Stream Global Services, Inc. - FORM 10-Q

Stream Global Services, Inc. - FORM 10-Q - November 2, 2011

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - Stream Global Services, Inc.	Financial_Report.xls
EX-32.2 - SECTION 906 CFO CERTIFICATION - Stream Global Services, Inc.	d225815dex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - Stream Global Services, Inc.	d225815dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Stream Global Services, Inc.	d225815dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Stream Global Services, Inc.	d225815dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-33739

STREAM GLOBAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware		26-0420454
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

20 William Street, Suite 310 Wellesley, Massachusetts		02481
(Address of Principal Executive Offices)		(Zip Code)

(781) 304-1800

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Units		NYSE Amex
Common Stock, $0.001 Par Value		NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:

None

Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 76,507,373 shares of the Registrant’s common stock, $0.001 par value per share, issued and outstanding as of October 28, 2011 (including shares of common stock that are part of the Registrant’s outstanding, publicly traded units and excluding treasury shares).

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION			1

Item 1.	Unaudited Consolidated Condensed Financial Statements		1

	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		1

	Consolidated Condensed Statements of Operations for the three months ended September 30, 2011 and September 30, 2010 and the nine months ended September 30, 2011 and September 30, 2010		2

	Consolidated Condensed Statements of Stockholders’ Equity for the nine months ended September 30, 2011		3

	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010		4

	Notes to Consolidated Condensed Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22

Item 4.	Controls and Procedures		24

PART II. OTHER INFORMATION			24

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 6.	Exhibits		25

SIGNATURES			26

Stream is a registered trademark of Stream Global Services, Inc.

PART I—FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

STREAM GLOBAL SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)


	September 30, 2011			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	21,370		$	18,489
Accounts receivable, net of allowance for bad debts of $263 and $714 at September 30, 2011 and December 31, 2010, respectively		160,599			180,211
Income taxes receivable		1,126			1,154
Deferred income taxes		17,250			15,665
Prepaid expenses and other current assets		15,022			20,371

Total current assets		215,367			235,890
Equipment and fixtures, net		83,918			80,859
Deferred income taxes		2,380			3,975
Goodwill		226,749			226,749
Intangible assets, net		70,494			83,674
Other assets		14,711			16,838

Total assets	$	613,619		$	647,985

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,735		$	10,758
Accrued employee compensation and benefits		62,932			59,797
Other accrued expenses		40,127			29,989
Income taxes payable		747			1,796
Current portion of long-term debt		228			96
Current portion of capital lease obligations		10,469			9,100
Other liabilities		6,378			7,072

Total current liabilities		131,616			118,608
Long-term debt, net of current portion		221,708			217,199
Capital lease obligations, net of current portion		10,361			10,491
Deferred income taxes		22,299			21,838
Other long-term liabilities		15,317			20,131

Total liabilities		401,301			388,267
Contingencies (Note 13)
Stockholders’ equity:
Preferred stock, par value $0.001 per share, shares authorized—1,000 shares; issued and outstanding shares —0 shares		—			—
Voting common stock, par value $0.001 per share, shares authorized—200,000 shares; outstanding shares—76,426 and 80,101 shares at September 30, 2011 and December 31, 2010, respectively		80			80
Non-voting common stock, par value $0.001 per share, shares authorized—11,000 shares; issued and outstanding shares—0 shares		—			—
Additional paid-in-capital		346,050			344,192
Treasury stock, at cost (3,772 and 0 shares at September 30, 2011 and December 31, 2010, respectively)		(12,095	)		—
Accumulated deficit		(111,173	)		(83,447	)
Accumulated other comprehensive loss		(10,544	)		(1,107	)

Total stockholders’ equity		212,318			259,718

Total liabilities and stockholders’ equity	$	613,619		$	647,985

See accompanying notes to consolidated condensed financial statements.

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue	$	207,996		$	197,146		$	626,825		$	577,625
Direct cost of revenue		122,909			114,001			369,010			336,868

Gross profit		85,087			83,145			257,815			240,757

Operating expenses:
Selling, general and administrative expenses		66,202			66,001			202,238			198,522
Severance, restructuring and other charges, net		2,449			3,746			8,595			8,716
Depreciation and amortization expense		15,848			16,356			45,593			49,321

Total operating expenses		84,499			86,103			256,426			256,559

Income (loss) from operations		588			(2,958	)		1,389			(15,802	)

Other expenses, net:
Interest expense, net		7,250			7,751			21,656			22,881
Foreign currency loss (gain)		2,713			(1,220	)		4,122			(788	)

Total other expenses, net		9,963			6,531			25,778			22,093

Loss before provision for income taxes		(9,375	)		(9,489	)		(24,389	)		(37,895	)
Provision for income taxes		378			3,091			3,337			6,665

Net loss	$	(9,753	)	$	(12,580	)	$	(27,726	)	$	(44,560	)

Net loss per share:
Basic and diluted	$	(0.13	)	$	(0.16	)	$	(0.35	)	$	(0.56	)
Shares used in computing per share amounts:
Basic and diluted		76,393			80,070			78,493			79,861

See accompanying notes to consolidated condensed financial statements.

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Stockholders’ Equity

For the nine months ended September 30, 2011

(Unaudited)

(In thousands)


	Common Stock					Additional Paid in Capital			Treasury Stock			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
	Shares			Par Value		Additional Paid in Capital			Treasury Stock			Retained Earnings (Deficit)						Total
Balances at December 31, 2010		80,101		$	80	$	344,192		$	—		$	(83,447	)	$	(1,107	)	$	259,718
Net loss		—			—		—			—			(27,726	)		—			(27,726	)
Currency translation adjustment		—			—		—			—			—			(769	)		(769	)
Unrealized loss on derivatives		—			—		—			—			—			(8,668	)		(8,668	)

Comprehensive income																			(37,163	)
Repurchase of common stock		(3,723	)		—		—			(12,095	)		—			—			(12,095	)
Stock option exercises and vesting of restricted stock		48			—		—			—			—			—			—
Stock-based compensation expense		—			—		1,880			—			—			—			1,880
Taxes withheld on restricted stock		—			—		(22	)		—			—			—			(22	)

Balances at September 30, 2011		76,426		$	80	$	346,050		$	(12,095	)	$	(111,173	)	$	(10,544	)	$	212,318

See accompanying notes to consolidated condensed financial statements.

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2011			2010
Operating Activities:
Net loss	$	(27,726	)	$	(44,560	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		45,593			49,321
Amortization of bond discount and debt issuance costs		2,953			2,642
Deferred taxes		313			1,447
Loss on impairment or disposal of assets		439			244
Noncash stock compensation		1,880			5,281
Changes in operating assets and liabilities:
Accounts receivable		20,439			1,215
Income taxes receivable		(32	)		893
Prepaid expenses and other current assets		(10	)		(688	)
Other assets		356			790
Accounts payable		(84	)		(4,578	)
Accrued expenses and other liabilities		3,450			2,766

Net cash provided by operating activities		47,571			14,773
Investing Activities:
Additions to equipment and fixtures, net of disposals		(26,827	)		(13,070	)

Net cash used in investing activities		(26,827	)		(13,070	)
Financing activities:
Net borrowings on line of credit		3,154			7,133
Payments on long-term debt		(169	)		(67	)
Payment of capital lease obligations		(7,880	)		(5,227	)
Proceeds from issuance of debt		466			—
Proceeds from capital leases		—			1,669
Proceeds from exercise of warrants		—			2,307
Proceeds from issuance of common stock related to pre-emptive rights and stock options		—			268
Tax payments on withholding of restricted stock		(22	)		(145	)
Repurchase of common stock		(12,095	)		—
Repurchase of warrants		—			(1,608	)

Net cash provided by (used in) financing activities		(16,546	)		4,330
Effect of exchange rates on cash and cash equivalents		(1,317	)		483

Net increase in cash and cash equivalents		2,881			6,516
Cash and cash equivalents, beginning of period		18,489			14,928

Cash and cash equivalents, end of period	$	21,370		$	21,444

Supplemental cash flow information:
Cash paid for interest	$	13,591		$	13,515
Cash paid for income taxes		7,482			7,382
Noncash financing activities:
Capital lease financing		9,098			4,616

See accompanying notes to consolidated condensed financial statements.

STREAM GLOBAL SERVICES, INC.

Notes to Consolidated Condensed Financial Statements

September 30, 2011

(Unaudited)

(In thousands, except per share amounts)

Note 1—Our Business

Stream Global Services, Inc. (“Stream,” the “Company,” “we,” “us,” or “our”) is a leading global business process outsourcing (“BPO”) service provider specializing in customer relationship management (“CRM”), including sales, customer care and technical support, for Fortune 1000 companies. Our clients include leading technology, computing, telecommunications, retail, entertainment/media, and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across 50 locations in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.

Note 2—Basis of Presentation

Our consolidated condensed financial statements as of September 30, 2011 and December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010 include our accounts and those of our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made in the September 30, 2010 consolidated financial statements to conform to the 2011 financial statement presentation. The reclassifications have no impact on net loss.

For the three months ended September 30, 2010:


	As previously reported in September 30, 2010 financial statements			Reclassification amounts			September 30, 2010 as reclassified
Direct cost of revenue		113,946			55	(1)		114,001
Foreign currency loss (gain)		(1,165	)		(55)	(1)		(1,220	)

For the nine months ended September 30, 2010:


	As previously reported in September 30, 2010 financial statements			Reclassification amounts			September 30, 2010 as reclassified
Direct cost of revenue		337,783			(915)	(1)		336,868
Foreign currency loss (gain)		(1,703	)		915	(1)		(788	)

(1)	Reclassification of realized gains on effective cash flow hedges from Foreign currency loss (gain) to Direct cost of revenue in our consolidated statement of operations.

We have evaluated subsequent events through the date these financial statements were issued.

Note 3—Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying consolidated condensed financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows. The results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ended December 31, 2011, or for any other interim period or future year.

Use of Estimates

The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and

liabilities, disclosure of contingent liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, litigation and restructuring liabilities, and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

Foreign Currency Translation and Derivative Instruments

We utilize forward contracts generally expiring within one to 18 months to reduce our foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in foreign currencies. Upon proper designation, certain of these contracts are accounted for as cash flow hedges, as defined by the authoritative guidance. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates. In using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk. We do not believe that we are exposed to a concentration of credit risk with our derivative financial instruments as the counterparties are well established institutions and counterparty credit risk information is monitored on an ongoing basis.

All derivatives, including foreign currency forward contracts, are recorded in other current assets or liabilities on the balance sheet at fair value. Fair values for our derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions. On the date the derivative contract is entered into, we determine whether the derivative contract should be designated as a cash flow hedge. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), until the forecasted underlying transactions occur. To date we have not experienced any hedge ineffectiveness of our cash flow hedges (except certain cash flow hedges previously determined to be effective, as of October 1, 2009, the date of the acquisition of EGS Corp., a Philippine corporation (“EGS”), which have since been designated to be ineffective at that date). Any realized gains or losses resulting from the effective cash flow hedges are recognized within direct cost of revenue. Cash flows from the derivative contracts are classified within cash flows from operating activities in the accompanying consolidated condensed statement of cash flows. Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged.

We may also enter into derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge accounting as defined by the authoritative guidance. Changes in fair value of derivatives not designated as hedges are reported in income as foreign currency loss (gain).

The assets and liabilities of our foreign subsidiaries whose functional currency is their local currency are translated at the exchange rate in effect on the reporting date, and income and expenses are translated at the average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income (loss), but is reflected in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity until the sale or until the liquidation of the net investment in the foreign subsidiary.

As of September 30, 2011 and December 31, 2010, we had approximately $181,250 and $233,183, respectively, of foreign exchange risk hedged using forward exchange contracts. As of September 30, 2011, the forward exchange contracts we held were comprised of $134,570 of contracts determined to be effective cash flow hedges and $46,680 of contracts for which we elected not to apply hedge accounting.

As of September 30, 2011, the fair market value of those derivative instruments designated as cash flow hedges was a loss of $3,173. As of September 30, 2011, the fair market value of derivatives for which we elected not to apply hedge accounting was a loss of $4,337. As of September 30, 2011, $2,862 of losses, net of tax, may be reclassified from other comprehensive income to earnings within the next 12 months based on current foreign exchange rates.

For the three and nine months ended September 30, 2011, we realized losses of $4,028 and $2,108, respectively, on hedges for which we elected to not apply hedge accounting. For the three and nine months ended September 30, 2011, we realized gains of $1,609 and $4,763, respectively, on hedges which were deemed effective cash flow hedges. For the three and nine months ended September 30, 2011, we realized no gain and a gain of $298, respectively, on hedges which were determined to be ineffective cash flow hedges. All realized gains resulting from hedges not deemed to be effective for the periods were reflected in foreign currency loss (gain) in the statement of operations.

Fair Value of Financial Instruments

We implemented the authoritative guidance for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

The following table presents information about our assets and liabilities and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and includes situations where there is little, if any, market activity for the asset or liability:


	September 30, 2011			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable (Level 3)
Description
Forward exchange contracts	$	(7,510	)	$	—	$	(7,510	)	$	—

Total	$	(7,510	)	$	—	$	(7,510	)	$	—

The fair values of our forward exchange contracts are determined through market, observable and corroborated sources.

The carrying amounts reflected in the consolidated balance sheets for other current assets, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. To the extent we have any outstanding borrowings under our revolving credit facility, the fair value would approximate its reported value because the interest rate is variable and reflects current market rates.

Net Income (Loss) Per Share

The following common stock equivalents were excluded from computing diluted net loss per share attributable to common stockholders because they had an anti-dilutive impact:


	Nine months ended September 30, 2011		Nine months ended September 30, 2010
Options to purchase common stock		5,314		6,777
Pre-emptive rights at $6.00 per share		17,842		17,852
Publicly held warrants at $6.00 per share		7,323		7,327
Restricted stock units		82		526

Total options, warrants and restricted stock units exercisable into common stock		30,561		32,482

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-08, to existing standards on Intangibles – Goodwill and Other (Accounting Standards Codification (“ASC”) Topic 350). ASU No. 2011-08 was issued to simplify the testing of goodwill for impairment by allowing an optional qualitative factors test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test already included in ASC Topic 350. ASU No. 2011-08 is effective for annual and interim goodwill tests performed for fiscal years ending after December 15, 2011. We will adopt the standard in 2012, and it is not expected to have a significant impact on our consolidated financial statements or results of operations.

In June 2011, the Financial Accounting Standards Board amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity has the option to present comprehensive income in either one continuous statement or two consecutive financial statements. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option under the current guidance that permits the presentation of components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendment becomes effective on January 1, 2012 and is applied retrospectively. Early adoption is permitted. This guidance will not have an impact on our financial position, results of operations, or cash flows as it is disclosure-only in nature.

Note 4—Goodwill and Intangibles

Goodwill and Indefinite Lived Intangible Assets

We evaluate goodwill and indefinite lived intangible assets for impairment annually and whenever events or changes in circumstances suggest that the carrying value of goodwill and indefinite lived intangible assets may not be recoverable. As more than 90% of our common stock is owned by the Participating Stockholders (as defined below) who collectively appoint the majority of our Board of Directors, our stock is thinly traded. Accordingly, we utilize internally developed models to estimate our expected future cash flow and utilize a discounted cash flow technique to estimate the fair value of the Company in connection with our evaluation of goodwill and indefinite lived intangible assets. No impairment of goodwill and indefinite lived intangible assets resulted from our most recent evaluation of goodwill and indefinite lived intangible assets for impairment, which occurred in the fourth quarter of 2010, or in any of the periods presented nor do we believe any indicators of impairment have occurred. Our next annual impairment assessment will be conducted in the fourth quarter of 2011.

Intangible Assets

We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows that the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in the statement of operations is the amount by which the carrying value of the assets exceeds their fair value, determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

Intangibles and Amortization

Intangible assets at September 30, 2011 consisted of the following:


	Estimated useful life	Weighted average remaining life		Gross cost		Accumulated amortization		Net
Customer relationships	Up to 10 years		6.1	$	98,749	$	45,515	$	53,234
Technology-based intangible assets	5 years		2.0		2,344		1,184		1,160
Trade names	indefinite		indefinite		16,197		97		16,100

				$	117,290	$	46,796	$	70,494

Future amortization expense of our intangible assets for the next five years is expected to be as follows:


	Remainder of 2011		2012		2013		2014		2015		2016
Amortization	$	3,823	$	14,331	$	11,497	$	7,571	$	5,652	$	4,435

Note 5—Warrants

Pursuant to our IPO, we sold 31,250 units, each consisting of one share of our common stock and one warrant entitling the holder to purchase one share of our common stock at an exercise price of $6.00 per share.

The warrants became exercisable beginning on October 17, 2008 and expired on October 17, 2011. Prior to expiration, we would have been able to redeem the warrants at a price of $0.01 per warrant upon 30 days prior written notice of redemption if the last sales price of our common stock equaled or exceeded $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we sent the notice of redemption.

During the three and nine months ended September 30, 2011, holders of our publicly traded warrants did not exercise any warrants and we did not redeem any warrants.

As of September 30, 2011, Stream had 7,357 public warrants outstanding, including 34 warrants embedded in our units. The warrants expired on October 17, 2011. The exercise of our public warrants would have triggered certain participation rights held by the following shareholders: Ares Corporate Opportunities Fund II, L.P., EGS Dutchco B.V. and NewBridge International Investments Ltd. (collectively, the “Participating Stockholders”). Prior to the expiration of the warrants, the Participating Stockholders had participation rights to purchase in the aggregate, for $6.00 per share, such number of shares of our common stock equal to 2.4364 multiplied by the number of shares issued upon exercise of the public warrants up to a maximum of 17,925 shares, reduced pro rata as the number of public warrants outstanding was reduced. These participation rights expired when the public warrants expired on October 17, 2011.

Note 6—Severance, Restructuring and Other Charges, Net

During the three and nine months ended September 30, 2011 we recorded a net expense of $2,449 and $8,595, respectively, primarily related to salary continuation related to reductions in workforce that occurred in the second and third quarter of 2011, direct third party transaction related expenses incurred related to the review and pursuit of business development related activities, and the release of lease exit liabilities established at one of our facilities.

During the three and nine months ended September 30, 2010 we recorded charges of $3,746 and $8,716 primarily related to lease exit liabilities established in vacated locations and charges related to changes in leadership and management positions within the company.

Severance, restructuring and other charges, net, consist of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Severance related to reductions in non-agent workforce	$	3,062		$	392		$	9,176		$	1,615
(Release) establishment of lease exit liability		262			(105	)		(333	)		3,434
Transaction related expense (benefit)		(920	)		—			52			208
Litigation settlements		24			—			(631	)		—
Other		21			3,459			331			3,459

Severance, restructuring and other charges, net	$	2,449		$	3,746		$	8,595		$	8,716

A rollforward of the activity in the Company’s restructuring liabilities is as follows:


	Reduction in work-force			Closure of call centers			Total
Balance at December 31, 2010	$	2,491		$	2,807		$	5,298
Expense		9,176			364			9,540
Cash Paid		(6,651	)		(772	)		(7,423	)
Reversals (1)		—			(1,397	)		(1,397	)

Balance at September 30, 2011	$	5,016		$	1,002		$	6,018

(1)	As previously disclosed in the first quarter of 2011, we reversed a previously recorded lease exit reserve.

Note 7—Equipment and Fixtures, Net

Equipment and fixtures, net, consist of the following:


	September 30, 2011			December 31, 2010
Furniture and fixtures	$	14,670		$	11,161
Building improvements		46,026			36,196
Computer equipment		47,408			37,200
Software		26,661			21,935
Telecom and other equipment		53,689			46,519
Equipment and fixtures not yet placed in service		908			1,232

	$	189,362		$	154,243
Less: accumulated depreciation		(105,444	)		(73,384	)

	$	83,918		$	80,859

Note 8—Accrued Employee Compensation and Benefits

Accrued employee compensation and benefits consist of the following:


	September 30, 2011		December 31, 2010
Compensation related amounts	$	33,807	$	31,805
Vacation liabilities		13,512		12,646
Medical and dental liabilities		2,116		1,860
Employer taxes		3,449		2,825
Retirement plans		8,424		8,146
Other benefit related liabilities		1,624		2,515

	$	62,932	$	59,797

Note 9—Other Accrued Expenses and Other Liabilities

Other accrued expenses consist of the following:


	September 30, 2011		December 31, 2010
Professional fees	$	6,244	$	7,151
Accrued interest		11,530		5,921
Occupancy expense		2,058		2,250
Technology expense		3,417		3,116
Forward exchange contracts		8,043		126
Other accrued expenses		8,835		11,425

	$	40,127	$	29,989

Other liabilities consist of the following:


	September 30, 2011		December 31, 2010
Lease exit liability	$	879	$	1,743
Deferred revenue		1,369		365
Market lease reserves		2,132		3,930
Other		1,998		1,034

Total other current liabilities	$	6,378	$	7,072

Other long-term liabilities consist of the following:


Deferred rent		1,111		1,433
Accrued income taxes		10,987		12,268
Market lease reserves		1,189		2,750
Asset retirement obligation		1,510		2,053
Other		520		1,627

Total other long-term liabilities	$	15,317	$	20,131

Note 10—Long-Term Debt and Revolving Credit Facility

We and certain of our subsidiaries (collectively, the “Borrowers”) entered into a credit agreement, dated as of October 1, 2009 (the “Credit Agreement”), as amended by the First Amendment to Credit Agreement dated June 3, 2011 and the Second Amendment to Credit Agreement dated November 1, 2011, with Wells Fargo Capital Finance, LLC, formerly known as Wells Fargo Foothill, LLC, as agent and co-arranger, and Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders, providing for revolving credit financing (the “Revolving Line of Credit”) of up to $100,000, including a $20,000 sub-limit for letters of credit. The Revolving Line of Credit has a maturity of four years at an interest rate of either Wells Fargo’s base rate plus 275 basis points or LIBOR plus 375 basis points, at our discretion. We capitalized fees of $7,815 and $3,929 associated with the $200,000 aggregate principal amount of 11.25% Senior Secured Notes due 2014, which were issued on October 1, 2009 (the “Notes”) and the Credit Agreement, respectively, at the inception of these agreements that are being amortized over their respective lives. For the three and nine months ended September 30, 2011, we amortized $599 and $1,763 of such capitalized fees. Substantially all of our assets, excluding intangible assets, secure the Notes and the Revolving Line of Credit. See Note 15 for Guarantor Financial Information.

At September 30, 2011, we are in compliance with the covenants of our Revolving Line of Credit. The Revolving Line of Credit has a fixed charge financial ratio covenant that is operative when our availability as defined in the Credit Agreement is less than $20,000. On a trailing four quarters basis, when the covenant is operative, Consolidated EBITDA less Capital Expenditures (net of amounts financed by capital leases) must be at least 1.1 times Fixed Charges, each as defined in the Credit Agreement. For the reporting period ending September 30, 2011, the ratio was 1.0, which is less than the ratio of 1.1 that would have been required if the covenant had been operative. This resulted from the significant increase in capital spending over the prior year. However, as a result of our significant availability under the Revolving Line of Credit, the covenant was not operative and we were in compliance with the Credit Agreement. For the availability portion of the test, we had $46,860 in excess availability versus the covenant requirements (i.e., availability of $66,860 less $20,000 below which the covenant would become operative).

Long-term borrowings consist of the following:


	September 30, 2011			December 31, 2010
Revolving line of credit	$	27,660		$	24,506
11.25% Senior Secured Notes		200,000			200,000
Other		443			147

		228,103			224,653
Less: current portion		(228	)		(96	)
Less: discount on notes payable		(6,167	)		(7,358	)

Long-term debt	$	221,708		$	217,199

Minimum principal payments on long-term debt subsequent to September 30, 2011 are as follows:


	Total
2011	$	228
2012		215
2013		27,660
2014		200,000

Total	$	228,103

We had Letters of Credit in the aggregate outstanding amounts of $5,480 at September 30, 2011 and $6,936 at December 31, 2010, respectively.

We had $195 and $161 of restricted cash as of September 30, 2011 and December 31, 2010, respectively.

Note 11—Income Taxes

The domestic and foreign source component of loss before taxes is as follows:


	Nine months ended September 30, 2011			Nine months ended September 30, 2010
Total US	$	(36,327	)	$	(54,661	)
Total Foreign		11,938			16,766

Total	$	(24,389	)	$	(37,895	)

The provisions for income taxes for the nine months ended September 30, 2011 and 2010 relate primarily to the foreign source component of loss before tax. Our operations in countries outside the United States are generally taxed at lower statutory rates and also benefit from tax holidays. The decrease in foreign tax expense for the nine months ended September 30, 2011 was primarily due to the previously unrecognized benefit related to the current year receipt of a tax refund in a foreign jurisdiction and expiration of the statute of limitations on uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign tax jurisdictions. We operate in a number of international tax jurisdictions and are subject to audits of income tax returns by tax authorities in those jurisdictions. We are currently under audit in India, the Philippines, Canada, Italy, and Spain.

As of September 30, 2011 and December 31, 2010, the liability for unrecognized tax benefits (including interest and penalties) was $11,530 and $13,227, respectively, of which $10,987 and $12,268, respectively, was recorded within other long term liabilities in our consolidated financial statements. Included in these amounts is $1,599 of un-benefitted tax losses which would be realized if the related uncertain tax positions were settled. As of December 31, 2010, we had reserved $2,635 for accrued interest and penalties, which decreased to $2,444 as of September 30, 2011. We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. The total amount of net unrealized tax benefits that would affect the income tax expense, if ever recognized in our consolidated financial statements, is $10,841. This amount includes interest and penalties of $2,444. We estimate that within the next 12 months, our unrecognized tax benefits, and interest and penalties, could decrease as a result of settlements with taxing authorities or the expiration of the statute of limitations by $1,945 and $942, respectively.

Note 12—Stock Options

The 2008 Stock Incentive Plan (the “Plan”) provides for the grant of incentive and nonqualified stock options. The Plan has authorized grants of up to 10,000 shares of common stock at an exercise price of not less than 100% of the fair value of the common stock at the date of grant. The Plan provides that the options shall have terms not to exceed ten years from the grant date. During the nine months ended September 30, 2011 and 2010, we granted options to purchase 1,760 and 2,688, respectively, shares of our common stock to our employees. Generally, the options vest over a five-year period.

During the nine-month period ended September 30, 2011 and 2010, 1,293 and 1,279, respectively, stock option grants were vested, zero and 35, respectively, were exercised, and 2,754 and 2,854, respectively, were forfeited.

The per share fair value of options granted was determined using the Black-Scholes-Merton model.

The following assumptions were used for the option grants in the nine months ended September 30, 2011 and 2010:


	Nine months ended September 30, 2011			Nine months ended September 30, 2010
Option term (years)		6.380			6.375
Volatility		67.15% - 72.23	%		63.71% - 67.88	%
Risk-free interest rate		1.18 - 2.62	%		1.73 - 3.06	%
Dividend yield		0	%		0	%
Weighted-average grant date fair value per option granted	$	1.82		$	3.48

The option term was calculated under the simplified method for all option grants issued during the quarters ended September 30, 2011 and 2010, as we do not have a long history of granting options. The volatility assumption is based on a weighted average of the historical volatilities for the company and its peer group. The risk-free interest rate assumption was based upon the implied yields from the U.S. Treasury zero-coupon yield curve with a remaining term equal to the expected term in options.

Stock options under the Plan during the nine months ended September 30, 2011 were as follows:


	Number of options		Weighted Average Exercise Price		Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2010		6,308	$	6.13		—		7.64
Granted		1,760		5.39	$	1.82
Exercised		—		—
Forfeited or canceled		2,754		6.13

Outstanding at September 30, 2011		5,314	$	5.89				7.45

At September 30, 2011, stock options to purchase 1,293 shares with a weighted-average exercise price of $6.10 were exercisable. The weighted average remaining contractual term of options exercisable at September 30, 2011 was 4.90 years. The total fair value of options vested during the nine months ended September 30, 2011 was $1,789. On September 30, 2011, there were 4,188 options outstanding, vested, and expected to vest (including forfeiture adjusted unvested shares) with a weighted average exercise price of $5.93 and a weighted average remaining contractual term of 7.03 years.

For the three months ended September 30, 2011 and 2010, we recognized net stock compensation expense of $553 and $2,402, respectively, for the stock options in the table above.

For the nine months ended September 30, 2011 and 2010, we recognized net stock compensation expense of $1,627 and $4,670, respectively, for the stock options in the table above.

As of September 30, 2011 and December 31, 2010, the aggregate intrinsic value (i.e., the difference in the estimated fair value of our common stock and the exercise price to be paid by the option holder) of stock options outstanding, excluding the effects of expected forfeitures, was zero. The aggregate intrinsic value of the shares of exercisable stock options at September 30, 2011 and December 31, 2010 was zero. The aggregate intrinsic value of options exercised for the three months ended September 30, 2011 and 2010, was zero and $19, respectively.

As of September 30, 2011 and December 31, 2010, there was $5,101 and $7,203, respectively, of unrecognized compensation cost related to the unvested portion of time-based arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.62 years from issue date.

Restricted stock award activity during the nine months ended September 30, 2011 was as follows:


	Number of Shares		Weighted average Grant- Date Fair Value
Unvested December 31, 2010		399	$	6.37
Granted		—		—
Vested		50		6.60
Forfeited		267		6.33

Unvested September 30, 2011		82	$	6.36

For the three months ended September 30, 2011 and 2010, we recognized net compensation expense of $90 and $180, respectively, for the restricted stock awards.

For the nine months ended September 30, 2011 and 2010, we recognized net compensation expense of $253 and $683, respectively, for the restricted stock awards. Restricted stock awards vest either quarterly over four years for grants in 2008 or semi-annually over five years for grants after 2008.

Note 13—Contingencies

We are subject to various lawsuits and claims in the normal course of business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of non-compliance with laws or regulations in jurisdictions in which we operate. Although the ultimate outcome of such lawsuits, claims and investigations cannot be ascertained, we believe, on the basis of present information, that the disposition or ultimate resolution of such claims, lawsuits and/or investigations will not have a material adverse effect on our business, results of operations or financial condition. We establish specific liabilities in connection with regulatory and legal actions that we deem to be probable and estimable, and we believe that our reserves for such liabilities are adequate.

We have been named as a third-party defendant in a putative class action captioned Kambiz Batmanghelich, on behalf of himself and all others similarly situated and on behalf of the general public, v. Sirius XM Radio, Inc., filed in the Los Angeles County Superior Court on November 10, 2009, and removed to the United States District Court for the Central District of California. The Plaintiff alleges that Sirius XM Radio, Inc. recorded telephone conversations between Plaintiff and members of the proposed class of Sirius customers, on the one hand, and Sirius and its employees, on the other, without the Plaintiff’s and class members’ consent in violation of California’s telephone recording laws. The Plaintiff also alleges negligence and violation of the common law right of privacy, and seeks injunctive relief. On December 21, 2009, Sirius XM Radio, Inc. filed a Third-Party Complaint in the action against us seeking indemnification for any defense costs and damages that result from the putative class action. On March 25, 2010, the Plaintiff filed an amended complaint that added us as a defendant. We believe that we have meritorious defenses and we intend to vigorously defend against these claims. In March 2011, the court granted preliminary approval of a settlement of the class action. In September 2011, the court granted final approval of the settlement and entered judgment. Three class members who had objected to the settlement filed appeals of the judgment. The judgment will not become final until these appeals are resolved.

Note 14—Geographic Operations and Concentrations

We operate in one operating segment and provide services primarily in two regions: “Americas”, which includes the United States, Canada, the Philippines, India, China, Costa Rica, Nicaragua, the Dominican Republic, and El Salvador; and “EMEA”, which includes Europe, the Middle East, and Africa.

The following table presents geographic information regarding our operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Revenues
Americas	$	148,526	$	146,262	$	448,891	$	425,430
EMEA		59,470		50,884		177,934		152,195

	$	207,996	$	197,146	$	626,825	$	577,625


	September 30, 2011		December 31, 2010
Total assets:
Americas	$	532,940	$	569,325
EMEA		80,679		78,660

	$	613,619	$	647,985

We derive significant revenues from three significant clients. At September 30, 2011, three of our largest clients are global computer companies. The percentage of revenue for each of these clients is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Dell		11	%		16	%		13	%		18	%
Hewlett Packard		10	%		11	%		10	%		13	%
Microsoft		10	%		7	%		10	%		4	%

Related accounts receivable from these three clients were 16%, 10% and 5%, respectively, of our total accounts receivable at September 30, 2011.

Note 15—Guarantor Financial Information

The Notes are guaranteed by the Company, along with certain of our wholly owned subsidiaries. Such guaranties are full, unconditional and joint and several. Condensed consolidating financial information related to the Company, our guarantor subsidiaries and our non-guarantor subsidiaries as of September 30, 2011 are reflected below:

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2011

(Unaudited)


	Parent			Guarantor subsidiaries			Non- Guarantor subsidiaries			Elimination			Total
Net revenue:
Customers	$	—		$	171,368		$	36,628		$	—		$	207,996
Intercompany		—			21,906			82,418			(104,324	)		—

		—			193,274			119,046			(104,324	)		207,996
Direct cost of revenue
Customers		—			54,835			68,074						122,909
Intercompany		—			94,322			10,002			(104,324	)		—

		—			149,157			78,076			(104,324	)		122,909
Gross Profit		—			44,117			40,970			—			85,087
Operating expenses		719			43,289			40,491			—			84,499
Non-operating expenses		7,413			658			1,892			—			9,963
Equity in Earnings of Subsidiaries		1,562			—			—			(1,562	)		—

Income (loss) before income taxes		(9,694	)		170			(1,413	)		1,562			(9,375	)

Provision (benefit) for income taxes		59			(971	)		1,290			—			378

Net income (loss)	$	(9,753	)	$	1,141		$	(2,703	)	$	1,562		$	(9,753	)

Condensed Consolidating Statement of Operations

For the nine months ended September 30, 2011

(Unaudited)


	Parent			Guarantor subsidiaries			Non- Guarantor subsidiaries			Elimination			Total
Net revenue:
Customers	$	—		$	511,807		$	115,018		$	—		$	626,825
Intercompany		—			66,494			239,779			(306,273	)		—

		—			578,301			354,797			(306,273	)		626,825
Direct cost of revenue
Customers		—			167,370			201,640						369,010
Intercompany		—			277,732			28,541			(306,273	)		—

		—			445,102			230,181			(306,273	)		369,010
Gross Profit		—			133,199			124,616			—			257,815
Operating expenses		2,163			138,856			115,407			—			256,426
Non-operating expenses		21,347			(4,137	)		8,568			—			25,778
Equity in Earnings of Subsidiaries		4,157			—			—			(4,157	)		—

Income (loss) before income taxes		(27,677	)		(1,520	)		641			4,157			(24,389	)

Provision (benefit) for income taxes		59			(435	)		3,713			—			3,337

Net income (loss)	$	(27,726	)	$	(1,085	)	$	(3,072	)	$	4,157		$	(27,726	)

Condensed Consolidating Balance Sheet

As of September 30, 2011

(Unaudited)


	Parent		Guarantor subsidiaries		Non- Guarantor subsidiaries		Elimination			Total
Assets
Cash and cash equivalents	$	6	$	3,890	$	17,474	$	—		$	21,370
Accounts receivable, net		—		134,341		26,258		—			160,599
Other Current Assets		2,599		23,203		7,596		—			33,398

Total current assets		2,605		161,434		51,328		—			215,367
Equipment and fixtures, net and other assets		4,773		45,587		50,649		—			101,009
Investment in Subsidiaries		434,628		74,207		45		(508,880	)		—
Goodwill and intangible assets, net		—		179,725		117,518		—			297,243

Total assets	$	442,006	$	460,953	$	219,540	$	(508,880	)	$	613,619

Liabilities and Stockholders’ Equity
Current liabilities	$	8,196	$	53,985	$	69,435	$	—		$	131,616
Long-term liabilities		221,492		36,629		11,564		—			269,685
Total shareholders’ equity (deficit)		212,318		370,339		138,541		(508,880	)		212,318

Total liabilities and stockholders’ equity	$	442,006	$	460,953	$	219,540	$	(508,880	)	$	613,619

Condensed Statements of Cash Flows

For the nine months ended September 30, 2011

(Unaudited)


	Parent			Guarantor subsidiaries			Non- Guarantor subsidiaries			Elimination		Total
Net cash provided by (used in) operating activities	$	(5,844	)	$	28,193		$	25,222		$	—	$	47,571
Cash Flows from investing activities:
Investment in Subsidiaries		—			(62,809	)		62,809			—		—
Additions to equipment and fixtures, net		—			(13,166	)		(13,661	)		—		(26,827	)

Net cash provided by (used in) investing activities		—			(75,975	)		49,148			—		(26,827	)

Cash Flows from financing activities:
Net borrowings (repayments) on line of credit		3,154			—			—			—		3,154
Net borrowings (repayments) on long term debt		—			297			—			—		297
Net borrowings (repayments) on capital leases		—			(5,482	)		(2,398	)		—		(7,880	)
Net Intercompany		14,807			54,727			(69,534	)		—		—
Proceeds from issuance of common stock related to pre-emptive rights and stock options		—			—			—			—		—
Tax withholding on Restricted Stock		(22	)		—			—			—		(22	)
Proceeds from exercise of warrants		(12,095	)		—			—			—		(12,095	)
Re-purchase of warrants		—			—			—			—		—

Net cash provided by financing activities		5,844			49,542			(71,932	)		—		(16,546	)
Effect of exchange rates on cash and cash equivalents		—			(301	)		(1,016	)		—		(1,317	)

Net increase (decrease) in cash and cash equivalents		—			1,459			1,422			—		2,881

Cash and cash equivalents, beginning of period		6			2,431			16,052			—		18,489

Cash and cash equivalents, end of period	$	6		$	3,890		$	17,474		$	—	$	21,370

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “intend,” “plan,” target,” “goal,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 2, 2011.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we explicitly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

Overview

Our Business

We are a leading global business process outsourcing (“BPO”) service provider specializing in customer relationship management (“CRM”), including sales, customer care and technical support, for Fortune 1000 companies. Our clients include leading computing/hardware, telecommunications/service providers, software/networking, entertainment/media, retail, travel and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across 50 locations in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.

We generate revenue based primarily on the amount of services our agents provide to a client’s program. Revenue is recognized as services are provided. The majority of our revenue is from multi-year contracts and we expect that trend to continue. However, we do provide certain client programs on a short-term basis.

Our industry is highly competitive. We compete primarily with the in-house business processing operations of our current and potential clients. We also compete with other third-party BPO providers. Our industry is labor-intensive and the majority of our operating costs relate to wages, employee benefits and employment taxes.

We periodically review our capacity utilization and projected demand for future capacity. In conjunction with these reviews, we may decide to consolidate or close under-performing service centers, including those impacted by the loss of client programs, in order to maintain or improve targeted utilization and margins.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated condensed financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

Critical Accounting Policies

Use of Estimates

The preparation of the consolidated condensed financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, litigation and restructuring liabilities, and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

Equipment and Fixtures

Equipment and fixtures are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are generally depreciated over a five-year life, software over a three- to five-year life and equipment generally over a three- to five-year life. Leasehold improvements are depreciated over the shorter of their estimated useful life or the remaining term of the associated lease. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease and is recorded in depreciation and amortization expense. Repair and maintenance costs are expensed as incurred.

The carrying value of equipment and fixtures to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with authoritative guidance. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets. Occasionally, we redeploy equipment and fixtures from underutilized centers to other locations to improve capacity utilization. We estimate the fair value of our asset retirement obligations, if any, associated with the retirement of tangible long-lived assets such as property and equipment when the long-lived asset is acquired, constructed, or developed through normal operations.

Goodwill and Other Intangible Assets

In accordance with the authoritative guidance, goodwill is reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value. The impairment, if any, is measured based on the estimated fair value of the reporting unit. We operate in one reporting unit, which is the basis for impairment testing of all goodwill. As more than 90% of our common stock is owned by Ares Corporate Opportunities Fund II, L.P., EGS Dutchco B.V. and NewBridge International Investments Ltd. who collectively appoint the majority of our Board of Directors, our stock is thinly traded. Accordingly, we utilize internally developed models to estimate our expected future cash flows in connection with our evaluation of goodwill and indefinite lived intangible assets. Intangible assets with a finite life are recorded at cost and amortized using their projected cash flows over their estimated useful life. Client lists and relationships are amortized over periods up to ten years, market adjustments related to facility leases are amortized over the term of the respective lease and developed software is amortized over five years. Brands and trademarks are not amortized as their life is indefinite. In accordance with the authoritative guidance, indefinite lived intangible assets are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired.

The carrying value of finite-lived intangibles is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the authoritative guidance. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets.

Stock-Based Compensation

For share-based payments, the fair value of each grant under our stock-based compensation plan for employees and directors, including both the time-based grants and the performance-based grants, is estimated on the date of grant using the Black-Scholes-Merton option valuation model. Stock compensation expense is recognized on a straight-line basis over the vesting term, net of an estimated future forfeiture rate.

Income Taxes

We recognize income taxes in accordance with the authoritative guidance, which requires recognition of deferred assets and liabilities for the future income tax consequence of transactions that have been included in the consolidated financial statements or tax returns. Under this method deferred tax assets and liabilities are determined based on the difference between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax, using the enacted tax rates for the year in which the differences are expected to reverse. We provide valuation allowances against deferred tax assets whenever we believe it is more likely than not, based on available evidence, that the deferred tax asset will not be realized. Further we provide for an uncertain tax position if that position is more likely than not of being sustained by the taxing authority.

Contingencies

We consider the likelihood of various loss contingencies, including non-income tax and legal contingencies arising in the ordinary course of business, and our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated

loss contingency is accrued in accordance with the authoritative guidance, when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such accruals should be adjusted.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-08, to existing standards on Intangibles – Goodwill and Other (Accounting Standards Codification (“ASC”) Topic 350). ASU No. 2011-08 was issued to simplify the testing of goodwill for impairment by allowing an optional qualitative factors test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test already included in ASC Topic 350. ASU No. 2011-08 is effective for annual and interim goodwill tests performed for fiscal years after December 15, 2011. We will adopt the standard in 2012, and it will not have a significant impact on its consolidated financial statements or results of operations.

Results of Operations

Three months ended September 30, 2011 compared with three months ended September 30, 2010

Revenue. Revenues increased $10.9 million, or 5.5%, to $208.0 million for the three months ended September 30, 2011, compared to $197.1 million for the three months ended September 30, 2010. The increase is primarily attributable to new business won in 2010 and 2011, expansion with existing clients and approximately $5.3 million due to fluctuations in currency exchange rates.

Revenues for services performed in our United States and Canadian service centers decreased $4.8 million, or 5.9%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010. This decrease is primarily attributed to volume shifting to near shore and offshore locations. Revenues for services performed in European service centers increased $7.4 million, or 21.0%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010. This increase is partly attributable to the strengthening of the European currencies relative to the U.S. Dollar resulting in approximately $4.3 million additional revenue in third quarter of 2011 on a constant currency basis. Revenues for services performed in offshore service centers in the Philippines, India, El Salvador, Costa Rica, the Dominican Republic, Tunisia and Egypt increased $8.3 million, or 10.3%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010 due to higher client volumes. Revenues in our offshore service centers represented 42.6% of consolidated revenues for the three months ended September 30, 2011, compared to 40.7% in the same period in 2010.

Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $8.9 million, or 7.8%, to $122.9 million for the three months ended September 30, 2011, compared to $114.0 million for the three months ended September 30, 2010. The increase is primarily attributable to the payroll-related costs to service greater client volumes and agent performance bonus programs in place for the current year.

Gross Profit. Gross profit increased $2.0 million, or 2.4%, to $85.1 million for the three months ended September 30, 2011 from $83.1 million for the three months ended September 30, 2010. Gross profit as a percentage of revenue was 40.9% and 42.2% for the three months ended September 30, 2011 and 2010, respectively. The decrease in gross margin percentage was partly attributed to an increase of $4.4 million of unpaid training costs from the prior year quarter on new programs and pay for performance programs in 2011 that did not exist in 2010.

Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance, restructuring and other charges, net and depreciation and amortization expense. Operating expenses decreased $1.6 million, or 1.9%, to $84.5 million for the three months ended September 30, 2011, compared to $86.1 million for the three months ended September 30, 2010. Operating expenses as a percentage of revenues decreased to 40.6% for the three months ended September 30, 2011 compared to 43.7% for the three months ended September 30, 2010 primarily as a result of the decreases in depreciation and amortization, higher revenue and the effect of the reductions in work-force that were conducted in the second and third quarters of 2011.

Selling, general and administrative expense increased slightly from $66.0 million for the three months ended September 30, 2010 to $66.2 million, or 0.3%, for the three months ended September 30, 2011. As a percentage of revenue, selling, general and administrative expense decreased from 33.5% for the three months ended September 30, 2010 to 31.8% for the three months ended September 30, 2011 largely due to reductions in workforce in the second and third quarters.

Severance, restructuring and other charges were $2.4 million and $3.7 million for the three months ended September 30, 2011 and 2010, respectively. The charge in 2011 principally relates to severance costs of $3.1 million in connection with a reduction in non-agent staffing during the quarter partially offset by a non-cash release of an acquisition related liability. In addition, we are exiting our South Africa call center operations, including the elimination of the company’s service delivery workforce in the company’s South Africa facility. We expect to complete substantially all of the South African workforce reduction in the fourth quarter of 2011 and incur a charge of approximately $0.6 million to $0.7 million related to these reductions. The charge in 2010 related to non-agent severance, lease exit costs, and facility impairment charges.

Depreciation and amortization decreased $0.5 million per the scheduled decline in amortization expense for intangible assets and certain fixed assets becoming fully depreciated.

Other Expenses, Net. Other expenses, net increased $3.5 million, or 53.8%, to $10.0 million for the three months ended September 30, 2011, compared to $6.5 million for the three months ended September 30, 2010. Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the three months ended September 30, 2011, we recorded $2.7 million in foreign currency losses versus a gain of $1.2 million for the comparable period in the prior year. The majority of our foreign currency losses in the quarter ended September 30, 2011 related to unrealized losses in the revaluation of certain intercompany and other balance sheet accounts which were denominated in currencies other than the functional currency.

Provision for Income Taxes. Income taxes decreased $2.7 million, or 87.1%, to $0.4 million for the three months ended September 30, 2011, compared to $3.1 million for the three months ended September 30, 2010. The decrease is primarily related to the resolution of liabilities for uncertain tax positions for which the statute of limitations expired in the period resulting in a tax benefit of $2.5 million partially offset by a charge of $0.8 million in the third quarter 2011 relating to the establishment of a valuation allowance against deferred tax assets in one of our foreign locations and a charge of $1.3 million in the third quarter 2010 relating to the finalization of EGS purchase accounting. Foreign tax expense was comprised of $2.4 million and $1.8 million for the three months ended September 30, 2011 and 2010, respectively. In the United States, where we operated at a loss for tax purposes, we recorded a tax benefit of $1.8 million as a result of the resolution of uncertain tax positions mostly due to the expiration of statutes of limitations, $0.4 million of state income tax benefit and $0.2 million of federal tax expense for the three months ended September 30, 2011. We operate in a number of countries outside the United States where we are generally taxed at lower statutory rates than the United States and we also benefit from tax holidays in some foreign locations.

Nine months ended September 30, 2011 compared with nine months ended September 30, 2010

Revenue. Revenues increased $49.2 million, or 8.5%, to $626.8 million for the nine months ended September 30, 2011, compared to $577.6 million for the nine months ended September 30, 2010. The increase is primarily attributable to new business won in 2010 and 2011, expansion with existing clients and approximately $12.0 million due to fluctuations in currency exchange rates.

Revenues for services performed in our United States and Canadian service centers increased $11.2 million, or 4.9%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. Revenues for services performed in European service centers increased $22.6 million, or 21.1%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. This increase is attributable to the addition of customers and the strengthening of the European currencies relative to the U.S. Dollar resulting in approximately $9.3 million additional revenue in the first nine months of 2011 on a constant currency basis. Revenues for services performed in offshore service centers in the Philippines, India, El Salvador, Costa Rica, the Dominican Republic, Tunisia and Egypt increased $15.4 million, or 6.4%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010 due to higher client volumes. Revenues in our offshore service centers represented 41.0% of consolidated revenues for the nine months ended September 30, 2011, compared to 41.9% in the same period in 2010.

Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $32.1 million, or 9.5%, to $369.0 million for the nine months ended September 30, 2011, compared to $336.9 million for the nine months ended September 30, 2010. The increase is primarily attributable to the payroll-related costs to service greater client volumes.

Gross Profit. Gross profit increased $17.0 million, or 7.1%, to $257.8 million for the nine months ended September 30, 2011 from $240.8 million for the nine months ended September 30, 2010. Gross profit as a percentage of revenue was consistent at 41.1% and 41.7% for the nine months ended September 30, 2011 and 2010. The decrease in gross margin percentage was partly attributed to a $4.5 million increase in unpaid training costs on new programs over the prior year.

Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance, restructuring and other charges, net and depreciation and amortization expense. Operating expenses decreased $0.2 million, or 0.1%, to $256.4 million for the nine months ended September 30, 2011, compared to $256.6 million for the nine months ended September 30, 2010. Operating expenses as a percentage of revenues decreased to 40.9% for the nine months ended September 30, 2011 compared to 44.4% for the nine months ended September 30, 2010, primarily as a result of the decreases in depreciation and amortization, higher revenue and the effect of the reductions in work-force that were conducted in the second and third quarters of 2011.

Selling, general and administrative expense grew from $198.5 million for the nine months ended September 30, 2010 to $202.2 million, or 1.9%, for the nine months ended September 30, 2011.

Severance, restructuring and other charges, net were a charge of $8.6 million and $8.7 million for the nine months ended September 30, 2011 and 2010, respectively. The charge in 2011 principally relates to severance costs of $9.2 million in connection with a reduction in non-agent staffing partially offset by a non-cash release of an acquisition related liability. The charge in 2010 relates to non-agent severance, lease exit costs, and facility impairment charges.

Depreciation and amortization decreased $3.7 million per the scheduled step down of amortization expense and certain fixed assets becoming fully depreciated.

Other Expenses, Net. Other expenses, net increased $3.7 million, or 16.7%, to $25.8 million for the nine months ended September 30, 2011, compared to $22.1 million for the nine months ended September 30, 2010. Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the nine months ended September 30, 2011, we recorded a foreign currency loss of $4.1 million versus a gain of $0.8 million for the comparable period in the prior year.

Provision for Income Taxes. Income taxes decreased $3.4 million, or 50.7%, to $3.3 million for the nine months ended September 30, 2011, compared to $6.7 million for the nine months ended September 30, 2010. The decrease year over year is primarily related to the resolution of liabilities for uncertain tax positions for which the statute of limitations expired in the period resulting in a tax benefit of $2.5 million partially offset by a charge of $0.8 million in the third quarter 2011 relating to the establishment of a valuation allowance against deferred tax assets in one of our foreign locations and a charge of $1.3 million in the third quarter 2010 relating to the finalization of EGS purchase accounting. Foreign tax expense was comprised of $5.0 million and $5.4 million for the nine months ended September 30, 2011 and 2010, respectively. In the United States, where we operated at a loss for tax purposes, we recorded a tax benefit of $1.8 million as a result of the resolution of uncertain tax positions mostly due to expiration of statutes of limitations, $0.1 million of state income tax benefit and $0.2 million of federal tax expense for the nine months ended September 30, 2011. We operate in a number of countries outside the United States where we are generally taxed at lower statutory rates than the United States and we also benefit from tax holidays in some foreign locations.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital associated with the expenses we incur in performing services under our client contracts and capital expenditures for the opening of new service centers, including the purchase of computers and related equipment. We have in place a credit facility that consists of a revolving line of credit that allows us to manage our cash flows. Our ability to make payments on the credit facility, to replace our indebtedness if desired, and to fund working capital and planned capital expenditures will depend on our ability to generate cash in the future. We have secured our working capital facility through our accounts receivable and therefore, our ability to continue servicing debt is dependent upon the timely collection of those receivables.

We made capital expenditures of $35.9 million, including those financed under capital leases, in the nine months ended September 30, 2011, as compared to $17.7 million for the nine months ended September 30, 2010. We expect to continue to make capital expenditures to build new service centers, meet new contract requirements and maintain and upgrade our technology.

On October 1, 2009, we issued $200 million aggregate principal amount of 11.25% Senior Secured Notes due 2014 (the “Notes”). The Notes were issued pursuant to the indenture among us, the Note Guarantors, and Wells Fargo, as trustee. The Notes were issued by us at an initial offering price of 95.454% of the principal amount. The Indenture contains restrictions on our ability to incur additional secured indebtedness under certain circumstances. The Notes mature on October 1, 2014. The Notes bear interest at a rate of 11.25% per annum. Interest on the Notes is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2010. The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, by the Note Guarantors and will be so guaranteed by any future domestic subsidiaries of ours, subject to certain exceptions. The Notes and the Note Guarantors’ guarantees of the Notes are secured by senior liens on our and the Guarantors’ Primary Notes Collateral and by junior liens on our and the Guarantors’ Primary ABL Collateral (each as defined in the Indenture).

On October 1, 2009, we, Stream Holdings Corporation, Stream International, Inc., Stream New York, Inc., Stream Global Services-US, Inc., Stream Global Services-AZ, Inc. and Stream International Europe B.V. (collectively, the “U.S. Borrowers”), and SGS Netherland Investment Corporation B.V., Stream International Service Europe B.V., and Stream International Canada Inc., (collectively, the “Foreign Borrowers” and together with the U.S. Borrowers, the “Borrowers”) entered into the Credit Agreement, as amended by the First Amendment to Credit Agreement dated June 3, 2011 and the Second Amendment to Credit Agreement dated November 1, 2011, with Wells Fargo Capital Finance, LLC, formerly known as Wells Fargo Foothill, LLC, as agent and co-arranger, Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders, providing for the Revolving Line of Credit of up to $100 million, including a $20 million sub-limit for letters of credit, in each case, with certain further sub-limits for certain Foreign Borrowers. The Revolving Line of Credit has a term of four years at an interest rate of either Wells Fargo’s base rate plus 275 basis points or LIBOR plus 375 basis points, at our discretion. Substantially all of our assets, excluding intangible assets, secure the Notes and the Revolving Line of Credit. See Note 15 for Guarantor Financial Information.

At September 30, 2011, we are in compliance with the covenants of our Revolving Line of Credit. The Revolving Line of Credit has a fixed charge financial ratio covenant that is operative when our availability as defined in the Credit Agreement is less than $20 million. On a trailing four quarters basis, when the covenant is operative, Consolidated EBITDA less Capital Expenditures (net of amounts financed by capital leases) must be at least 1.1 times Fixed Charges, each as defined in the Credit Agreement. For the reporting period ending September 30, 2011, the ratio was 1.0, which is less than the ratio of 1.1 that would have been required if the covenant had been operative. This resulted from the significant increase in capital spending over the prior year period. However, as a result of our significant availability under the Revolving Line of Credit, the covenant was not operative and we were in compliance with the Credit Agreement. For the availability portion of the test, we had $46.9 million in excess availability versus the covenant requirements (i.e., availability of $66.9 million less $20 million below which the covenant would become operative).

Letters of Credit. We have certain standby letters of credit for the benefit of landlords of certain sites in the United States and Canada. As of September 30, 2011, we had approximately $5.5 million of these letters of credit in place under our Revolving Line of Credit. The obligations under the letters of credit decline periodically as the underlying obligations are satisfied.

Unrestricted cash and cash equivalents totaled $21.2 million for both the nine months ended September 30, 2011 and September 30, 2010. A substantial portion of our cash and cash equivalents is located in foreign countries and may be subject to foreign withholding taxes if repatriated to the United States. Working capital decreased $28.7 million to $84.0 million for the nine months ended September 30, 2011, compared to $112.7 million for the nine months ended September 30, 2010.

Net cash provided by operating activities totaled $47.6 million for the nine months ended September 30, 2011, a $32.8 million increase from the $14.8 million provided in the nine months ended September 30, 2010. The increase is primarily due to the $16.9 million reduction in net loss and $18.9 decrease in accounts receivable comparing September 30, 2011 to September 30, 2010.

Net cash used in investing activities totaled $26.8 million for the nine months ended September 30, 2011 which is a $13.7 million increase from the $13.1 million used in the period ended September 30, 2010. The increase is due to higher capital expenditures to support the growth in our business in 2011.

Net cash used in financing activities totaled $16.5 million for the nine months ended September 30, 2011, a $20.8 million decrease from the $4.3 million of cash provided by financing activities for the period ended September 30, 2010. The change was primarily due to repayment of debt and repurchase of 3.7 million shares of common stock in June 2011 pursuant to the securities purchase agreement among us, Trillium Capital, LLC and R. Scott Murray, our former chief executive officer.

Our foreign exchange forward contracts require the exchange of foreign currencies for U.S. dollars or vice versa, and generally mature in one to 18 months. We had outstanding foreign exchange forward contracts with aggregate notional amounts of $181.3 million as of September 30, 2011 and $192.2 million as of September 30, 2010.

We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditures for the next 12 months.

Off-Balance Sheet Arrangements

With the exception of operating leases discussed above, we do not have any off-balance sheet arrangements.

Seasonality

We are exposed to seasonality in our revenues because of the nature of certain consumer-based clients. We may experience approximately 10% increased volume associated with the peak processing needs in the fourth quarter coinciding with the holiday period and a somewhat seasonal overflow into the first quarter of the following calendar year.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes the use of derivative instruments to reduce the effects on our operating results and cash flows from fluctuations caused by volatility in currency exchange and interest rates. By using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk.

Interest Rate Risk

We are exposed to interest rate risk primarily through our debt facilities since some of those instruments, including capital leases, bear interest at variable rates. At September 30, 2011, we had outstanding borrowings under variable rate debt agreements that totaled approximately $30.0 million. A hypothetical 1% increase in the interest rate would have increased interest expense by approximately $0.3 million and would have decreased annual cash flow by a comparable amount. The carrying amount of our variable rate borrowings reflects fair value due to their short-term and variable interest rate features.

We had no outstanding interest rate derivatives covering interest rate exposure at September 30, 2011.

Foreign Currency Exchange Rate Risk

We serve many of our U.S.-based clients using our service centers in Canada, India, the Dominican Republic, El Salvador, Egypt, Germany, the Philippines, Nicaragua and Costa Rica. Although the contracts with these clients are typically priced in U.S. dollars, a substantial portion of the costs incurred to render services under these contracts are denominated in the local currency of the country in which the contracts are serviced which creates foreign exchange exposure. We serve most of our EMEA-based clients using our service centers in the Netherlands, the United Kingdom, Italy, Ireland, Spain, Sweden, France, Germany, Poland, Denmark, Bulgaria, Egypt, Tunisia and South Africa. We typically bill our EMEA-based clients in Euros or British Pound Sterling. While a substantial portion of the costs incurred to render services under these contracts are denominated in Euros, a part is also denominated in the local currency in which the contracts are serviced which creates foreign exchange exposure.

The expenses from these foreign operations create exposure to changes in exchange rates between the local currencies and the contractual currencies – primarily the U.S. dollar and the Euro. As a result, we may experience foreign currency gains and losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. The majority of this exposure is related to work performed from call centers in Canada, India and the Philippines.

In order to manage the risk of these foreign currencies from strengthening against the currency used for billing, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, although not 100%, of these foreign currency exposures. While our hedging strategy may protect us from adverse changes in foreign currency rates in the short term, an overall strengthening of the foreign currencies would adversely impact margins over the long term.

The following summarizes the relative (weakening)/strengthening of the U.S. Dollar against the local currency during the years presented:


	Nine Months Ended September 30,
	2011			2010
U.S. Dollar vs. Canadian Dollar		3.2	%		(2.1	%)
U.S. Dollar vs. Euro		(1.9	%)		5.3	%
U.S. Dollar vs. Indian Rupee		10.0	%		(4.3	%)
U.S. Dollar vs. Philippine Peso		(0.8	%)		(5.9	%)
U.S. Dollar vs. S. African Rand		18.8	%		(5.8	%)
U.S. Dollar vs. U.K. Pound Sterling		(1.0	%)		2.0	%

Cash Flow Hedging Program

Substantially all of our subsidiaries use the respective local currency as their functional currency because they pay labor and operating costs in those local currencies. Certain of our subsidiaries in the Philippines use the U.S. dollar as their functional currency while paying their labor and operating cost in local currency. Conversely, revenue for most of our foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. dollars and other non-local currencies. To mitigate the risk of principally a weaker U.S. dollar, we purchase forward contracts to acquire the local currency of the foreign subsidiary at a fixed exchange rate at specific dates in the future. We have designated and account for certain of these derivative instruments as cash flow hedges where applicable, as defined by the authoritative guidance.

Given the significance of our foreign operations and the potential volatility of certain of these currencies versus the U.S. dollar, we use forward purchases of Philippine Peso, Canadian Dollars, Euros, British Pounds and Indian Rupees to minimize the impact of currency fluctuations. As of September 30, 2011, we had entered into forward contracts with financial institutions to acquire the following currencies:


Currency	Notional Value		USD Equivalent		Highest Rate		Lowest Rate
Philippine Peso		2,605,000	$	81,256		46.98		42.40
Canadian Dollar		68,900	$	65,847		1.04		0.96
Indian Rupee		924,500	$	18,547		51.32		45.89
Euro		10,750	$	14,428		1.34		1.34
British Pound		750	$	1,172		1.56		1.56

While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this risk is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could affect our consolidated operating results.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

Our Chief Executive Officer, Kathryn V. Marinello, and our Chief Financial Officer, Dennis Lacey (our principal executive officer and principal financial officer, respectively), have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective as of September 30, 2011 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by Stream in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. On an on-going basis, we review and document our disclosure controls and procedures and our internal control over financial reporting and we may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and Rule 15d-15(f) of the Exchange Act) occurred during the fiscal quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We have been named as a third-party defendant in a putative class action captioned Kambiz Batmanghelich, on behalf of himself and all others similarly situated and on behalf of the general public, v. Sirius XM Radio, Inc., filed in the Los Angeles County Superior Court on November 10, 2009, and removed to the United States District Court for the Central District of California. The Plaintiff alleges that Sirius XM Radio, Inc. recorded telephone conversations between Plaintiff and members of the proposed class of Sirius customers, on the one hand, and Sirius and its employees, on the other, without the Plaintiff’s and class members’ consent in violation of California’s telephone recording laws. The Plaintiff also alleges negligence and violation of the common law right of privacy and seeks injunctive relief. On December 21, 2009, Sirius XM Radio, Inc. filed a Third-Party Complaint in the action against us seeking indemnification for any defense costs and damages that result from the putative class action. On March 25, 2010, the Plaintiff filed an amended complaint that added us as a defendant. We believe that we have meritorious defenses and we intend to vigorously defend against these claims. In March 2011, the court granted preliminary approval of a settlement of the class action. In September 2011, the court granted final approval of the settlement and entered judgment. Three class members who had objected to the settlement filed appeals of the judgment. The judgment will not become final until these appeals are resolved.

ITEM 1A.

RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 2, 2011, which could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause operating results to vary significantly from period to period. As of September 30, 2011, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2010, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Our Compensation Committee previously approved the payment of applicable tax withholding on the vesting of restricted stock and restricted stock units held by certain members of our senior management team through the surrender by such shareholders and the repurchase by us of that number of the vested shares or units equal to the total tax withholding obligations divided by the fair market value of our common stock on the trading day preceding the vesting date. Such repurchases by us occurred in July 2011 and were not made pursuant to a publicly announced repurchase program.

The aggregate number of shares repurchased by us pursuant to these arrangements is set forth in the table below.


Period	(a) Total Number of Shares/Units Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares that may yet be Purchased under the Plans or Programs
July 2011
(July 1, 2011 – July 31, 2011)		3,175	$	3.36		—		—
August 2011
(August 1, 2011 – August 31, 2011)		—		—		—		—
September 2011
(September 1, 2011 – September 30, 2011)		—		—		—		—

Total		3,175				—		—

ITEM 6.

EXHIBITS.

We are filing as part of this Report the Exhibits listed in the Exhibit Index following the signature page to this Report.

SIGNATURES

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


	STREAM GLOBAL SERVICES, INC.

November 2, 2011	By:	/s/ Kathryn V. Marinello
		Kathryn V. Marinello Chairman, Chief Executive Officer and President (Principal Executive Officer)

November 2, 2011	By:	/s/ Dennis Lacey
		Dennis Lacey Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit Index


Exhibit No.		Description

10.1		Second Amendment to Credit Agreement, dated as of November 1, 2011, by and among Wells Fargo Capital Finance, LLC, in its capacity as agent for the lenders and bank product providers party thereto, Stream Global Services, Inc. and each of the subsidiaries of Stream Global Services, Inc. signatory thereto (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 1, 2011 (File No. 001-33739) and incorporated herein by reference).

31.1*		Principal Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Principal Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Principal Financial and Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS***		XBRL Instance Document

101.SCH***		XBRL Taxonomy Extension Schema Document

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

**	Furnished herewith.

***

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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