| Subcontracted  and other services expenses            |       | 12,888                 |       | 12,815 |   |
| Operating,  selling and administrative expenses       |       | 80,003                 |       | 76,839 |   |
| Total operating  expenses                             |       | 245,367                |       | 233,782 |   |
|                                                  |       |                   |       |   |   |
| **Operating  income**                                 |       | 5,802                  |       | 10,286 |   |
|                                                  |       |                   |       |   |   |
| **Other  income (expense):**                          |       |                   |       |   |   |
| Interest expense                                      |       | (2,857                 | )          | (3,233 | ) |
| Interest income                                       |       | 120                    |       | 121 |   |
| Equity in  earnings (loss) of affiliates              |       | (107                   | )          | (7 | ) |
| Other expense,  net                                   |       | (10                    | )          | (274 | ) |
| Total other  expense, net                             |       | (2,854                 | )          | (3,393 | ) |
|                                                  |       |                   |       |   |   |
| **Income  before income taxes and minority interest** |       | 2,948                  |       | 6,893 |   |
|                                                  |       |                   |       |   |   |
| Income tax  expense                                   |       | 1,139                  |       | 1,853 |   |
| Minority  interest                                    |       | 360                    |       | 214 |   |
| **Net  income**                                       |       | $                      | 1,449      |   | $ | 4,826 |   |
|                                                  |       |                   |       |   |   |
| **Weighted  average common shares outstanding:**      |       |                   |       |   |   |
| Basic                                                 |       | 73,736                 |       | 73,633 |   |
| Diluted                                               |       | 74,340                 |       | 73,980 |   |
|                                                  |       |                   |       |   |   |
| **Earnings  per share:**                              |       |                   |       |   |   |
| Basic                                                 |       | $                      | 0.02       |   | $ | 0.07 |   |
| Diluted                                               |       | $                      | 0.02       |   | $ | 0.07 |   |

* *

*See Notesto Consolidated Condensed Financial Statements*

 

2

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### **SITEL CORPORATION AND SUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except share data)
| ** **                                                                                                                                   | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                                                   | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                                                                                   |       |            |       |             |       |
| **Current  assets:**                                                                                                                         |       |            |       |             |       |
| Cash and cash  equivalents                                                                                                                   |       | $               | 34,980     |             | $          | 28,906 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $2,066 and $2,391,  respectively)                                      |       | 193,975         |       | 191,391          |       |
| Prepaid expenses  and other assets                                                                                                           |       | 16,154          |       | 15,859           |       |
| Deferred income  taxes                                                                                                                       |       | 2,033           |       | 1,313            |       |
| Total current  assets                                                                                                                        |       | 247,142         |       | 237,469          |       |
|                                                                                                                                         |       |            |       |             |       |
| **Property  and equipment, net**                                                                                                             |       | 81,959          |       | 86,057           |       |
|                                                                                                                                         |       |            |       |             |       |
| **Other  assets:**                                                                                                                           |       |            |       |             |       |
| Goodwill                                                                                                                                     |       | 47,592          |       | 48,276           |       |
| Investment in  affiliates                                                                                                                    |       | 16,194          |       | 16,466           |       |
| Other assets                                                                                                                                 |       | 5,566           |       | 8,420            |       |
| Deferred income  taxes                                                                                                                       |       | 777             |       | 843              |       |
| **Total  assets**                                                                                                                            |       | $               | 399,230    |             | $          | 397,531 |   |
|                                                                                                                                         |       |            |       |             |       |
| **Liabilities  and Stockholders’ Equity**                                                                                               |       |            |       |             |       |
| **Current  liabilities:**                                                                                                                    |       |            |       |             |       |
| Senior  Subordinated Notes                                                                                                                   |       | $               | 90,000     |             | $          | — |   |
| Revolving credit  facility and other current debt                                                                                            |       | 37,338          |       | 18,802           |       |
| Current portion  of capital lease obligations                                                                                                |       | 3,302           |       | 3,202            |       |
| Trade accounts  payable                                                                                                                      |       | 15,895          |       | 32,595           |       |
| Accrued wages,  salaries and bonuses                                                                                                         |       | 54,033          |       | 43,641           |       |
| Accrued  operating expenses                                                                                                                  |       | 38,793          |       | 46,533           |       |
| Deferred revenue  and other                                                                                                                  |       | 7,249           |       | 8,816            |       |
| Income taxes  payable                                                                                                                        |       | 102             |       | 1,107            |       |
| Total current  liabilities                                                                                                                   |       | 246,712         |       | 154,696          |       |
| **Long-term  debt and other liabilities:**                                                                                                   |       |            |       |             |       |
| Long-term debt,  excluding current portion                                                                                                   |       | —          |       | 90,000           |       |
| Capital lease  obligations, excluding current portion                                                                                        |       | 7,775           |       | 8,393            |       |
| Other  liabilities                                                                                                                           |       | 10,907          |       | 8,949            |       |
| Deferred income  taxes                                                                                                                       |       | 204             |       | 205              |       |
| Total  liabilities                                                                                                                           |       | 265,598         |       | 262,243          |       |
|                                                                                                                                         |       |            |       |             |       |
| **Minority  interests**                                                                                                                      |       | 2,989           |       | 2,629            |       |
| **Stockholders’  equity:**                                                                                                              |       |            |       |             |       |
| Common stock,  voting, $.001 par value 200,000,000 shares authorized, 74,437,829 and  74,433,629 shares issued and outstanding, respectively |       | 74              |       | 74               |       |
| Additional paid-in  capital                                                                                                                  |       | 168,871         |       | 168,871          |       |
| Accumulated  other comprehensive income                                                                                                      |       | 4,845           |       | 8,342            |       |
| Accumulated  deficit                                                                                                                         |       | (42,162         | )          | (43,611          | )          |
| Less treasury  stock, at cost, 694,339 and 707,927 common shares, respectively                                                               |       | (985            | )          | (1,017           | )          |
| Total  stockholders’ equity                                                                                                             |       | 130,643         |       | 132,659          |       |
| **Total  liabilities and stockholders’ equity**                                                                                         |       | $               | 399,230    |             | $          | 397,531 |   |

* *

*See Notesto Consolidated Condensed Financial Statements.*

 

3

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### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

** (UNAUDITED)**

(in thousands)
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**          | ** ** |
| ** **                                                                        | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from operating activities:**                                        |       |                   |       |   |   |
| Net income                                                                        |       | $                      | 1,449      |   | $ | 4,826 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                    |       | 8,857                  |       | 9,185 |   |
| (Gain)/Loss on  disposal of assets                                                |       | 88                     |       | — |   |
| Provision for  deferred income taxes                                              |       | (799                   | )          | (18 | ) |
| Equity in  (earnings) loss of affiliates                                          |       | 107                    |       | 7 |   |
| Minority  interest in net income of consolidated subsidiaries                     |       | 360                    |       | 214 |   |
| Changes in  operating assets and liabilities:                                     |       |                   |       |   |   |
| Trade accounts  receivable                                                        |       | (6,921                 | )          | (8,772 | ) |
| Other assets                                                                      |       | (679                   | )          | (716 | ) |
| Trade accounts  payable                                                           |       | (7,779                 | )          | (4,137 | ) |
| Other  liabilities                                                                |       | (2,993                 | )          | 5,703 |   |
| Net cash flows  from operating activities                                         |       | (8,310                 | )          | 6,292 |   |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from investing activities:**                                        |       |                   |       |   |   |
| Purchases of  property and equipment                                              |       | (6,598                 | )          | (5,458 | ) |
| Proceeds from  cash surrender value of life insurance                             |       | 3,274                  |       | — |   |
| Net cash flows  from investing activities                                         |       | (3,324                 | )          | (5,458 | ) |
|                                                                              |       |                   |       |   |   |
| **Cash  flows from financing activities:**                                        |       |                   |       |   |   |
| Borrowings on  debt                                                               |       | 49,652                 |       | 4,092 |   |
| Repayments of  debt                                                               |       | (30,566                | )          | (5,488 | ) |
| Repayments of  capital lease obligations                                          |       | (852                   | )          | (718 | ) |
| Treasury stock  reissuances                                                       |       | 33                     |       | 63 |   |
| Net cash flows  from financing activities                                         |       | 18,267                 |       | (2,051 | ) |
| Effect of  exchange rates on cash                                                 |       | (559                   | )          | 433 |   |
| **Net  increase (decrease) in cash**                                              |       | 6,074                  |       | (784 | ) |
| **Cash  and cash equivalents, beginning of period**                               |       | 28,906                 |       | 29,850 |   |
| **Cash  and cash equivalents, end of period**                                     |       | $                      | 34,980     |   | $ | 29,066 |   |
|                                                                              |       |                   |       |   |   |
| **Non-cash  investing and financing activities:**                                 |       |                   |       |   |   |
| Capital leases  incurred                                                          |       | $                      | 796        |   | $ | — |   |

 

*See Notesto Consolidated Condensed Financial Statements*

 

4

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### **SITEL CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

** **

**Note1.** Basis of Consolidationand Presentation

 

***General***

References in the Notes to Consolidated CondensedFinancial Statements to “the Company”, “we” and “our” are to SITEL Corporationand its subsidiaries, collectively.

 

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact centers. We support the customer managementstrategies of large and medium size corporations in North America, Europe, AsiaPacific, and Latin America. We provide customer acquisition, customer care,technical support and risk management services on an outsourced basis, as wellas operational and information technology professional services for bothoutsourced and internal contact centers. We serve clients primarily in the automotive,consumer, financial services, insurance, technology, telecommunications andISP, media services, and utilities sectors.

 

The accompanying unaudited consolidated condensed financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the interim periods presented. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2004. All significant intercompany balances and transactions have been eliminated. Certain amounts in prior fiscal periods have been reclassified for comparative purposes.

 

***Use of Accounting Estimates***

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

 

***Recently IssuedAccounting Pronouncements***

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the costrecorded as compensation expense over the period during which the employee isrequired to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” below for the pro forma net incomeand net income per share amounts, for the three months ended March 31, 2005 and2004, as if we had used a fair-value-based method similar to the methodsrequired under SFAS 123R to measure compensation expense for employeestock incentive awards.  In March 2005,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,which expressed the views of the SEC regarding the interaction betweenSFAS 123R and certain SEC rules and regulations. SAB No. 107provides guidance related to the valuation of share-based payment arrangementsfor public companies, including assumptions such as expected volatility andexpected term.  In April 2005, theSEC approved a rule that delayed the effective date of SFAS 123R forpublic companies. As a result, SFAS 123R will be effective for the Companyin the first quarter of 2006 and will apply to all of our outstanding unvestedshare-based payment awards as of January 1, 2006 and all prospectiveawards.  Although we have not yet determinedwhether the adoption of SFAS 123R will result in amounts that are similarto the current pro forma disclosures under SFAS 123, we are evaluating therequirements under SFAS 123R and expect the adoption to have a significantimpact on our consolidated statements of operations and net income per share.

 

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

 

5

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In January 2003, the FASB released Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51*, (FIN 46), which required that allprimary beneficiaries of Variable Interest Entities (VIE) consolidate thatentity. FIN 46 was effective immediately for VIE’s created after January 31,2003 and to VIE’s in which an enterprise obtained an interest after that date.It applied in the first fiscal year or interim period beginning after June 15,2003 to VIE’s in which an enterprise held a variable interest it acquiredbefore February 1, 2003. In December 2003, the FASB published a revision to FIN46 (FIN 46R) to clarify some of the provisions of the interpretation and todefer the effective date of implementation for certain entities. The remainingprovisions of FIN 46R were effective January 1, 2004.  The adoption of FIN 46R had no impact on ourconsolidated financial statements.

 

***Stock-BasedCompensation***

We apply theintrinsic-value-based method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (APBNo. 25)*,* and relatedinterpretations to account for our fixed-plan stock options. Under thismethod, compensation expense is recorded on the date of grant only if thecurrent market price of the underlying stock exceeded the exercise price.Statement of Financial Accounting Standard No. 123, *Accounting for Stock-Based Compensation* (SFAS No. 123)*,* established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-basedemployee compensation plans.

 

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

 
| **Three Months Ended March 31,**                                                                                          | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                      |       |       |       |       |       |
| Net income:                                                                                                               |       |       |       |       |       |
| As reported                                                                                                               |       | $          | 1,449      |       | $          | 4,826 |   |
| Less: total  stock based employee compensation expense determined under the fair value method  for all awards, net of tax |       | (127       | )          | (259       | )          |
| Pro forma                                                                                                                 |       | $          | 1,322      |       | $          | 4,567 |   |
| ** **                                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income per  common share:                                                                                                 |       |       |       |       |       |
| As reported:                                                                                                              |       |       |       |       |       |
| Basic                                                                                                                     |       | $          | 0.02       |       | $          | 0.07 |   |
| Diluted                                                                                                                   |       | 0.02       |       | 0.07       |       |
| Pro forma:                                                                                                                |       |       |       |       |       |
| Basic                                                                                                                     |       | 0.02       |       | 0.06       |       |
| Diluted                                                                                                                   |       | 0.02       |       | 0.06       |       |

 

 

The fair value of options granted during the three months ended March31, 2004, was estimated at the date of the grant using the Black-Scholesoption-pricing model, and the following weighted-average assumptions:

 
| ** **                  | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|
| * *                    | * *   | * * | * *   |
| - Volatility  factor        |       | 53.0     | %          |
| - Risk-free  interest rate  |       | 3.4      | %          |
| - Expected life  (in years) |       | 5        |       |
| - Expected  dividend yield  |       | 0.0      | %          |

 

 

There were no options granted during the three months ended March 31,2005.

 

***SignificantClients***

Our******top20 clients accounted for 68.9% and 68.3% of our revenue in the three-monthperiods ended March 31, 2005 and 2004, respectively, and include multiple independentlymanaged business units within the client’s affiliated group.  Hewlett-Packard Company business units

 

6

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were responsible for 12.4% and 11.6% of our revenuefor the three-month period ended March 31, 2005 and 2004.  General Motors Corporation (General Motors)business units were responsible for 12.2% and 17.3% of our total revenue in thethree-month periods ended March 31, 2005 and 2004.  The primary General Motors contract expiresin December 2005, while a second contract terminated in June 2004.

** **

**Note2.** Comprehensive Income

 

Comprehensive income for the three months ended March31, 2005 and 2004 is as follows (in thousands):

** **
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **March 31,**          | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                |       |                   |       |   |   |
| Net income                          |       | $                      | 1,449      |   | $ | 4,826 |   |
| Other  comprehensive income (loss): |       |                   |       |   |   |
| Currency  translation adjustment    |       | (3,497                 | )          | 1 |   |
| Comprehensive  income (loss)        |       | $                      | (2,048     | ) | $ | 4,827 |   |
|                                |       |                   |       |   |   |

 

 

Accumulated other comprehensive income included in our consolidatedcondensed balance sheets represents the accumulated foreign currency translationadjustment.

** **

**Note3.**  Asset Impairment and Restructuring Expenses

 

The following table summarizes activity in ourrestructuring liabilities for the three months ended March 31, 2005:

 
| ** **         | ** ** | ** **    | ** ** | **Facility**   | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|----------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**  | ** ** | **Total**  | ** ** |
|               |       |          |       |           |       |       |       |
| December 31,  2004 |       | $             | 4.2        |           | $          | 5.9        |       | $ | 10.1 |   |
| Expensed           |       | —        |       | —         |       | —     |       |
| Paid               |       | (1.5          | )          | (1.1           | )          | (2.6       | )          |
| Other              |       | 0.1           |       | (0.5           | )          | (0.4       | )          |
| March 31, 2005     |       | $             | 2.8        |           | $          | 4.3        |       | $ | 7.1 |   |
|               |       |          |       |           |       |       |       |

 

 

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

 

We expect to pay theemployee compensation restructuring liabilities during 2005. The Companyexpects to utilize the remaining facility closure or reduction restructuringliabilities over the respective lease periods through fiscal 2009.

 

**Note4.** Investments inAffiliates

 

We have made minority interest investments for business and strategicpurposes through the purchase of voting common and preferred stock ofcompanies.  We periodically evaluatewhether declines in fair value, if any, of our investments areother-than-temporary. This evaluation consists of a review of qualitative andquantitative factors. We also consider other factors to determine whetherdeclines in fair value are other-than-temporary, such as the investee’sfinancial condition, results of operations and operating trends. We alsoconsider the implied value from any recent rounds of financing completed by theinvestee.

 

7

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Subcontracted expenses for services provided byour India joint venture for the three-month periods ended March 31, 2005 and2004 were $4.0 million and $3.4 million, respectively.  The Company had payables to our India jointventure of $3.0 million at March 31, 2005 and December 31, 2004, which areincluded in trade accounts payable in the accompanying consolidated condensedbalance sheets.

 

Subcontracted services provided by our LatinAmerica joint venture for the three-month periods ended March 31, 2005 and 2004were not material.

 

**Note 5.** Stock-Based Compensation

 

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

 

Vesting terms vary with eachgrant, and option terms may not exceed ten years. Option prices, set by theCompensation Committee of the Board of Directors, may not be less than the fairmarket value at date of grant for incentive stock options or less than parvalue for nonqualified stock options. At March 31, 2005, there wereapproximately 5.8 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

 

Prior to the adoption of the 1999 Plan, we grantedoptions under several different plans. As of March 31, 2005, options grantedunder these plans aggregating 2.3 million remained outstanding with strikeprices ranging from $2.41 to $19.50.  Thelast of these options will expire on February 1, 2009. We will not grantadditional options under these plans. The following table sets forth sharessubject to options:

 

 
| ** **               | ** ** | ** **    | ** ** | **Weighted-Average** | ** ** |
|--------------------------|------------|---------------|------------|----------------------|------------|
| ** **               | ** ** | **Number of** | ** ** | **Exercise Price**   | ** ** |
| ** **               | ** ** | **Options**   | ** ** | **per Share**        | ** ** |
|                     |       |          |       |                 |       |
| Balance January  1, 2005 |       | 6,808,736     |       | $                    | 3.68       |   |
| Granted                  |       | —        |       | —               |       |
| Exercised                |       | (4,200        | )          | 1.33                 |       |
| Canceled                 |       | (154,546      | )          | 3.89                 |       |
| Balance March  31, 2005  |       | 6,649,990     |       | $                    | 3.58       |   |
|                     |       |          |       |                 |       |

 

 

The options exercisable at theend of each period were:

 
| ** **         | ** ** | **Weighted-Average** | ** ** | ** **         | ** ** |
|--------------------|------------|----------------------|------------|--------------------|------------|
| ** **         | ** ** | **Number of**        | ** ** | **Exercise Price** | ** ** |
| ** **         | ** ** | **Options**          | ** ** | **per Share**      | ** ** |
| December 31,  2004 |       | 3,716,345            |       | $                  | 4.28       |   |
| March 31, 2005     |       | 3,882,712            |       | $                  | 4.04       |   |

 

 

The following tablesummarizes stock options outstanding at March31, 2005:
| ** **          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** | **Weighted-Average** | ** ** |
|---------------------|------------|-----------------|------------|----------------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Remaining**        | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Life**             | ** ** | **Price**            | ** ** |
| $1.24 to $1.75      |       | 732,884         |       | 7.8                  |       | $                    | 1.56       |   |
| $1.76 to $4.00      |       | 4,601,187       |       | 4.9                  |       | $                    | 3.08       |   |
| $4.01 to $6.33      |       | 709,184         |       | 4.0                  |       | $                    | 4.84       |   |
| $6.34 to $7.22      |       | 425,525         |       | 4.7                  |       | $                    | 6.70       |   |
| $7.23 to $12.66     |       | 121,210         |       | 2.9                  |       | $                    | 9.78       |   |
| $12.67 to $20.00    |       | 60,000          |       | 2.0                  |       | $                    | 17.35      |   |

 

8

----

 

The following table summarizes stock options exercisable at March 31,2005:

 
| ** **          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** |
|---------------------|------------|-----------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Exercisable** | ** ** | **Price**            | ** ** |
| $1.24 to $1.75      |       | 329,984         |       | $                    | 1.55       |   |
| $1.76 to $4.00      |       | 2,271,169       |       | $                    | 3.02       |   |
| $4.01 to $6.33      |       | 676,034         |       | $                    | 4.83       |   |
| $6.34 to $7.22      |       | 425,525         |       | $                    | 6.70       |   |
| $7.23 to $12.66     |       | 120,000         |       | $                    | 9.75       |   |
| $12.67 to $20.00    |       | 60,000          |       | $                    | 17.35      |   |

 

 

**Note 6.****Contingencies**

 

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

 

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

 

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

 

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

 

**Note 7.****Earnings PerShare**

 

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

 

The difference between the number of shares usedto calculate basic and diluted earnings per share represents the number ofshares assumed to be issued from the exercise of dilutive stock options underour stock option plans, less shares assumed to be purchased with proceeds fromthe

 

9

----

 

exercise of the stockoptions and the related tax benefits. At March 31, 2005 and 2004, we had 6.0 million and5.8 million options, respectively, which have been excluded from the dilutednet income per share computation because their exercise price exceeds the fairmarket value.

 

**Note 8.****Supplemental Guarantor FinancialInformation**

 

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

•            Condensed Consolidating Statements ofOperations and Comprehensive Income (Loss) for the three months ended

March 31, 2005 and 2004,

•            Condensed Consolidating Balance Sheets atMarch 31, 2005 and December 31, 2004, and

•            Condensed Consolidating Statements of Cash Flows forthe three months ended March 31, 2005 and 2004.

 

10

----

 

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

(in thousands)

** **
| ** **                                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **Three Months Ended March 31,  2005**                | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Revenue**                                           |       | $          | 85,411     |             | $          | 10,330           |       | $                | 160,247    |             | $          | (4,819 | ) | $ | 251,169 |   |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Operating  expenses:**                              |       |       |       |             |       |             |       |             |       |             |       |
| Direct labor and  telecommunications expenses         |       | 45,025     |       | 4,650            |       | 102,801          |       | —           |       | 152,476          |       |
| Subcontracted  and other services expenses            |       | 13,448     |       | 1,849            |       | 2,216            |       | (4,625           | )          | 12,888           |       |
| Operating,  selling and administrative expenses       |       | 25,119     |       | 2,782            |       | 52,296           |       | (194             | )          | 80,003           |       |
| Total operating  expenses                             |       | 83,592     |       | 9,281            |       | 157,313          |       | (4,819           | )          | 245,367          |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Operating  income**                                 |       | 1,819      |       | 1,049            |       | 2,934            |       | —           |       | 5,802            |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Other  income (expense):**                          |       |       |       |             |       |             |       |             |       |             |       |
| Interest expense                                      |       | (2,356     | )          | (1               | )          | (500             | )          | —           |       | (2,857           | )          |
| Interest income                                       |       | 45         |       | —           |       | 75               |       | —           |       | 120              |       |
| Equity in  earnings (loss) of affiliates              |       | 62         |       | (702             | )          | (107             | )          | 640              |       | (107             | )          |
| Other expense,  net                                   |       | 1,879      |       | (258             | )          | (1,631           | )          | —           |       | (10              | )          |
| Total other  expense, net                             |       | (370       | )          | (961             | )          | (2,163           | )          | 640              |       | (2,854           | )          |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Income  before income taxes and minority interest** |       | 1,449      |       | 88               |       | 771              |       | 640              |       | 2,948            |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| Income tax  expense                                   |       | —     |       | 26               |       | 1,113            |       | —           |       | 1,139            |       |
| Minority  interest                                    |       | —     |       | —           |       | 360              |       | —           |       | 360              |       |
| **Net  income (loss)**                                |       | $          | 1,449      |             | $          | 62               |       | $                | (702       | )                | $          | 640 |   | $ | 1,449 |   |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| Currency  translation adjustment                      |       | (3,497     | )          | (66              | )          | (1,986           | )          | 2,052            |       | (3,497           | )          |
| **Comprehensive  income (loss)**                      |       | $          | (2,048     | )                | $          | (4               | )          | $                | (2,688     | )                | $          | 2,692 |   | $ | (2,048 | ) |

 

11

----

 

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

(in thousands)

 

** **
| ** **                                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **Three Months Ended March 31, 2004**                 | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Revenue**                                           |       | $          | 91,986     |             | $          | 12,852           |       | $                | 139,230    |             | $          | — |   | $ | 244,068 |   |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Operating  expenses:**                              |       |       |       |             |       |             |       |             |       |             |       |
| Direct labor and  telecommunications expenses         |       | 50,019     |       | 6,552            |       | 87,557           |       | —           |       | 144,128          |       |
| Subcontracted  and other services expenses            |       | 11,557     |       | 820              |       | 438              |       | —           |       | 12,815           |       |
| Operating,  selling and administrative expenses       |       | 26,555     |       | 2,779            |       | 47,505           |       | —           |       | 76,839           |       |
| Total operating  expenses                             |       | 88,131     |       | 10,151           |       | 135,500          |       | —           |       | 233,782          |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Operating  income**                                 |       | 3,855      |       | 2,701            |       | 3,730            |       | —           |       | 10,286           |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Other  income (expense):**                          |       |       |       |             |       |             |       |             |       |             |       |
| Interest expense                                      |       | (2,547     | )          | (1               | )          | (685             | )          | —           |       | (3,233           | )          |
| Interest income                                       |       | 44         |       | —           |       | 77               |       | —           |       | 121              |       |
| Equity in  earnings (loss) of affiliates              |       | 2,172      |       | (615             | )          | (7               | )          | (1,557           | )          | (7               | )          |
| Other expense,  net                                   |       | 1,314      |       | 113              |       | (1,701           | )          | —           |       | (274             | )          |
| Total other  expense, net                             |       | 983        |       | (503             | )          | (2,316           | )          | (1,557           | )          | (3,393           | )          |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Income  before income taxes and minority interest** |       | 4,838      |       | 2,198            |       | 1,414            |       | (1,557           | )          | 6,893            |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| Income tax  expense                                   |       | 12         |       | 26               |       | 1,815            |       | —           |       | 1,853            |       |
| Minority  interest                                    |       | —     |       | —           |       | 214              |       | —           |       | 214              |       |
| **Net  income (loss)**                                |       | $          | 4,826      |             | $          | 2,172            |       | $                | (615       | )                | $          | (1,557 | ) | $ | 4,826 |   |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| Currency  translation adjustment                      |       | —     |       | (12              | )          | 13               |       | —           |       | 1                |       |
| **Comprehensive  income (loss)**                      |       | $          | 4,826      |             | $          | 2,160            |       | $                | (602       | )                | $          | (1,557 | ) | $ | 4,827 |   |

 

12

----

 

**CondensedConsolidating Balance Sheet**

(in thousands)

** **
| ** **                                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **At March 31, 2005**                                 | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Assets**                                            |       |       |       |             |       |             |       |             |       |             |       |
| **Current  assets:**                                  |       |       |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents                            |       | $          | 6,258      |             | $          | 4,183            |       | $                | 24,202     |             | $          | 337 |   | $ | 34,980 |   |
| Trade accounts  receivable, net                       |       | 123,284    |       | 4,083            |       | 119,699          |       | (53,091          | )          | 193,975          |       |
| Prepaid expenses  and other current assets            |       | 4,670      |       | 132              |       | 13,385           |       | —           |       | 18,187           |       |
| Total current  assets                                 |       | 134,212    |       | 8,398            |       | 157,286          |       | (52,754          | )          | 247,142          |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Property  and equipment, net**                      |       | 17,405     |       | 1,655            |       | 62,899           |       | —           |       | 81,959           |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Other  assets:**                                    |       |       |       |             |       |             |       |             |       |             |       |
| Goodwill                                              |       | 19,577     |       | 14               |       | 28,001           |       | —           |       | 47,592           |       |
| Deferred income  taxes                                |       | 141        |       | —           |       | 636              |       | —           |       | 777              |       |
| Investments in  affiliates                            |       | —     |       | —           |       | 16,194           |       | —           |       | 16,194           |       |
| Other assets                                          |       | 3,207      |       | 56               |       | 2,303            |       | —           |       | 5,566            |       |
| Investments in  subsidiaries                          |       | 102,654    |       | 96,703           |       | —           |       | (199,357         | )          | —           |       |
| **Total  assets**                                     |       | $          | 277,196    |             | $          | 106,826          |       | $                | 267,319    |             | $          | (252,111 | ) | $ | 399,230 |   |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity**        |       |       |       |             |       |             |       |             |       |             |       |
| **Current  liabilities:**                             |       |       |       |             |       |             |       |             |       |             |       |
| Senior  Subordinated Notes                            |       | $          | 90,000     |             | $          | —           |       | $                | —     |             | $          | — |   | $ | 90,000 |   |
| Revolving credit  facility and other current debt     |       | 11,314     |       | —           |       | 26,024           |       | —           |       | 37,338           |       |
| Current portion  of capital lease obligations         |       | 696        |       | 68               |       | 2,538            |       | —           |       | 3,302            |       |
| Trade accounts  payable                               |       | 7,330      |       | 2,052            |       | 60,280           |       | (53,767          | )          | 15,895           |       |
| Accrued expenses  and other current liabilities       |       | 28,884     |       | 2,052            |       | 69,307           |       | (66              | )          | 100,177          |       |
| Total current  liabilities                            |       | 138,224    |       | 4,172            |       | 158,149          |       | (53,833          | )          | 246,712          |       |
| **Long-term  debt and other liabilities:**            |       |       |       |             |       |             |       |             |       |             |       |
| Long-term debt                                        |       | —     |       | —           |       | —           |       | —           |       | —           |       |
| Capital lease  obligations, excluding current portion |       | 140        |       | —           |       | 7,635            |       | —           |       | 7,775            |       |
| Deferred  compensation                                |       | 6,138      |       | —           |       | 4,769            |       | —           |       | 10,907           |       |
| Deferred income  taxes                                |       | 141        |       | —           |       | 63               |       | —           |       | 204              |       |
| Total  liabilities                                    |       | 144,643    |       | 4,172            |       | 170,616          |       | (53,833          | )          | 265,598          |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Minority  interests**                               |       | —     |       | —           |       | 2,989            |       | —           |       | 2,989            |       |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Stockholders’  equity**                        |       | 132,553    |       | 102,654          |       | 93,714           |       | (198,278         | )          | 130,643          |       |
| **Total  liabilities and stockholders’ equity**  |       | $          | 277,196    |             | $          | 106,826          |       | $                | 267,319    |             | $          | (252,111 | ) | $ | 399,230 |   |

** **

**13**

----

** **

 

**CondensedConsolidating Balance Sheet**

(in thousands)

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

 

14

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**CondensedConsolidating Statement of Cash Flows**

(in thousands)

** **
| ** **                                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **Three Months Ended March 31, 2005**                 | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Net  cash flows from operating activities**         |       | $          | 3,393      |             | $          | (18,534          | )          | $                | 5,810      |             | $          | 1,021 |   | $ | (8,310 | ) |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Cash  flows from investing activities:**            |       |       |       |             |       |             |       |             |       |             |       |
| Purchases of  property and equipment                  |       | (1,409     | )          | (14              | )          | (5,175           | )          | —           |       | (6,598           | )          |
| Proceeds from  cash surrender value of life insurance |       | 3,274      |       | —           |       | —           |       | —           |       | 3,274            |       |
| Net cash flows  from investing activities             |       | 1,865      |       | (14              | )          | (5,175           | )          | —           |       | (3,324           | )          |
|                                                  |       |       |       |             |       |             |       |             |       |             |       |
| **Cash  flows from financing activities:**            |       |       |       |             |       |             |       |             |       |             |       |
| Borrowings on  debt                                   |       | —     |       | —           |       | 49,652           |       | —           |       | 49,652           |       |
| Repayments of  debt and capital lease obligations     |       | (168       | )          | (33              | )          | (31,217          | )          | —           |       | (31,418          | )          |
| Net borrowings  and payments in intercompany balances |       | (8,018     | )          | 19,952           |       | (11,164          | )          | (770             | )          | —           |       |
| Treasury stock  reissuances                           |       | 33         |       | —           |       | —           |       | —           |       | 33               |       |
| Net cash flows  from financing activities             |       | (8,153     | )          | 19,919           |       | 7,271            |       | (770             | )          | 18,267           |       |
| Effect of  exchange rates on cash                     |       | —     |       | —           |       | (559             | )          | —           |       | (559             | )          |
| **Net  increase (decrease) in cash**                  |       | (2,895     | )          | 1,371            |       | 7,347            |       | 251              |       | 6,074            |       |
| **Cash  and cash equivalents, beginning of period**   |       | 9,153      |       | 2,812            |       | 16,855           |       | 86               |       | 28,906           |       |
| **Cash  and cash equivalents, end of period**         |       | $          | 6,258      |             | $          | 4,183            |       | $                | 24,202     |             | $          | 337 |   | $ | 34,980 |   |

 

15

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**CondensedConsolidating Statement of Cash Flows**

(in thousands)

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

 

 

 

# ***Note 9.*****SeniorSubordinated Notes**

 

Our 9.25% SeniorSubordinated Notes (the Notes) are due in March 2006.  As the Notes are due within one year, theCompany has reclassified the remaining $90.0 million of outstanding bonds to acurrent liability as of March 31, 2005. We are currently in the process ofrefinancing the Notes and our revolving credit facility.

 

16

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**Item2****.****Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

##### **General**

 

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

 

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

 

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

 

As you read this discussion and analysis, refer to our ConsolidatedCondensed Statements of Operations, which present the results of our operationsfor the three-month periods ended March 31, 2005 and 2004, and are summarizedon the following pages. We analyze and explain the differences between periodsfor the components of net income in the following sections. Our analysis isimportant in making decisions about your investment in SITEL Corporation.

 

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

##### ** **

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

 

**General BusinessRisks**

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

 

Our results of operations and operating cash flowsmay vary with periodic wins and losses of client contracts and with changes inthe scope of client requirements. Our******top20 clients accounted for 68.9% and 68.3% of our revenue in the three-monthperiods ended March 31, 2005 and 2004, respectively, and include multiple independentlymanaged business units within the client’s affiliated group.  Hewlett-Packard Company business units were responsible for 12.4% and11.6% of our revenue for the three-month period ended March 31, 2005 and2004.  General Motors Corporation(General Motors) business units were responsible for 12.2% and 17.3% of ourtotal revenue in the three-month periods ended March 31, 2005 and 2004. On April 21, 2004, we announced thesigning of a new contract with General Motors to continue to provide customersupport services for General Motors’ North American Vehicle Sales, Service, andMarketing Group through December 31, 2005. An existing agreement under which wesupported OnStar operations terminated effective June 22, 2004.  Thefinancial failure of any of these clients or the loss of any or all of theirbusiness could have an adverse impact on our operating results.

 

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

 

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

 

17

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**Critical Accounting Policies andEstimates**

The process of preparing financial statements requiresthe use of estimates on the part of management. These estimates involvejudgments with respect to, among other things, future economic factors that aredifficult to predict and are beyond management’s control. As a result, actualresults could differ from these estimates.

 

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

***Revenue Recognition***

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

 

***Trade Accounts Receivable***

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

 

***Property and Equipment***

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

 

***Asset Impairment***

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

 

Upon the occurrence of a triggering event, the carrying amount of along-lived asset is reviewed to assess whether the recoverable amount hasdeclined below its carrying amount.  Therecoverable amount is the estimated net future cash flows that we expect torecover from the future use of the asset, undiscounted and without interest,plus the asset’s residual value on disposal. Where the recoverable amount ofthe long-lived asset is less than the carrying value, an impairment loss wouldbe recognized to write down the asset to its fair value, which is based ondiscounted estimated cash flows from the future use of the asset.

 

The estimated cash flows arising from future use of the asset that areused in the impairment analysis requires judgment regarding what we wouldexpect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use ofthe asset or the residual value of the asset on disposal based on changes inthe market conditions, changes in the use of the assets, management’s plans,and the determination of the useful life of the assets 

 

18

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could significantly change the recoverable amount of theasset or the calculation of the fair value and the resulting impairment loss, whichcould significantly affect the results of operations.

 

***Goodwill***

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

 

***Deferred Income Taxes***

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

 

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

 

***Self-Insurance Reserves***

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

 

***Contingencies***

We consider the likelihood of various loss contingencies, including taxand legal contingencies arising in the ordinary course of business, and ourability to reasonably estimate the amount of loss in determining losscontingencies. An estimated loss contingency is accrued when it is probablethat a liability has been incurred and the amount of loss can be reasonablyestimated. We regularly evaluate current information available to us to determinewhether such accruals should be adjusted.

 

19

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**Results of Operations**

##### ** **

##### **For the Three MonthsEnded March 31, 2005 Compared to the Same Period of 2004**

 

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

 

**Components of Operations**

 

The following table summarizes our statement ofoperations data on a percentage-of-revenue basis.

 
| ** **                                            | ** **   | **Three Months Ended March 31,** | ** **   |
|-------------------------------------------------------|--------------|----------------------------------|--------------|
| ** **                                            | ** **   | **2005**                         | ** **   | **2004** | ** ** |
| ** **                                            | ** **   | **$**                            | ** **   | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *** ***                                          | *** *** | **(in thousands)**               | *** *** |
|                                                  |         |                             |         |   |   |   |   |   |   |
| **Revenue**                                           | ** **   | **$**                            | **251,169**  |   | 100.0 | % | $ | 244,068 |   | 100.0 | % |
|                                                  |         |                             |         |   |   |   |   |   |   |
| Direct labor and  telecommunications expenses         | ** **   | **152,476**                      |         | 60.7 | % | 144,128 |   | 59.1 | % |
| Subcontracted  and other services expenses            | ** **   | **12,888**                       |         | 5.1 | % | 12,815 |   | 5.3 | % |
| Operating,  selling and administrative expenses       | ** **   | **80,003**                       |         | 31.9 | % | 76,839 |   | 31.5 | % |
| **Operating  income**                                 | ** **   | **5,802**                        |         | 2.3 | % | 10,286 |   | 4.2 | % |
|                                                  |         |                             |         |   |   |   |   |   |   |
| Interest expense                                      | ** **   | **(2,857**                       | )            | -1.1 | % | (3,233 | ) | -1.3 | % |
| Interest income                                       | ** **   | **120**                          |         | 0.0 | % | 121 |   | 0.0 | % |
| Equity in  earnings (loss) of affiliates              | ** **   | **(107**                         | )            | 0.0 | % | (7 | ) | 0.0 | % |
| Other expense,  net                                   | ** **   | **(10**                          | )            | 0.0 | % | (274 | ) | -0.1 | % |
| **Income  before income taxes and minority interest** | ** **   | **2,948**                        |         | 1.2 | % | 6,893 |   | 2.8 | % |
|                                                  |         |                             |         |   |   |   |   |   |   |
| Income tax  expense                                   | ** **   | **1,139**                        |         | 0.5 | % | 1,853 |   | 0.8 | % |
| Minority  interest                                    | ** **   | **360**                          |         | 0.1 | % | 214 |   | 0.1 | % |
|                                                  |         |                             |         |   |   |   |   |   |   |
| **Net  Income**                                       | ** **   | **$**                            | **1,449**    |   | 0.6 | % | $ | 4,826 |   | 2.0 | % |
|                                                  |         |                             |         |   |   |   |   |   |   |

 

 

 

***Revenue***

Revenue increased $7.1 million, or 2.9%, in the first quarter of 2005compared to the same period of 2004.  Thechanges in revenue by geographic region are shown in the following table:
| **Three months**    | ** ** | ** **        | ** ** | ** ** | ** ** | **$**      | ** ** | **%**      | ** ** |
|---------------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended March 31,** | ** ** | **2005**          | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **          | ** ** | **(in millions)** | ** ** |
|                |       |              |       |       |       |       |       |       |       |
| North America       | ** ** | **$**             | **122.9**  |       | $          | 129.2      |       | $          | (6.3       | ) | -4.9 | % |
| Europe              | ** ** | **107.9**         |       | 98.5       |       | 9.4        |       | 9.5        | %          |
| Asia Pacific        | ** ** | **12.3**          |       | 9.7        |       | 2.6        |       | 26.8       | %          |
| Latin America       | ** ** | **8.1**           |       | 6.7        |       | 1.4        |       | 20.9       | %          |
| Totals              | ** ** | **$**             | **251.2**  |       | $          | 244.1      |       | $          | 7.1        |   | 2.9 | % |
|                |       |              |       |       |       |       |       |       |       |

 

 

North American revenue decreased $6.3 million dueto a $14.0 million decrease in customer acquisition, customer care and riskmanagement business partially offset by a $7.7 million increase in technicalsupport services.

 

20

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European revenue increased $9.4 million in the first quarter of 2005 compared to the same period in 2004. Highersales volumes from new and existing clients resulted in an increase in revenueof $4.7 million in the first quarter of 2005 compared to the same period in2004.  The weakening of the U.S. dollarversus the British pound and Euro accounted for the remaining $4.7 million ofthe increase.

 

The weakening of the US dollar versus the NewZealand and Australia dollars accounted for $0.5 million of the increase inAsia Pacific revenue.  The remainingincrease was the result of higher sales volumes from new and existing clients.

 

Latin American revenue increased $0.6 million as a result of theweakening of the US dollar versus the Brazilian Real.  The remaining increase is a result of highersales volumes from new and existing clients.

 

***Direct Labor andTelecommunications Expenses***

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

 

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

 

Direct labor and telecommunications expensesincreased $8.3 million, or 5.8%, in the first quarter of 2005 compared to thesame period of 2004.  As a percentage ofrevenue, direct labor and telecommunications expenses increased to 60.7% in the first quarter of 2005compared to 59.1% in same period in 2004. The increase was primarily the resultof higher direct labor costs, particularly in Europe, and a change in the mixof services provided in the first quarter of 2005 compared to the same periodin 2004.

 

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expenses includeservices provided to clients through subcontractors and other out-of-pocketexpenses. Subcontracted and other services expenses remained consistent for thefirst quarter of 2005 compared to the same period of 2004.

 

Subcontracted expenses for services provided byour India joint venture for the three months ended March 31, 2005 and 2004 were$4.0 million and $3.4 million, respectively.

 

***Operating, Selling andAdministrative Expenses***

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

 

Operating, selling and administrative expensesincreased $3.2 million, or 4.1%, in the first quarter of 2005 compared to the sameperiod of 2004.  The weakening of the U.S. dollar compared tothe primary currency in the jurisdictions that we operate accounted for anincrease of $2.4 million in operating, selling and administrative expensescompared to the same period in 2004.  Asa percentage of revenue, operating, selling and administrative expensesincreased to 31.9% in the first quarter of 2005 compared to 31.5% in the firstquarter of 2004.

 

***Operating Income***

Operating incomedecreased $4.5 million inthe first quarter of 2005 compared to the same period of 2004. As a percentage of revenue, operating incomedecreased to 2.3% in the first quarter of 2005 compared to 4.2% in the sameperiod of 2004 due to the factors discussed above.

 

***Interest Expense***

Interest expense decreased $0.4 million or 11.6% in the first quarterof 2005 compared to the same period in 2004 primarily as a result of thedecrease in the outstanding Senior Subordinated Notes from $100 million duringthe first quarter of 2004 to $90 million for the same period in 2005.

 

***Interest Income***

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

 

21

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***Equity in Earnings (Loss) ofAffiliates***

Equity in losses of affiliatesincreased by $0.1 million in the first quarter of 2005 as compared to the sameperiod in 2004.

 

***Other Expense, Net***

Other expense, net of other income, decreased $0.3 million in the firstquarter of 2005 as compared to the same period in 2004.

 

***Income Tax Expense***

Income tax expense as a percentageof income before income taxes and minority interest was 38.6% and 26.9% for thethree-months ended March 31, 2005 and 2004, respectively. The differencebetween these rates and the statutory U.S. Federal rate of 35% was primarilydue to the utilization of net operating loss carryforwards in certainsubsidiaries for which a full valuation allowance had previously been providedagainst the net deferred tax asset and due to income tax expense incurred incertain non-US subsidiaries.

 

**FinancialCondition and Liquidity**

 

In this section, we discuss our financial condition and liquidity andthe factors affecting them. We separately discuss cash flows, capitalresources, and contractual obligations and commitments. We describe our generalbusiness risks, critical accounting policies, and estimates that are importantto our financial condition and liquidity earlier in this report. Please referto that discussion as you read this section.

# * *

# ***Cash Flows***

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

 
| **Three Months Ended March 31,** | ** ** | **2005**           | ** ** | **2004** | ** ** |
|----------------------------------|------------|--------------------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| **Net  cash flows from:**        |       |               |       |     |       |
| Operating  activities            |       | $                  | (8,310     | )        | $          | 6,292 |   |
| Investing  activities            |       | (3,324             | )          | (5,458   | )          |
| Financing  activities            |       | 18,267             |       | (2,051   | )          |
|                             |       |               |       |     |       |
|                                  |            |                    |            |          |            |  |  |

 

** **

**2005**

In the first quarter of 2005, cash used by operatingactivities resulted primarily from income before depreciation and amortizationand other charges of $10.1 million, which was offset by a $7.6 million increasein trade accounts receivable and other assets and a $10.8 million decrease intrade accounts payable and other liabilities.

 

In the first quarter of 2005, weused cash for investing activities to purchase $6.6 million of property andequipment.  This was partially offset by$3.3 million in proceeds from the cash surrender value of life insurance.

 

In the first quarter of 2005,cash provided by financing activities resulted from $19.1 million in netborrowings under the revolving credit facility and other short-termborrowings.  This was partially offset bycash used to repay borrowings under capital lease obligations of $0.9 million.

 

**2004**

In the first quarter of 2004,cash provided by operating activities resulted primarily from income beforedepreciation and amortization of $14.2 million and a $5.7 million increase inother liabilities, which were partially offset by a$8.8 million increase in trade accounts receivable and $4.1 million decrease intrade accounts payable.

 

In the first quarter of 2004, we used cash forinvesting activities to purchase $5.5 million of property and equipment.

 

In the first quarter of 2004, weused cash for financing activities to repay $4.6 million of the revolvingcredit facility, net of additional borrowings of $4.1 million. Additionally, weused cash to repay borrowings under local lines of credit and capital leaseobligations of $0.9 million and $0.7 million, respectively.

# * *

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***Capital Resources***

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

 

We have a three-year $50 million revolving creditfacility that expires in December 2005. The credit facility is secured by accounts receivable in the UnitedStates, Canada and the United Kingdom. We intend to utilize the facility, as needed, for ongoing workingcapital requirements and general corporate purposes. At March 31, 2005, we had$30.3 million of available borrowings under the credit facility, and we were incompliance with all financial covenants of the facility.

Our 9.25% Senior Subordinated Notes (the Notes) are due in March2006.  As the Notes are due within oneyear, the Company has reclassified the remaining $90.0 million of outstandingbonds to a current liability as of March 31, 2005. We are currently in theprocess of refinancing the Notes and our revolving credit facility.

 

We expect to finance our currentoperations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash andavailable funds under our credit facility in addition to lease financing forproperty and equipment. Weexpect capital expenditures in the second quarter of 2005 to be in the range of$10 million to $12 million, as we continue to cover maintenance and technologyupgrades, asset replacements, efficiency investments, and investment forcontinued growth. Future acquisitions, if any, may requireadditional debt or equity financing.

 

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

 

# ***ContractualObligations and Commitments***

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

•            $90.0 million of SeniorSubordinates Notes as shown in our consolidated condensed balance sheet atMarch 31, 2005,

•            $37.3 million of revolving creditfacility and other local short-term borrowings debt as shown in ourconsolidated condensed balance sheet at March 31, 2005,

•            $11.1 million of capital leaseobligations as shown in our consolidated condensed balance sheet at March 31,2005, and

•            operating leaseobligations for property and certain equipment under noncancelable operatinglease arrangements, which expire at various dates through 2018.

 

**Off-Balance Sheet Arrangements**

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

 

 

**Other Matters**

 

***QuarterlyResults and Seasonality***

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

•                  the timing of ourclients’ customer management initiatives and customer acquisition and loyaltycampaigns,

•                  the commencement of newcontracts and the discontinuance and termination of existing contracts,

•                  revenue mix,

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

•                  the timing ofrecognition of incentive fees.

We experience periodic fluctuations in our results of operationsrelated to both the start-up costs associated with expansion and theimplementation of clients’ outsourced customer management activities. Inaddition, our business generally tends to be slower in the third quarter due tosummer holidays in Europe.

 

 

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***Effects of Inflation***

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

 

***Related PartyTransactions***

We have mademinority interest investments for business and strategic purposes through thepurchase of voting common and preferred stock of companies.  These investments are included in investmentsin affiliates in consolidated financial statements.  As of March 31, 2005 and December 31, 2004,the investment in our India joint venture was approximately $3.8 million and$4.1 million respectively.  Subcontracted services provided by our India jointventure for the three months ended March 31, 2005 and 2004 were $4.0 millionand $3.4 million, respectively and are included in subcontracted and otherservices expenses in the accompanying consolidated statements of operations.The Company had payables to our India joint venture of $3.0 million at March31, 2005 and December 31, 2004, which are included in trade accounts payable inthe consolidated financial statements.

 

As of March 31, 2005 and December 31, 2004, the investment in certainLatin America affiliates was approximately $12.4 million. Of the $12.4 millioninvestment in certain Latin America affiliates, approximately $7.7 million isequity method goodwill. This equity method goodwill is not amortized.  Subcontracted services provided by our LatinAmerica joint ventures for the three months ended March 31, 2005 and 2004 werenot material.

 

***Recently IssuedAccounting Pronouncements***

In December 2004, the Financial Accounting Standards Board (FASB)issued SFAS No. 123 (R), *Share-Based Payment*,(SFAS 123R). This standard will require the cost of employee compensation paidwith equity instruments to be measured based on grant-date fair values with thecost recorded as compensation expense over the period during which the employeeis required to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” in Note 1 to the consolidatedfinancial statements for the pro forma net income and net income per shareamounts, for the three months ended March 31, 2005 and 2004, as if we had useda fair-value-based method similar to the methods required under SFAS 123Rto measure compensation expense for employee stock incentive awards.  In March 2005, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,which expressed the views of the SEC regarding the interaction betweenSFAS 123R and certain SEC rules and regulations. SAB No. 107provides guidance related to the valuation of share-based payment arrangementsfor public companies, including assumptions such as expected volatility andexpected term.  In April 2005, theSEC approved a rule that delayed the effective date of SFAS 123R forpublic companies. As a result, SFAS 123R will be effective for the Companyin the first quarter of 2006 and will apply to all of our outstanding unvestedshare-based payment awards as of January 1, 2006 and all prospectiveawards.  Although we have not yetdetermined whether the adoption of SFAS 123R will result in amounts thatare similar to the current pro forma disclosures under SFAS 123, we are evaluatingthe requirements under SFAS 123R and expect the adoption to have asignificant impact on our consolidated statements of income and net income pershare.

 

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

 

In January 2003, the FASB released Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51,* (FIN 46), which required that allprimary beneficiaries of Variable Interest Entities (VIE) consolidate thatentity. FIN 46 was effective immediately for VIE’s created after January 31,2003 and to VIE’s in which an enterprise obtained an interest after that date.It applied in the first fiscal year or interim period beginning after June 15,2003 to VIE’s in which an enterprise held a variable interest it acquiredbefore February 1, 2003. In December 2003, the FASB published a revision to FIN46 (FIN 46R) to clarify some of the provisions of the interpretation and todefer the effective date of implementation for certain entities. The remainingprovisions of FIN 46R were effective January 1, 2004.  The adoption of FIN 46R had no impact on ourconsolidated financial statements.

 

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

 

***Foreign Currency Risk***

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

 

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

 

With respect to translation risk, even though the fluctuations ofcurrencies against the U.S. dollar can be substantial and thereforesignificantly impact comparisons with prior periods, the translation impact isincluded in accumulated other comprehensive income, a component of stockholders’ equity, and does not affect theunderlying results of operations. Gains andlosses related to transactions denominated in a currency other than thefunctional currency of the countries in which we operate including short-termintercompany accounts are included in the determination of net income.

 

***Interest Rate Risk***

We are also exposed to changes in interest rates on our variable rateborrowings. Interest rates on our Senior Subordinated Notes and capital leaseobligations are fixed, but rates on borrowings under our bank credit facilityare variable. During the three-month period ended March 31, 2005, our averageborrowings under our revolving credit facility were $11.0 million.  Based on our projected cash needs for theforeseeable future, we do not expect that our exposure to changes in interestrates for these borrowings will have a material impact on our interest expense.

 

***Investment Risk***

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

 

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

 

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

 

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

 

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

 

 

 

 

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**PART II****— OTHERINFORMATION**

** **

**Item 1****.****Legal Proceedings**

 

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

 

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

 

*BankruptcyOP Computers SPA vs. SITEL Kingston Limited* (now known as MitreTelesales Limited) was filed in April 2004 in the Court of Ivrea in Milan,Italy.  The receivers assert that Mitre,as a former supplier to Olivetti, is required under Italian bankruptcy law toreturn €5,349,025 (approximately $6.9 million) in payments Olivetti hadallegedly paid Mitre during a one-year “clawback” period, which allegedly runsfrom March 9, 1998 until March 9, 1999, the alleged date Olivetti filed forreceivership.  Mitre filed its Defencewith the court in November 2004.  TheDefence outlined the facts and reasons why Mitre did not and should not reasonablyhave known of Olivetti’s insolvent state during the time that Mitre wasperforming services for Olivetti.  Thefirst substantive hearing held in May 2005 was adjourned to November 2005.  The Company and its subsidiary MitreTelesales Limited are currently unable to predict the outcome or reasonablyestimate the possible loss, if any, or range of losses associated with thisclaim.

 

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

 

**Item 5****.****Other Information**

 

**Forward-LookingStatements**

 

We make statements in this report that are considered forward-lookingstatements within the meaning of the Securities Exchange Act of 1934. Sometimesthese statements will contain words such as “believes,” “expects,” “intends,” “should,”“will,” “plans,” and other similar words. These statements are not guaranteesof our future performance and are subject to risks, uncertainties, and otherimportant factors that could cause our actual performance or achievements to bematerially different from those we project. These risks, uncertainties, andfactors include, but are not limited to: reliance on major clients, conditionsaffecting clients’ industries, clients’ budgets and plans, unanticipated labor,contract or technical difficulties, delays in ramp up of services undercontracts, reliance on major subcontractors and strategic partners, risksassociated with managing a global business, fluctuations in operating results, reliance on telecommunications and computertechnology, dependence on labor force, industry regulation, general andlocal economic conditions, competitive pressures in our industry, risks associatedwith litigation and claims, foreign currency risks, the effects of leverage,dependency on credit availability, restrictions imposed by the terms ofindebtedness, 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.

 

 

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**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 February 3, 2005, which reported under Items2.02 and 9.01 the issuance of a press release. The press release was filed asan exhibit to the Form 8-K.

 

The Company filed a Current Report on Form 8-Kdated February 10, 2005, which reported under Items 2.02 and 9.01 the issuanceof a press release. The press release was filed as an exhibit to the Form 8-K.

 

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### **SIGNATURE**

 

 

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

 

 
|               |   |              | SITEL Corporation            |
|--------------------|--------|-------------------|------------------------------|
|               |   |              | **(Registrant)**             |
|               |   |              |                         |
| Date: May 10, 2005 |   | By /s/  | *Jorge A. Celaya*            |
| ** **         |   |              | **Jorge A. Celaya**          |
| * *           |   |              | *Chief  Financial Officer*   |
|               |   |              | (Duly Authorized Officer and |
|               |   |              | Principal Financial Officer) |

 

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**EXHIBIT INDEX**

 

 

 

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

 

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