M o v i n g F o r w a r d 2 0 0 2 SYKES T R O P E R L A U N N A 25Y e a r s S t r o n g For 25 years, Sykes has provided some of the world’s largest companies with flexible, high quality customer management solutions and services. Since our inception in 1977, Sykes has grown to a team of over 15,000 employees who strive to help companies around the world acquire, serve, retain and grow the relationships with their customers. In our never-ending pursuit of customer excellence we have delivered high quality solutions that provide our clients the ability to enhance their company brands and maximize the lifetime value of their customers. Our industry experience, sophisticated technology and global growth strategy have enabled Sykes to become a market leader in the customer management industry and it is these differentiators that will drive our success further in 2003 and beyond. ® A b o u t S y k e s Sykes is a global leader in providing customer manage- handle over 600,000 customer contacts each day through ment solutions and services to Fortune 1000 companies a multitude of media channels, including phone, e-mail, primarily in the technology, consumer, communications, web and chat. We complement our customer support financial services and transportation and leisure indus- solutions with a range of fulfillment and enterprise support tries. Utilizing Sykes integrated onshore/offshore global services—delivering complete solutions that are tailored delivery model, we specialize in providing seamless, high for each client’s unique needs. Headquartered in Tampa, quality customer support outsourcing solutions with an Florida, Sykes operates a network of 40 state-of-the-art emphasis in inbound technical support and customer customer support centers across the United States, service. Our more than 13,000 customer care agents Canada, Europe, Latin America, Asia and Africa. 2002 Revenue by Geographic Region 2002 Revenue by Vertical Market Americas 66% EMEA 34% Technology & Consumer Products 43% Communications 40% Financial Services 3% Other 14% Americas—United States, Canada, Latin America, Asia Pacific and India EMEA—Europe, Middle East and Africa 1977 Sykes begins as a technical engineering firm with three employees in Charlotte, North Carolina. Sykes enters into an agreement in 1978 with a leading technology manufacturer, the beginning of a growing, long-term client relationship. Sykes specializes in technical writing and staffing resources. 1993 Sykes acquires first customer support center in Sterling, Colorado. Revenues reach approximately $50 million and Sykes relocates our corporate headquar- ters to Tampa, Florida. 1 s t n e m h s i l p m o c c A f o s r a e Y 5 2 “We take pride in our business, and through our global commitment to excellence in helping our clients acquire, serve, grow and retain their customers, we are confident that Sykes will prosper, adding value to the investments of our shareholders.” John H. Sykes Chairman and Chief Executive Officer T o O u r S h a r e h o l d e r s , 2002 represented a significant year in Sykes’ history as we celebrated our 25th year in business. In light of the many challenges presented to our industry in recent times, spurred by the uncertainty of the global econ- omy, I am proud to state that Sykes’ strong values of delivering superior customer service and pursuing operational excellence in everything we do has built a strong foundation for Sykes’ success, both now and in the future. The prolonged softness in the global economy has forced business organizations across many industries to strive for improved operating effi- ciencies while maintaining high quality and customer loyalty. In today’s environment, labor demand is transitioning from one market to another, 2 1994 Sykes commences Pan European growth strategy with the opening of our first international customer support center in the Netherlands. predominately to offshore markets, where a high quality customer support solution at a lower cost is available to meet demand. These changes have affected our business and the industry alike, but through Sykes’ focused strategic Sykes began adding more than 1,100 customer care agents initiatives, we have prepared ourselves to emerge a to support new business wins offshore, the majority stronger organization, positioned for continued success in of which will be hired and trained during the first half our dynamic industry. of 2003. In particular, Sykes implemented a restructuring plan Sykes is a leader in providing customer management solu- during the fourth quarter of 2002, designed to reduce tions offshore, as we launched our first operation in 1996 costs and improve operating margins through the reduc- with a small ten-seat facility in the Philippines. Today, as a tion of excess seat capacity in the U.S. and Europe. This result of Sykes’ strategic investments and successful distrib- reduction in capacity will realign our U.S. and European uted delivery model, our offshore network of more than infrastructure with our current business model and future 3,300 customer care seats spans several countries, includ- opportunities. These initiatives, combined with our con- ing the Philippines, The Peoples Republic of China, India tinued global market expansion, are expected to provide and Costa Rica. We also have established operations in considerable improvements in Sykes’ employed capital Eastern Europe and South Africa, two regions that indus- assets, ultimately enhancing our return on assets and oper- try business analysts expect to grow for offshore support ating results. According to industry business analysts, the offshore cus- tomer management outsourcing market is predicted to continue to grow at a rapid pace in the coming years, and Sykes is well-positioned to take full advantage of this trend. In 2002, we continued our global expansion initia- tives offshore adding more than 2,300 seats to Sykes’ sophisticated network including a new state-of-the-art customer support center in Bangalore, India. In addition to the cost savings, our offshore operations offer Sykes’ services in the near future. Our entire offshore network is fully integrated into Sykes’ private asynchronous transfer mode (ATM) communications infrastructure, allowing us to rapidly launch complex solutions anywhere in the world. This superior call management routing system, launched in 2001, serves as a transport backbone for our clients, providing them with secure and scalable voice and data customer support solutions. Our system has also proven to be a key differentiator in winning new business as we pursue diversification in our client base. clients an experienced management team and a highly Our efforts to broaden Sykes’ vertical market mix are educated and devoted labor force. As we closed 2002, proving successful. As we began 2002, we continued to emphasize our focus on the communications market, supporting leading ISP, Internet broadband and wireless 1996 Sykes completes successful IPO on NASDAQ—symbol ‘SYKE.’ Revenues reach $250 million and employees total 3,000. Sykes enters offshore market with small center in the Philippines. Through 1997-98, Sykes continues to expand service offering and customer base through internal growth and strategic acquisitions. By the end of 1998, Sykes operates 29 customer support centers across 13 countries. 1999 Sykes is inducted into Software Support Professionals Association’s Hall of Fame after winning the Software Technical Assistance Recognition award 5 consec- utive years. Enters Latin America market with acquisition in Heredia, Costa Rica. 3 Our steady cash flow generation has also allowed Sykes to make key strategic investments in developing outsourcing markets such as The Peoples Republic of China, Costa companies. As we closed the year, revenues from commu- Rica, India and the Philippines to better enhance our com- nications clients around the world represented 40 percent petitive position in 2003 and beyond. of Sykes’ total 2002 revenues. Our strategy to further penetrate the financial services market in 2002 also awarded success. We generated new financial services business with banking, credit card and brokerage service companies, and the pilot programs we added in 2001 have expanded, allowing for greater stability in Sykes’ revenue mix. By the end of 2003, we anticipate this industry segment will represent approximately 15 percent of total revenues, up from 3 percent in 2002. Our Delta Air Lines contract win, along with new business from other leading As we move forward in 2003, our company is focused on several essential goals. These include the continued devel- opment of our highly demanded offshore delivery model, enhancing Sykes’ profitability and the continued delivery of service excellence to our clients. We take pride in our business, and through our global commitment to excel- lence in helping our clients acquire, serve, grow and retain their customers, we are confident that Sykes will prosper, adding value to the investments of our shareholders. companies in the transportation and leisure industry, pre- I extend my personal gratitude to you, our shareholders, sent the opportunity for added success in a new vertical for your continued belief in Sykes as we advance through market, as our highly reliable service offering provides an a challenging environment in pursuit of growth and avenue for these companies to reduce costs while retain- improved profitability. Sykes is led by a dedicated team ing and growing their customer base. of employees and, for their continued commitment and Most importantly, while meeting the challenges of a soft global economy and the client demand for high quality service at a lower cost solution, Sykes continued to main- tain a sound financial position through 2002. In addition to our proven technology platform, our financial strength has differentiated Sykes within the industry and was para- mount in winning several new clients in 2002. For the full 2002 year, Sykes generated $43.3 million in operating cash flow. We ended the year with no outstanding debt and $79.5 million in cash and cash equivalents that, even after $20.2 million in focused capital investments, repre- sented an increase of $29.5 million since the end of 2001. contributions in making Sykes a success, I am exception- ally proud. It is their extraordinary effort that will allow Sykes to persevere through this dynamic marketplace, facing each challenge and opportunity with dedication and excellence. John H. Sykes Chairman and Chief Executive Officer March 2003 2000 Sykes establishes presence in communi- cations industry supporting ISP, Internet broadband and wireless companies. Expands global coverage with entrance into Shanghai, China. Sykes sells health- care services unit (SHPS), generating an $84 million gain. 2001 Sykes launches leading edge ATM com- munications technology, providing an efficient and flexible system to dynami- cally route client call volume globally. Vertical market diversification strategy continues with entrance into financial services industry. 2002 Sykes opens center in Bangalore, India and continues Philippines expansion to meet demand. Offshore network grows to 3,300 agent seats while revenues total $453 million with 40 customer support centers across 17 countries. 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the fiscal year ended December 31, 2002 Or [ ] 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 0-28274 S y k e s E n t e r p r i s e s , I n c o r p o ra t e d (Exact name of registrant as specified in its charter) Florida (State or other jurisdiction of incorporation or organization) 400 N. Ashley Drive, Tampa, Florida (Address of principal executive offices) 56-1383460 (IRS Employer Identification No.) 33602 (Zip Code) (813) 274-1000 (Registrant’s telephone number, including area code) 100 N. Tampa Street, Suite 3900, Tampa, Florida 33602 (Former address, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Voting Common Stock $.01 Par Value 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [x] No [ ] The aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant computed by reference to the closing sales price of such shares on the NASDAQ National Market the last business day of the Registrant’s most recently completed second fiscal quarter, was $204,251,152. As of March 7, 2003, there were 40,411,018 outstanding shares of common stock. Documents Incorporated by Reference: Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portions of the Proxy Statement for the year 2003 Form 10-K Reference Annual Meeting of Shareholders . . . . . . . . . . . . . . . . . . . . . . . Part III Items 10–13 5 FORM 10-K ANNUAL REPORT Table of Contents Page No. PART I Item 1 Item 2 Item 3 Item 4 Business ............................................................................................................................................ Properties .......................................................................................................................................... Legal Proceedings ............................................................................................................................. Submission of Matters to a Vote of Security Holders ......................................................................... PART II Item 5 Market for the Registrant’s Common Equity and Related Shareholder Matters ................................... Selected Financial Data..................................................................................................................... Item 6 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations................ Item 7a Quantitative and Qualitative Disclosures About Market Risk ............................................................ Financial Statements and Supplementary Data.................................................................................. Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ............ Item 9 PART III Item 10 Directors and Executive Officers of the Registrant ............................................................................. Item 11 Executive Compensation ................................................................................................................... Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.......................................................................................................... Item 13 Certain Relationships and Related Transactions ................................................................................. Item 14 Controls and Procedures ................................................................................................................... PART IV Item 15 Exhibits, Financial Statement Schedule, and Reports on Form 8-K .................................................... 7 18 20 21 21 22 23 32 33 33 33 33 33 33 33 33 6 P A R T I I n d u s t r y O v e r v i e w Item 1. Business G e n e r a l Sykes Enterprises, Incorporated and consolidated sub- sidiaries (“Sykes,” “our” or “we”) is a global leader in providing outsourced customer management solutions and services. Sykes provides an array of sophisticated customer management solutions to Fortune 1000 com- panies around the world primarily in the technology, consumer, communications, financial services and trans- portation and leisure industries. We serve our clients through two geographic operating segments: the Americas (United States, Canada, Latin America, India and the Asia Pacific Rim) and EMEA (Europe, Middle East and Africa). Sykes’ Americas and EMEA groups primarily provide customer support outsourcing services with an emphasis on inbound technical support and customer service. These services are delivered through multiple communications channels encompassing phone, e-mail, web and chat. Sykes also provides various enterprise sup- port services in the Americas that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk serv- ices. In EMEA, Sykes also provides fulfillment services including multi-lingual sales order processing via the Internet and phone, inventory control, product delivery and product returns handling. Sykes’ complete service offering helps our clients acquire, serve, retain and grow relationships with their customers. Sykes has developed an extensive global reach with 40 state-of-the-art cus- tomer support centers throughout the United States, Canada, Europe, Latin America, Asia and Africa. Sykes was founded in 1977 in North Carolina and we moved our headquarters to Florida in 1993. In March 1996, we changed our state of incorporation from North Carolina to Florida. Sykes’ headquarters are located at 400 North Ashley Drive, 28th Floor, Tampa, Florida 33602, and our telephone number is (813) 274-1000. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amend- ments to those reports, as well as our proxy statements and other materials which are filed with or furnished to the Securities and Exchange Commission are made available, free of charge, on our Internet website at www.sykes.com/english/investors.asp under the heading “Financial Reports—SEC Filings,” as soon as reasonably practicable after they are filed with, or furnished to, the Commission. Sykes believes that growth for outsourced customer management solutions and services will be driven by the trend of global Fortune 1000 companies turning to outsourcers to provide cost-effective, high quality cus- tomer support solutions. We also anticipate that the acceleration to an offshore solution, which provides cus- tomer management solutions at significantly lower costs and a highly educated labor force, will drive growth in the industry. In today’s ever-changing marketplace, companies require innovative customer management solutions that allow them to enhance the end user’s experience with their products and services, strengthen and enhance company brands, maximize the lifetime value of customers, efficiently and effectively deliver human inter- action when customers value it most, and deploy best- in-class customer management strategies, processes and technologies. The softness in the global economy, rapid changes in technology, global competition and pricing pressures, however, are making it increasingly difficult for compa- nies to cost-effectively maintain in-house the necessary personnel to handle all of their customer management needs. As a result, companies are increasingly turning to outsourcers to perform specialized functions and services in customer management due to the following factors: • Increasing importance for companies to focus on customer-facing activities and retain and grow client relationships; • Increasing need for companies to focus on core compe- tencies rather than non-revenue producing activities; • Rapid changes in technology requiring personnel with specialized technical expertise; • Growing capital requirements for sophisticated technol- ogy needed to maintain the necessary infrastructure to provide timely technical support and customer service; • Growing capital requirements for entrance into new geographic markets offering a lower cost solution; • Increasing need to integrate and continually update complex systems incorporating a variety of hardware and software components spanning a number of tech- nology generations; • Extensive and ongoing staff training and associated costs required for maintaining responsive, up-to-date in-house technical support and customer service solutions. We believe Sykes is a leader among our peers in that we offer a full, global customer management solution with a dynamic, secure communications infrastructure and a global presence that reaches across 17 countries. This global presence includes established operations in four highly demanded offshore geographic markets where companies have access to high quality customer support solutions at lower costs compared to other markets. 7 S t r a t e g y Sykes’ objective is to continue to grow operations and enhance profitability through the expansion of our global client base. Our goal is to remain a leading provider of high quality, reliable and affordable outsourced customer management solutions and services. Our services are customized to address each client’s unique needs and focused on improving the quality and cost-effectiveness of the support our clients provide to their customers. Our principal strategies are as follows: Build Long-term Client Relationships Through Service Excellence. We believe that providing superior, quality service is critical in our clients’ decisions to outsource and in building long-term relationships with our clients. To ensure service excellence and continuity across each of our centers globally, Sykes implemented an internally developed quality program titled Sykes Standard of Excellence (SSE). This quality certification standard is a compilation of Sykes’ twenty-five years of experience and best practices from industry standards such as the Malcom Baldrige National Quality Award and COPC (Customer Operations Performance Center Inc.). Every customer support center of Sykes is held accountable to meet or exceed the criteria set forth by Sykes Standard of Excellence which address leadership, hiring and training, performance management down to the agent level, fore- casting and scheduling, and the client relationship including disaster recovery plans, feedback and correc- tive measures. Continue to Grow Sykes’ Customer Management Out- sourcing Operations. We have grown Sykes’ customer management outsourcing operations utilizing a strategy of both internal growth and external acquisitions. This plan has resulted in an increase from three U.S. customer sup- port centers in 1994 to 40 customer support centers worldwide as of March 7, 2003. Our state-of-the-art net- work of customer support centers currently handles in excess of 600,000 customer contacts per day over numer- ous contact media including phone, e-mail, web and chat. We have standardized the establishment and ongo- ing operation of our customer support centers by: (i) gen- erally locating the centers in smaller communities, near a college or university, with a relatively low cost structure and a technically proficient, stable work force; (ii) con- structing the customer support centers modeled after the same prototype; (iii) utilizing standardized procedures on a global basis to hire and train customer care agents; and (iv) maintaining consistently responsive and highly reli- able services through global deployment of a common communication platform and performance management technologies and procedures. Sykes’ systematic approach and procedures, tailored to the unique needs of each of our clients, are part of our strategy of providing respon- sive, high quality and cost-efficient support. Capitalize on Global Service Offering in Offshore Markets. In addition to Sykes’ network of customer sup- port centers throughout North America and Europe, we continue to develop our offshore delivery model in the Philippines, The Peoples Republic of China, India and Costa Rica, which offers our clients a secure, high quality solution at a significant cost savings. We expanded our offshore operations significantly in 2002 adding more than 2,300 new customer care seats to support the increasing demand for Sykes’ offshore customer manage- ment solution. By the end of 2002 we had over 3,300 seats offshore, offering our clients one of the largest company-owned offshore networks fully integrated through Sykes’ leading edge asynchronous transfer mode (ATM) communications infrastructure. This expansion included our entry into Bangalore, India with a new 250- seat center in August of 2002. Sykes also believes there are further opportunities to expand our offshore solution within certain geographic markets, including Asia, Latin America, Eastern Europe and South Africa. Diversify Sykes’ Vertical Market Reach. We market Sykes’ services on a worldwide basis to Fortune 1000 companies primarily in the technology, consumer, com- munications, financial services and transportation and leisure industries. We built our industry knowledge by ini- tially focusing on software publishers, personal computer manufacturers and peripheral hardware manufacturers within the technology vertical market, providing Sykes with a competitive advantage in technical support. In 2002, the technology vertical market represented 43% of Sykes’ consolidated revenues. Beginning in 1999, our growth strategy targeted the communications vertical mar- ket, where Sykes has leveraged our technical support capabilities to capitalize on dial-up Internet, broadband Internet and wireless services opportunities. Revenues generated from the communications vertical market in 2002 totaled 40% compared to 9% in 1999. In 2001, Sykes began targeting the financial services vertical market recognizing the potential growth this market offered and the added stability this market would provide Sykes’ revenue mix. We entered several new relationships with financial services companies in late 2001 and during 2002 and this vertical market continues to offer expansion potential. For 2002, this vertical market represented 3% of our consolidated revenues. Further, Sykes has recently entered new client relationships with leading companies in the transportation and leisure industry and we antici- pate this vertical market becoming a greater focus for Sykes in the near future. We believe our proven success in entering vertical markets like technology and communica- tions provides a foundation for growth and success in new vertical markets like financial services and transportation and leisure. We believe the diversification of our business into new, focused vertical markets should allow for a more predictable, steady revenue stream. 8 Maintain a Competitive Advantage Through Leading Edge Technology. Sykes seeks to maintain a competitive advantage by continuing to capitalize on sophisticated and specialized technological capabilities, including our current private asynchronous transfer mode (ATM) network between North America, Latin America, the Philippines and India that provides Sykes the ability to manage call volumes more efficiently and carry voice and data over the same network. Sykes’ flexible, secure and scalable network infrastructure allows us to rapidly respond to changes in client voice and data traffic and quickly establish support operations for new and existing clients. Through strategic technology relationships, Sykes is able to provide fully integrated communication serv- ices encompassing e-mail, chat and web self-service plat- forms. Additional technological capabilities include automatic call distributors, intelligent call routing and workforce management capabilities based on agent skill and availability, call tracking software, quality manage- ment systems and computer-telephony integration (CTI) that enable Sykes’ customer support centers to serve as a transparent extension for our clients, receive telephone calls and data directly from our clients’ systems, and report detailed information concerning the status and results of our services on a daily basis. In addition, Sykes’ European deployment of Global Direct, Sykes’ CRM/ e-commerce application utilized within the fulfillment operations, establishes a platform whereby our clients can manage all customer profile and contact information from every communication channel making it a viable customer-facing infrastructure solution to support their CRM initiatives. Utilize Aggressive Sales and Marketing Efforts. In the last eighteen months, we have increased Sykes’ sales and marketing efforts to more fully realize the market poten- tial of the customer management outsourcing industry. In addition to developing an industry focused sales force with business development managers assigned to vertical markets in each of their areas of expertise, Sykes devel- oped a client services group in 2001 to develop addi- tional business with existing clients. Each client services director is assigned to specific client accounts and they are responsible for managing and growing the business of these existing clients. Sykes has also implemented a mar- keting and business development plan with the goal of increasing our visibility in the vertical markets we serve through direct mailing campaigns and inside sales lead generation programs. S e r v i c e s Sykes specializes in providing primarily inbound out- sourced customer management solutions and services on a global basis with an emphasis on technical support and customer service. These services are provided through two operating segments—the Americas and EMEA. The Americas region, representing 66% of consol- idated revenues in 2002, includes the United States, Canada, Latin America, India and the Asia Pacific Rim. The sites within India and the Asia Pacific Rim are included in the Americas region given the nature of the business and client profile, which is primarily made up of U.S. companies utilizing our support services to support their customer management needs. The EMEA region, representing 34% of consolidated revenues in 2002, includes Europe, the Middle East and Africa. The follow- ing is a description of Sykes’ customer management solu- tions and services: Customer Support Outsourcing. Sykes’ customer sup- port outsourcing services represented approximately 91% of total 2002 consolidated revenues, and encompasses primarily inbound technical support and customer serv- ice. Sykes handles over 600,000 customer contacts on a daily basis throughout the Americas and EMEA regions. In the technical support area, Sykes primarily handles inquiries from the customers of technology, consumer and communications companies for a variety of needs including installation, operating assistance and trou- bleshooting for software, PC’s and other consumer equip- ment as well as ISP dial-up and broadband Internet connections. Customer service contacts include product information requests, describing product features, acti- vating customer accounts, resolving complaints and handling billing inquiries. Sykes provides these services through multiple communication channels encompassing phone, e-mail, web and chat through a network of global state-of-the-art customer support centers. Our extensive network of customer support centers provides global sup- port capabilities in over 30 languages. Technical support and customer service solutions provided through Sykes’ support centers are generally billed to the client based on an amount per e-mail, a fee per call, a rate per minute or time and material basis. Fulfillment Services. Fully integrated with Sykes’ cus- tomer support services in Europe, we provide Pan European fulfillment solutions including multi-lingual sales order processing via the Internet and phone, inventory control, product delivery and product returns handling. Enterprise Support Services. In the United States, Sykes also provides a range of enterprise support services for companies’ internal support operations including technical staffing services and outsourced corporate help desk solutions. Help desk services are provided to major companies, either at their facilities or through Sykes’ sup- port centers. Employees of Sykes’ clients telephone the help desk number provided to them by their employer for technical or employee related assistance. 9 O p e r a t i o n s Customer Support Centers. Sykes operates 15 stand- alone customer support centers in the United States, 3 centers in Canada, 15 in Europe, the Middle East and South Africa, and 7 centers offshore, including The Peoples Republic of China, the Philippines, India and Costa Rica. Sykes’ strategy in the United States has been to locate customer support centers in smaller communities with similar demographic characteristics, typically near a col- lege or university. We believe these characteristics tend to provide a well-educated, technically proficient employee pool from which to attract qualified candidates. These locations also tend to have lower labor and infrastructure costs than large metropolitan areas. Our strategy interna- tionally is to locate customer support centers near a major metropolitan area, or near a large facility of a major client, if it is the first entrance into the country. Otherwise, we generally follow the same strategy used in the United States for locating international customer support centers. New customer support centers are established to accommodate anticipated growth in our business or in response to a specific customer need. Sykes currently believes the capacity we have in the U.S. and Europe is sufficient to meet near-term demand in the industry. With the continued acceleration of business offshore, we currently believe there are opportunities to establish additional customer support centers in India, the Asia Pacific Rim and potentially South America. A typical United States customer support center is approximately 42,000 square feet, has 432 workstations and can handle in excess of 12,000 user transactions per day. The technical and customer support centers employ current technology in PBX switches, call tracking soft- ware, telephone-computer integration, interactive voice response and relational database management systems that are integrated into centrally managed local area net- works and wide area networks. Sykes’ equipment and technology enable us to serve as the transparent exten- sion of our clients at a low cost per transaction and pro- vide our clients with immediate access to the status and results of our customer support services. Due to the mod- ular, open system architecture, Sykes’ technology infra- structure allows for timely and efficient system updates and modifications. Sykes utilizes sophisticated workforce management systems to provide efficient scheduling of personnel to accommodate fluctuations in call volume. To comple- ment our workforce management systems, Sykes has developed a digital private communications network that allows for effective call volume management and disaster recovery backup. Through Sykes’ private asynchronous transfer mode (ATM) network and dynamic intelligent call routing capabilities, we can rapidly respond to changes in client call volumes and move call volume traffic based on agent availability and skill throughout our network of support centers, improving the responsiveness and productivity of our agents. Customer support center systems capture and down- load to permanent databases a variety of information concerning each call for reporting on a daily basis to clients, including number and duration of calls which are important for billing purposes, response time and results of the call. Summary data and complete databases are made available to the client to enable it to monitor the level of service provided by Sykes, as well as to deter- mine whether end users of our clients’ products are encountering recurring problems that require modifica- tion. The databases also provide Sykes’ clients with con- siderable marketing information concerning end users, such as whether the user is a home or business user and regional differences in purchasing patterns or usage. Sykes maintains tape backups and offsite storage to assure the integrity of its reporting systems and databases. The customer support centers are protected by a fire extinguishing system and backup generators and short- term battery backups in the event of a power outage, reduced voltage or a power surge. Rerouting of call vol- ume to one of the other customer support centers is also available in the event of a telecommunications failure, natural disaster or other emergency. Security measures are imposed to prevent unauthorized access. Software and related data files are backed up daily and stored off site at multiple locations. Sykes carries business interrup- tion insurance covering interruptions that might occur as a result of damage to our business. In addition, Sykes believes that it has adequate arrangements with its equip- ment vendors which provides that damaged equipment can be replaced promptly. Enterprise Support Services Offices. Personnel from Sykes’ enterprise support services group are assigned to one of two regional offices and four satellite offices, which are located in metropolitan areas throughout the United States. Sykes’ enterprise support services group provides a range of services for a company’s internal support operations including technical staffing services and outsourced corporate help desk solutions including technical or other employee related support. Our enter- prise support services offices provide a strong recruiting platform for high-end knowledge workers and establish a local presence to service major accounts. Each office is responsible for staffing the personnel needs of clients or managing program its geographic region. These offices give Sykes the ability to (i) offer a broad range of internal support services to exist- ing clients, and (ii) deliver flexible, innovative solutions to new and existing clients in each market. implementations within 1 0 Fulfillment Centers. Sykes currently has two fulfillment centers located in Europe. Sykes provides its fulfillment services primarily to certain clients operating in Europe who desire this complementary service in connection with customer support services. Q u a l i t y A s s u r a n c e Sykes believes that providing superior, quality service is critical in our clients’ decisions to outsource and in building long-term relationships with our clients. It is also our belief and commitment that quality is the respon- sibility of each individual at every level of the organ- ization. To ensure service excellence and continuity across our organization, Sykes has developed an integrated Quality Assurance program consisting of three major components: • The certification of client accounts and customer sup- port centers to Sykes Standard of Excellence program; • The application of continuous improvement to all business processes; and • The application of process audits to all work procedures. Sykes Standard of Excellence (SSE) program is a quality certification standard that was compiled from Sykes’ twenty-five years of experience and the best practices from industry standards such as the Malcom Baldrige National Quality Award and COPC (Customer Opera- tions Performance Center Inc.). Every customer support center is held accountable to meet or exceed the criteria set forth by Sykes Standard of Excellence which address leadership, hiring and training, performance manage- ment down to the agent level, forecasting and schedul- ing, and the client relationship including disaster recovery plans, feedback and corrective measures. The application of continuous improvement is estab- lished in Sykes Standard of Excellence and is based upon the Six Sigma cycle of Define, Measure, Analyze, Improve/ Design and Control/Verify. All of Sykes’ management is responsible for continuous improvement in their opera- tions and certification requires that processes, measures and corrective action plans are documented and available for review. Process audits are utilized at the local client account or customer support center level. The purpose is to verify that client processes and procedures are consistently exe- cuted as required by established documentation. Process audits are applicable to all services being provided for the client and certification requires that all applicable processes be audited twice a year. In general, the training of Sykes’ agents occurs at the customer support centers. Representatives of our clients conduct product-specific training of new customer care agents through certified trainers or Sykes actively recruits highly skilled professionals to staff specific assignment needs of our clients. Sykes’ customer care agents will also receive ongoing training throughout the year to respond to changes in products and technology. A support center manager supervises project leaders, team leaders, and customer care agents dedicated to individual client accounts. Each team leader monitors approximately ten customer care agents. A project leader supervises a particular client’s account and through the use of call tracking software, the project leader monitors the number of calls each customer care agent handles, the duration of each call, time between calls, response time, number of queries resolved after the first call and other statistics important in measuring and enhancing productivity and service levels. Clients also have daily access to a variety of measures of service performance tracked by Sykes’ technology and can monitor calls directly through Sykes’ remote call monitoring systems. Two of Sykes’ customer support centers in Europe have received COPC-2000 Standard (Customer Operations Performance Center Inc.) certification for technical sup- port and help desk services. Sykes is also pursuing COPC certification for several additional centers in Europe and our offshore markets. The COPC-2000 Standard was developed in 1996 by representatives from American Express, Dell, L.L. Bean, Microsoft, Motorola, Novell and other customer-focused companies that wanted measur- able standards to improve the level of service quality their customers received from external customer service providers. The development team used the criteria and framework of the Malcolm Baldrige National Quality Award as the foundation of the standard, and adapted it to accommodate the practical realities of the customer support industry. Sykes’ commitment to quality has also resulted in receiving the STAR Award for the years 1995 through 1999 in the highest call volume category and received a lifetime achievement award during 1999. This award has been presented annually since 1988 by the Software Support Professionals Association (SSPA) to the software support company that achieves superior customer satis- faction and call metrics. S a l e s a n d M a r k e t i n g Sykes’ marketing objective is to develop long-term relationships with existing and potential clients to become the preferred vendor for their customer management out- sourcing services. We believe that our client base pro- vides excellent opportunities for further marketing and cross selling of our complementary customer manage- ment services. We market our services through a variety of methods, including client referrals, personal sales calls, advertising in industry publications, attending trade shows, direct mailings to targeted customers, telemarketing and cross selling additional services to existing clients. Sykes currently employs 52 people in our global sales force. 1 1 Sykes’ sales force is composed of business develop- ment managers that pursue new business and client serv- ices directors that manage and grow relationships with existing accounts. Sykes also has inside customer sales representatives who receive customer inquiries and pro- vide outbound lead generation for the field sales force. As part of our marketing efforts, Sykes invites potential and existing clients to visit our customer support centers, where Sykes can demonstrate our dynamic telecommuni- cations and call tracking technology, quality procedures and the knowledge of our customer care agents. Sykes also demonstrates the ability to quickly accommodate a new client or a significant increase in business from an existing client by emphasizing our systematic approach to establishing and managing support centers. Sykes emphasizes account development to strengthen relationships with current clients. Business development managers or client service directors are generally assigned to vertical markets in their area of expertise in order to develop a complete understanding of each client’s particular needs, to form strong client relation- ships and encourage cross selling of other services offered by Sykes. C l i e n t s Sykes serves clients in the United States, Canada, Latin America, Europe, the Philippines, The Peoples Republic of China, India and South Africa. We market to Fortune 1000 corporations primarily within the technology, con- sumer, communications, financial services and trans- portation and leisure industries. Revenue by vertical market for 2002, as a percentage of our consolidated revenues, totaled 43% for technology, 40% for com- munications, 3% for financial services and 14% for all other vertical markets. We believe our globally recog- nized client base presents opportunities for further cross marketing of our services. For the years ended December 31, 2002, 2001 and 2000, total revenues included $71.6 million, or 15.8% of consolidated revenues, $58.5 million, or 11.8% of con- solidated revenues, and $35.6 million, or 6.3% of con- solidated revenues, exclusive of SHPS (2000 only), respectively, from SBC Communications Inc. and affili- ates (“SBC”), a major provider of communications services. In addition, for the years ended December 31, 2002, 2001 and 2000, total revenues included $54.6 mil- lion, or 12.1% of consolidated revenues, $46.2 million, or 9.3% of consolidated revenues, and $38.6 million, or 6.8% of consolidated revenues, exclusive of SHPS (2000 only), respectively, from Microsoft Corporation (“Microsoft”), a major provider of software and related services. The loss of (or the failure to retain a significant amount of business with) SBC, Microsoft or any of our key clients could have a material adverse effect on Sykes’ performance. Our top ten clients accounted for approxi- mately 60.0% of our consolidated revenues in 2002. Many of Sykes’ contracts are cancelable by the client at any time or on short-term notice, and clients may uni- laterally reduce their use of Sykes’ services under our contracts without penalty. Sykes provided services to hundreds of clients during 2002. C o m p e t i t i o n The industry in which Sykes operates is extremely competitive and highly fragmented. While many compa- nies provide customer management solutions and serv- ices, Sykes believes no one company is dominant in the industry. There are numerous and varied providers of such services, including firms specializing in various CRM consulting, other customer management solutions providers—niche or large market companies, companies that manage their customer support needs in-house, as well as product distribution companies that provide ful- fillment services. We may also face competition from companies who possess substantially greater resources, greater name recognition and a more established customer base than Sykes. Sykes believes that the most significant competitive factors in the sale of services include service quality, advanced technology capabilities, global coverage, relia- bility, scalability, security, industry experience, price and tailored service offerings. As a result of intense competi- tion, customer management solutions and services fre- quently are subject to pricing pressure. Clients also require outsourcers to be able to provide services in mul- tiple locations. Competition for contracts for many of Sykes’ services takes the form of competitive bidding in response to requests for proposals. I n t e l l e c t u a l P r o p e r t y We rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology Sykes uses at our customer support centers and facilities. We also rely on a combination of copyright, trademark and trade secret laws to protect our proprietary software. We attempt to further protect our trade secrets and other proprietary information through agreements with employees and consultants. Sykes does not hold any patents and does not have any patent applications pend- ing. There can be no assurance that the steps we have taken to protect our proprietary technology will be ade- quate to deter misappropriation of our proprietary rights or third-party development of similar proprietary soft- ware. Sykes(cid:1), REAL PEOPLE. REAL SOLUTIONS.(cid:1) and Sykes Answerteam(cid:1) are registered service marks of Sykes. Sykes holds a number of registered trademarks, including ETSC(cid:1), FS PRO(cid:1) and FS PRO MARKETPLACE(cid:1). 1 2 E m p l o y e e s As of February 28, 2003, Sykes had 15,750 employees (full-time and part-time), consisting of 13,750 customer care agents handling technical and customer support inquiries at our centers, 280 in enterprise support services, 160 in fulfillment services, 40 in sales and marketing and 1,520 in management, administration and finance. The technical and service nature of Sykes’ business makes our employees an important corporate asset. While the market for qualified personnel is extremely competi- tive, we believe the relationships with our employees are good. Sykes’ employees, with the exception of about 500 employees in Europe, are not represented by any labor unions. Sykes employs personnel through a continually updated recruiting network. This network includes a seasoned team of recruiters, a company-wide candidate database, Internet/newspaper advertising, candidate referral pro- grams and job fairs. However, demand for qualified professionals with the required language and technical skills may exceed supply, as new skills are needed to keep pace with the requirements of customer engage- ments. Competition for such personnel is intense and employee turnover in this industry is high, particularly in the U.S. market. F a c t o r s I n f l u e n c i n g F u t u r e R e s u l t s a n d A c c u r a c y o f F o r w a r d - L o o k i n g S t a t e m e n t s This report contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, esti- mates, forecasts, and projections about Sykes, manage- ment’s beliefs, and assumptions made by management. In addition, other written or oral statements, which consti- tute forward-looking statements, may be made from time to time by or on behalf of Sykes. Words such as “may,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives, or goals also are forward-looking state- ments. These statements are not guarantees of future per- formance and are subject to a number of risks and uncertainties, including those discussed below and else- where in this report. Our actual results may differ materi- ally from what is expressed or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materi- ally from what is expressed or forecasted in such forward- looking statements include, but are not limited to: the marketplace’s continued receptivity to Sykes’ terms and elements of services offered under Sykes’ standardized contract for future bundled service offerings; Sykes’ ability to continue the growth of its support service rev- enues through additional technical and customer support centers; Sykes’ ability to further penetrate into vertically integrated markets; Sykes’ ability to expand revenues within the global markets; Sykes’ ability to continue to establish a competitive advantage through sophisticated technological capabilities, and the following risk factors: Dependence on Key Clients Sykes derives a substantial portion of its revenues from a few key clients. Total revenue for the years ended December 31, 2002, 2001 and 2000, includes $71.6 million, or 15.8% of consolidated revenues, $58.5 mil- lion, or 11.8% of consolidated revenues and $35.6 million, or 6.3% of consolidated revenues, exclusive of SHPS (2000 only), respectively, from SBC Communi- cations Inc. and affiliates (“SBC”), a major provider of communications services. In addition, total revenue for the years ended December 31, 2002, 2001 and 2000, includes $54.6 million, or 12.1% of consolidated revenues, $46.2 million, or 9.3% of consolidated rev- enues and $38.6 million, or 6.8% of consolidated rev- enues, exclusive of SHPS (2000 only), respectively, from Microsoft Corporation (“Microsoft”), a major provider of software and related services. Our top ten clients accounted for approximately 60%, 57% and 49%, of consolidated revenue for the years ended December 31, 2002, 2001, and 2000, respectively, exclusive of SHPS revenue (2000 only). Our loss of, or the failure to retain a significant amount of business with, SBC, Microsoft or any of our key clients could have a material adverse effect on our business, financial condition and results of operations. Many of our contracts are cancelable by the client at any time or on short-term notice, and clients may unilaterally reduce their use of our services under these contracts without penalty. Thus, Sykes’ contracts with its clients do not ensure that we will generate a min- imum level of revenues. Risks Associated With International Operations and Expansion We intend to continue to pursue growth opportunities in markets outside the United States. At December 31, 2002, Sykes’ international operations were conducted from 25 customer support centers located in Sweden, the Netherlands, Finland, France, Germany, South Africa, Scotland, India, Ireland, Italy, Hungary, Spain, Turkey, The Peoples Republic of China, and the Philippines. 1 3 Revenues from these operations for the years ended December 31, 2002, 2001, and 2000, were 39%, 37%, and 38%, of consolidated revenues, respectively, exclu- sive of revenue from SHPS which was sold in June 2000. We also conduct business in Canada and Costa Rica. International operations are subject to certain risks com- mon to international activities, such as changes in foreign governmental regulations, tariffs and taxes, import/export license requirements, the imposition of trade barriers, dif- ficulties in staffing and managing foreign operations, political uncertainties, longer payment cycles, foreign exchange restrictions that could limit the repatriation of earnings, possible greater difficulties in accounts receiv- able collection, potentially adverse tax consequences, and economic instability. Sykes conducts business in various foreign currencies and is therefore exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact our results of operations and financial con- dition. Sykes is also subject to certain exposures arising from the translation and consolidation of the financial results of its foreign subsidiaries. Sykes has, from time to time, taken limited actions to attempt to mitigate Sykes’ currency exchange exposure. However, there can be no assurance that we will take any actions to mitigate such exposure in the future, and if taken that such actions taken will be successful or that future changes in cur- rency exchange rates will not have a material impact on Sykes’ future operating results. A significant change in the value of the dollar against the currency of one or more countries where Sykes operates may have a material adverse effect on Sykes’ results. Sykes has historically not entered into hedge contracts for either its translation risk or its economic risk. Fundamental Shift Towards Offshore Markets We intend to continue to expand and pursue growth opportunities in offshore markets. Our offshore locations include The Peoples Republic of China, India, the Asia Pacific Rim region and Costa Rica and while Sykes has operated in offshore markets for several years, there can be no assurance that we will be able to successfully conduct and expand such operations, and a failure to do so would have a material adverse effect on our busi- ness, financial condition, and results of operations. While it has been the industry trend to move towards offshore markets, such movement could result in excess capacity in the United States and Europe. The success of the our offshore operations will be subject to numerous con- tingencies, some of which are beyond management’s control, including general and regional economic condi- tions, prices for our services, competition, changes in regulation and other risks. In addition, as with all of our operations outside of the United States, Sykes is subject to various additional political, economic, and market uncertainties. (See “Risks Associated with International Operations and Expansion.”) Existence of Substantial Competition The markets for Sykes’ services are highly competitive, subject to rapid change, and highly fragmented. While many companies provide customer management out- sourcing services, Sykes believes no one company is dominant in the industry. There are numerous and varied providers of our services, including firms special- izing in call center operations, temporary staffing and personnel placement companies, general management consulting firms, divisions of large hardware and software companies and niche providers of customer management outsourcing services, many of whom compete in only certain markets. Our competitors include many com- panies who may possess substantially greater resources, greater name recognition and a more established cus- tomer base than we do. In addition to Sykes’ competitors, many companies who might utilize the services of Sykes or one of our competitors may utilize in-house personnel to perform such services. Increased competition, the fail- ure of Sykes to compete successfully, pricing pressures, loss of market share and loss of clients could have a material adverse effect on Sykes’ business, financial condition, and results of operations. Many of Sykes’ large clients purchase customer man- agement solutions and services primarily from a limited number of preferred vendors. Sykes has experienced and continues to anticipate significant pricing pressure from these clients in order to remain a preferred vendor. These companies also require vendors to be able to provide services in multiple locations. Although we believe we can effectively meet our clients’ demands, there can be no assurance that we will be able to compete effectively with other customer management outsourcing services companies. Sykes believes that the most significant com- petitive factors in the sale of our services include quality, advanced technology capabilities, global coverage, relia- bility, scalability, security, industry experience, price and tailored service offerings. Inability to Attract and Retain Experienced Personnel May Adversely Impact Sykes’ Business Sykes’ business is labor intensive and places significant importance on its ability to recruit, train, and retain qualified technical and consultative professional person- nel. We generally experience high turnover of our per- sonnel and are continuously required to recruit and train replacement personnel as a result of a changing and expanding work force. Additionally, demand for qualified technical professionals conversant with certain technologies may exceed supply, as new and additional 1 4 skills are required to keep pace with evolving computer technology. Sykes’ ability to locate and train employees is critical to achieving our growth objective. Sykes’ inability to attract and retain qualified personnel or an increase in wages or other costs of attracting, training, or retain- ing qualified personnel could have a material adverse effect on Sykes’ business, financial condition and results of operations. Dependence on Senior Management The success of Sykes is largely dependent upon the efforts, direction and guidance of its senior management. Sykes’ growth and success also depend in part on its abil- ity to attract and retain skilled employees and managers and on the ability of our executive officers and key employees to manage our operations successfully. We have entered into employment and non-competition agreements with our executive officers. The loss of any of our senior management or key personnel, or the inability to attract, retain or replace key management personnel in the future, could have a material adverse effect on Sykes’ business, financial condition and results of operations. Dependence on Trend Toward Outsourcing Sykes’ business and growth depend in large part on the industry trend toward outsourcing customer management solutions and services. Outsourcing means that an entity contracts with a third party, such as Sykes, to provide customer support services rather than perform such serv- ices in-house. There can be no assurance that this trend will continue, as organizations may elect to perform such services themselves. A significant change in this trend could have a material adverse effect on Sykes’ business, financial condition and results of operations. Addition- ally, there can be no assurance that Sykes’ cross-selling efforts will cause clients to purchase additional services from Sykes or adopt a single-source outsourcing approach. Our Strategy of Growing Through Selective Acquisitions and Mergers Involves Potential Risks We evaluate opportunities to expand the scope of our services through acquisitions and mergers. We may be unable to identify companies that complement our strate- gies, and even if we identify a company that comple- ments our strategies, we may be unable to acquire or merge with the company. In addition, the decrease in the price of Sykes’ common stock could hinder our growth strategy by limiting growth through stock acquisitions. Our acquisition strategy involves other potential risks. These risks include: • The inability to obtain the capital required to finance potential acquisitions on satisfactory terms; • The diversion of management’s attention to the integra- tion of the businesses to be acquired; • The risk that the acquired businesses will fail to maintain the quality of services that Sykes has histori- cally provided; • The need to implement financial and other systems and add management resources; • The risk that key employees of the acquired business will leave after the acquisition; • Potential liabilities of the acquired business; • Unforeseen difficulties in the acquired operations; • Adverse short-term effects on Sykes’ operating results; • Lack of success in assimilating or integrating the oper- ations of acquired businesses with those of Sykes; • The dilutive effect of the issuance of additional equity securities; • The impairment of goodwill and other intangible assets involved in any acquisitions; • The businesses we acquire not proving profitable; and • Potentially incurring additional indebtedness. Uncertainties Relating to Pending Litigation Sykes faces uncertainties relating to the pending litiga- tion described in “Item 3. Legal Proceedings.” We also cannot predict whether any other material suits, claims, or investigations may arise in the future based on the same claims as those described in “Item 3. Legal Proceedings” or other claims that may arise in the ordi- nary course of business. Regardless of the outcome of any of these lawsuits or any future actions, claims, or investigations relating to the same or any other subject matter, we may incur substantial defense costs and such actions may cause a diversion of management time and attention. Also, it is possible that Sykes may be required to pay substantial damages or settlement costs which could have a material adverse effect on our financial condition and results of operations. Rapid Technological Change Rapid technological advances, frequent new product introductions and enhancements, and changes in client requirements characterize the market for customer man- agement services. Sykes’ future success will depend in large part on our ability to service new products, plat- forms, and rapidly changing technology. These factors will require Sykes to provide adequately trained person- nel to address the increasingly sophisticated, complex and evolving needs of our clients. In addition, Sykes’ ability to capitalize on our acquisitions will depend on our ability to continually enhance software and services and adapt such software to new hardware and operating system requirements. Any failure by Sykes to anticipate or respond rapidly to technological advances, new products and enhancements, or changes in client requirements could have a material adverse effect on Sykes’ business, financial condition and results of operations. 1 5 Reliance on Technology and Computer Systems Sykes has invested significantly in sophisticated and specialized communications and computer technology and has focused on the application of this technology to meet our clients’ needs. We anticipate that it will be nec- essary to continue to invest in and develop new and enhanced technology on a timely basis to maintain our competitiveness. Significant capital expenditures may be required to keep Sykes’ technology up-to-date. There can be no assurance that any of Sykes’ information systems will be adequate to meet our future needs or that Sykes will be able to incorporate new technology to enhance and develop our existing services. Moreover, investments in technology, including future investments in upgrades and enhancements to software, may not necessarily maintain Sykes’ competitiveness. Sykes’ future success will also depend in part on our ability to anticipate and develop information technology solutions that keep pace with evolving industry standards and changing client demands. Risk of Emergency Interruption of Customer Support Center Operations Sykes’ operations are dependent upon our ability to protect our customer support centers and our information databases against damage that may be caused by fire and other disasters, power failure, telecommunications fail- ures, unauthorized intrusion, computer viruses and other emergencies. The temporary or permanent loss of such systems could have a material adverse effect on Sykes’ business, financial condition and results of operations. Notwithstanding precautions taken to protect Sykes and our clients from events that could interrupt delivery of services, there can be no assurance that a fire, natural disaster, human error, equipment malfunction or inade- quacy, or other event would not result in a prolonged interruption in Sykes’ ability to provide support services to our clients. Such an event could have a material adverse effect on Sykes’ business, financial condition and results of operations. Control By Principal Shareholder and Anti-Takeover Considerations As of March 7, 2003, John H. Sykes, Sykes’ Chairman of the Board and Chief Executive Officer, beneficially owned approximately 39% of Sykes’ outstanding com- mon stock. As a result, Mr. Sykes will have substantial influence in the election of our directors and in determin- ing the outcome of other matters requiring shareholder approval. Sykes’ Board of Directors is divided into three classes serving staggered three-year terms. The staggered Board of Directors and the anti-takeover effects of certain pro- visions contained in the Florida Business Corporation Act and in Sykes’ Articles of Incorporation and Bylaws, including the ability of the Board of Directors of Sykes to issue shares of preferred stock and to fix the rights and preferences of those shares without shareholder approval, may have the effect of delaying, deferring or preventing an unsolicited change in the control of Sykes. This may adversely affect the market price of Sykes’ common stock or the ability of shareholders to participate in a transac- tion in which they might otherwise receive a premium for their shares. Volatility of Stock Price May Result in Loss of Investment The trading price of Sykes’ common stock has been and may continue to be subject to wide fluctuations over short and long periods of time. Sykes believes that market prices of customer management services stocks in gen- eral have experienced volatility, which could affect the market price of Sykes’ common stock regardless of Sykes’ financial results or performance. Sykes further believes that various factors such as general economic conditions, changes or volatility in the financial markets, changing market conditions in the customer management services industry, quarterly variations in Sykes’ financial results, the announcement of acquisitions, strategic partnerships, or new product offerings, and changes in financial esti- mates and recommendations by securities analysts could cause the market price of Sykes’ common stock to fluctu- ate substantially in the future. 1 6 E x e c u t i v e O f f i c e r s o f t h e R e g i s t r a n t The following table provides the names and ages of our executive officers, and the positions and offices currently held by each of them: Name Age Principal Position John H. Sykes W. Michael Kipphut Charles E. Sykes Harry A. Jackson, Jr. Gerry L. Rogers Jenna R. Nelson James T. Holder William N. Rocktoff 66 49 40 50 57 39 44 40 Chairman and Chief Executive Officer Group Executive, Senior Vice President—Finance General Manager, Senior Vice President—Americas General Manager, Senior Vice President—EMEA Group Executive, Senior Vice President—Chief Information Officer Group Executive, Senior Vice President—Human Resources and Administration General Counsel and Corporate Secretary Vice President and Corporate Controller John H. Sykes has held the titles and responsibilities of Chairman and Chief Executive Officer of Sykes since December 1998. He was President of Sykes from inception in 1977 until December 1998. Previously, Mr. Sykes was Senior Vice President of CDI Corporation, a publicly held technical services firm. W. Michael Kipphut, a CPA, joined Sykes in March 2000 as Vice President and Chief Financial Officer and was named Group Executive, Senior Vice President—Finance in June 2001. From September 1998 to February 2000, Mr. Kipphut held the position of Vice President and Chief Financial Officer for USA Floral Products, Inc., a publicly held worldwide perishable products distributor. From September 1994 until September 1998, Mr. Kipphut held the position of Vice President and Treasurer for Spalding & Evenflo Companies, Inc., a global manufacturer of consumer products. Previously, Mr. Kipphut held various financial positions including Vice President and Treasurer in his 17 years at Tyler Corporation, a publicly held diversified holding company. Charles E. Sykes joined Sykes in 1986 and was named General Manager, Senior Vice President—Americas in June 2001. Prior to that, he held the position of Senior Vice President, Marketing since March 2000. In December 1996, Mr. Sykes was appointed Vice President Sales and held the position of Regional Manager of the Midwest Region for Professional Services from 1992 until 1996. Mr. Charles E. Sykes is the son of Mr. John H. Sykes. Harry A. Jackson, Jr. joined Sykes in 1997 and was named General Manager, Senior Vice President—EMEA in June 2001. Before relocating to Europe in 1998 to assume responsibility for the EMEA operations group as Group Vice President of Operations, Mr. Jackson served as a Client Services Director in the U.S. Prior to joining Sykes in 1997, Mr. Jackson held various positions with MCI, Synergetics and Brooks International. Gerry L. Rogers joined Sykes in February 1999 as Group Vice President, North America and was named Group Executive, Senior Vice President—Chief Information Officer in July 2000. From March 2000 until July 2000, Mr. Rogers held the position of Senior Vice President—The Americas. From 1968 to 1999, Mr. Rogers held various management positions with AT&T, a publicly held telecommunications firm, most recently as General Manager for the Business Growth Markets. Jenna R. Nelson joined Sykes in August 1993 and was named Group Executive, Senior Vice President—Human Resources and Administration in July 2001. From January 2001 until July 2001, Ms. Nelson held the position of Group Executive and Vice President, Human Resources. In August 1998, Ms. Nelson was appointed Vice President, Human Resources and held the position of Director, Human Resources and Administration from August 1996 to July 1998. From August 1993 until July 1996, Ms. Nelson served in various management positions within Sykes, including Director of Administration. James T. Holder joined Sykes in December 2000 as General Counsel and was named Corporate Secretary in January 2001. From November 1999 until November 2000, Mr. Holder served in a consulting capacity as Special Counsel to Checkers Drive-In Restaurants, Inc., a publicly held restaurant operator and franchisor. From November 1993 until November 1999, Mr. Holder served in various capacities at Checkers including Corporate Secretary, Chief Financial Officer and Senior Vice President and General Counsel. William N. Rocktoff joined Sykes in August 1997 as Corporate Controller and was named Treasurer and Cor- porate Controller in December 1999 and Vice President and Corporate Controller in March 2002. From November 1989 to August 1997, Mr. Rocktoff held various financial positions, including Corporate Controller at Kimmins Corporation, a publicly held contracting company. 1 7 Item 2. Properties Our principal executive offices are located in Tampa, Florida. This facility currently serves as the headquarters for senior management and the financial, information technology and administrative departments. We believe our existing facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any physical expansion. We operate from time to time in temporary facilities to accommodate growth before new support centers are available. The Bangalore, India facility totaling 24,072 square feet is a temporary facility. Our permanent facility in Bangalore, India with 94,727 square feet is under construction and expected to be ready for occupancy in June 2003. The following table sets forth additional information concerning our facilities: Properties General Usage Square Feet Lease Expiration UNITED STATES LOCATIONS Tampa, Florida Corporate headquarters 67,645 June 2010 Ada, Oklahoma Bismarck, North Dakota Marianna, Florida Palatka, Florida Wise, Virginia Greeley, Colorado Hays, Kansas Klamath Falls, Oregon Manhattan, Kansas Milton-Freewater, Oregon Morganfield, Kentucky Perry County, Kentucky Minot, North Dakota Pikesville, Kentucky Ponca City, Oklahoma Scottsbluff, Nebraska Sterling, Colorado Eveleth, Minnesota Rocklin, California Cary, North Carolina Charlotte, North Carolina Plano, Texas Poughkeepsie, New York St. Louis, Missouri Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center(1) Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center(1) Customer support center Customer support center(1) Office Office Office Office Office Office (1) Closed in connection with our 2002 and 2001 restructuring plans. 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 42,000 34,000 42,000 1,650 3,400 1,850 225 1,000 5,700 Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned Company owned April 2003 March 2006 May 2003 August 2003 January 2004 September 2004 1 8 Properties General Usage INTERNATIONAL LOCATIONS Amsterdam, The Netherlands London, Ontario, Canada Customer support center/Headquarters Customer support center/Headquarters Budapest, Hungary Edinburgh, Scotland LaAurora, Heredia, Costa Rica Customer support center Customer support center/Office Customer support center/Office LaAurora, Heredia, Costa Rica Toronto, Ontario, Canada North Bay, Ontario, Canada Sudbury, Ontario, Canada Moncton, New Brunswick, Canada Turku, Finland Les Ulis, France Bochum, Germany Hannover, Germany Pasewalk, Germany Wilhelmshaven, Germany Bangalore, India Customer support center Customer support center Customer support center (2) Customer support center (2) Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support centers (two) Customer support center Makati City, The Philippines Customer support center Mandaluyong, The Philippines Mandaue City, The Philippines Johannesburg, South Africa Ed, Sweden Sveg, Sweden Istanbul, Turkey Shanghai, The Peoples Republic of China Prato, Italy Shannon, Ireland Lugo, Spain Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Customer support center Square Feet 70,500 45,000 15,700 55,000 61,000 10,764 99,600 14,600 5,371 2,048 8,200 12,500 36,200 37,780 12,500 41,900 36,800 24,700 94,727 24,072 90,300 51,500 50,500 13,500 12,500 44,000 35,100 20,700 24,763 32,300 66,000 27,703 Lease Expiration July 2004 Company owned June 2005 September 2019 December 2006 February 2004 September 2023 December 2006 March 2004 December 2007 December 2006 February 2005 February 2004 July 2004 November 2003 March 2007 March 2009 April 2003 May 2006 January 2004 December 2005 February 2023 March 2005 February 2023 February 2006 October 2009 July 2008 June 2003 October 2005 June 2012 April 2013 June 2005 Galashiels, Scotland Upplands Vasby, Sweden Distribution center Distribution center and Sales office 126,700 23,498 Company owned October 2004 Sudbury, Ontario, Canada Vancouver, British Columbia, Sales office Sales office Canada 2,048 400 December 2007 Monthly London, Ontario, Canada Sales Office 4,000 October 2006 (2) Considered part of the Toronto, Ontario, Canada customer support center. 1 9 Item 3. Legal Proceedings A . C l a s s A c t i o n a n d D e r i v a t i v e A c t i o n L i t i g a t i o n During 2002, a consolidated class action lawsuit against Sykes was pending in the United States District Court for the Middle District of Florida, Tampa Division, captioned: In re Sykes Enterprises, Inc. Securities Litigation (hereinafter the “Class Action Litigation”). The plaintiffs purported to assert claims on behalf of a class of purchasers of Sykes’ common stock during the period from July 27, 1998 through September 18, 2000. The consolidated action claimed violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Among other things, the consolidated action alleged that during 2000, 1999 and 1998, Sykes and certain of its officers made materi- ally false statements concerning Sykes’ financial condi- tion and its future prospects. The consolidated complaint also claimed that certain of Sykes’ quarterly financial statements during 1999 and 1998 were not prepared in accordance with accounting principles generally accepted in the United States of America. The consoli- dated action sought compensatory and other damages, and costs and expenses associated with the litigation. Although we denied the plaintiff’s allegations and defended the action vigorously, due to the extremely high costs and risks of litigation, as well as the drain on our time and attention, we agreed to a settlement of the Class Action Litigation with the plaintiffs. The settlement resulted in a cash payment of $30.0 million. Insurance amounts, after payment of litigation expenses, covered $16.6 million of the settlement and we paid the remain- ing amount of $13.4 million. We recorded a $13.8 mil- lion charge for the uninsured portion of the Class Action Litigation settlement and associated legal costs during the third quarter of 2002. The settlement was approved by the court and the Class Action Litigation was dismissed on March 7, 2003. During 2002, two shareholder derivative lawsuits were pending in the Hillsborough County, Florida, Circuit Court against certain current and former members of Sykes’ Board of Directors and officers. These suits were captioned Clarence S. Gurerra v. Sykes Enterprises, Incor- porated, et. al., and James Bunde v. Sykes Enterprises, Incorporated, et. al. While Sykes was a nominal defen- dant in these suits, both were purportedly instituted by shareholders of Sykes on Sykes’ behalf, and no damages or other relief were sought from Sykes. Both suits alleged breach of fiduciary duties and mismanagement by the defendant directors and officers arising out of the facts and circumstances alleged in the Class Action Litigation. The Bunde lawsuit also named Ernst & Young LLP, our former accountants, as a defendant and alleges breach of contract and negligence by Ernst & Young LLP arising out of the facts and circumstances alleged in the Class Action Litigation. The suits sought, on behalf of Sykes, disgorge- ment of profits allegedly made by certain officers and directors through the sale of Sykes’ stock while in posses- sion of inside information and other unspecified damages and relief. The Board of Directors established a Special Committee to investigate the allegations made in the derivative suits. During the investigation, a motion was pending in the Gurerra case to continue a stay of the pro- ceedings pending the completion of the investigation of the claims made in the complaints by the Special Committee. The Special Committee completed its investi- gation related to the Gurerra case in October 2002, and determined that the Gurerra case should be dismissed. As a result of that finding, we filed a motion with the court seeking to have the Gurerra case terminated, which motion is pending. There can be no assurance this motion will be granted. The plaintiffs voluntarily dismissed the Bunde case in February 2003. 2 0 B . O t h e r L i t i g a t i o n Sykes from time to time is involved in legal actions arising in the ordinary course of business. With respect to these matters, we believe we have adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on our future financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of the year covered by this report. P A R T I I Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters Sykes’ common stock is quoted on the NASDAQ National Market under the symbol SYKE. The following table sets forth, for the periods indicated, certain information as to the high and low sale prices per share of Sykes’ common stock as quoted on the NASDAQ National Market. High Low Year ended December 31, 2002: First Quarter........................................ Second Quarter ................................... Third Quarter ...................................... Fourth Quarter .................................... Year ended December 31, 2001: First Quarter......................................... Second Quarter.................................... Third Quarter ....................................... Fourth Quarter ..................................... $11.20 11.00 8.00 4.93 $ 5.94 11.10 13.47 12.00 $6.54 7.23 4.14 2.75 $4.31 4.75 5.24 5.58 Holders of Sykes’ common stock are entitled to receive dividends out of the funds legally available when and if declared by the Board of Directors. Sykes has not declared or paid any cash dividends on its common stock in the past and does not anticipate paying any cash divi- dends in the foreseeable future. In addition, the Company’s credit facilities contain substantial restrictions on the pay- ment of cash dividends. Information concerning securities authorized for issuance under equity compensation plans is incorpo- rated by reference to Sykes’ Proxy Statement for the 2003 Annual Meeting of Shareholders. As of March 7, 2003, there were approximately 930 holders of record of the common stock. The Company believes that there were approximately 8,700 beneficial owners of its common stock. 2 1 Item 6. Selected Financial Data S e l e c t e d F i n a n c i a l D a t a The following selected financial data has been derived from Sykes’ consolidated financial statements. The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Sykes’ Consolidated Financial Statements and related notes. (In thousands, except per share data) 2002 Years Ended December 31, 2000 1999 2001 1998 INCOME STATEMENT DATA: Revenues .................................................................. Income (loss) from operations(2,5,7,8) ........................... Net income (loss)(2,3,4,5,6,7,8,9) ....................................... Net income (loss) per basic share(2,3,4,5,6,7,8,9) ............... Net income (loss) per diluted share(2,3,4,5,6,7,8,9) ............ PRO FORMA INFORMATION ASSUMING ACCOUNTING CHANGE IS APPLIED RETROACTIVELY (1): Revenues .................................................................. Income (loss) from operations(2,5,7,8) ........................... Net income (loss)(2,3,4,5,6,7,8,9) ....................................... Net income (loss) per basic share(2,3,4,5,6,7,8,9) ............... Net income (loss) per diluted share(2,3,4,5,6,7,8,9) ............ BALANCE SHEET DATA: Working capital ........................................................ Total assets ............................................................... Long-term debt, less current installments.................. Shareholders’ equity ................................................. $452,737 (12,240) (18,631) (0.46) (0.46) $496,722 135 409 0.01 0.01 $603,606 (12,308) 46,787 1.13 1.13 $572,742 37,037 20,534 0.49 0.48 $460,102 31,414 1,656 0.04 0.04 $452,737 (12,240) (18,631) (0.46) (0.46) $101,115 295,544 — 182,345 $496,722 135 409 0.01 0.01 $603,606 (12,308) 47,706 1.15 1.15 $571,243 35,538 19,615 0.47 0.46 $460,102 31,414 1,656 0.04 0.04 $ 96,547 309,780 — 191,212 $ 92,964 357,954 8,759 195,892 $ 93,075 420,732 80,053 193,233 $ 84,632 362,270 75,448 158,316 (1) Effective January 1, 2000, we changed our policy regarding the recognition of revenue based on criteria established by Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). (2) The amounts for 2002 include $20.8 million of restructuring and other charges and $1.5 million of charges associated with the impairment of long-lived assets. (3) The amounts for 2002 include $13.8 million of charges associated with the litigation settlement and a $1.6 million gain on sale of facilities. (4) The amounts for 2001 include $14.6 million of restructuring and other charges and $1.5 million of charges associated with the impairment of long-lived assets. (5) The amounts for 2000 include $7.8 million of compensation expense related to payments made to certain SHPS, Incorporated (“SHPS”) option holders as part of the sale of a 93.5% ownership interest in SHPS that occurred on June 30, 2000 and $30.5 million of restructuring and other charges. (6) The amounts for 2000 include an $84.0 million gain from the sale of a 93.5% ownership interest in SHPS that occurred on June 30, 2000 and a gain of $0.7 million related to the sale of a small Canadian operation that sold roadside assistance memberships for which Sykes provides customer support and $38.3 million of special charges as identified in note (5) above. (7) The amounts for 1999 include $6.0 million of charges associated with the impairment of long-lived assets. (8) The amounts for 1998 include $0.5 million of expense associated with accrued severance costs, $1.4 million of merger and related charges associated with acquisitions and $14.5 million of acquisition related in-process research and development costs. (9) The amounts for 1998 include $3.9 million of acquisition related in-process research and development costs incurred by a joint venture entity, $7.3 million of charges associated with the write-down of marketable securities and $16.4 million of special charges as identified in note (8) above. 2 2 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following should be read in conjunction with the Consolidated Financial Statements and the notes thereto that appear elsewhere in this document. The following discussion and analysis compares the year ended December 31, 2002 (“2002”) to the year ended December 31, 2001 (“2001”), and 2001 to the year ended December 31, 2000 (“2000”). The following discussion and analysis and other sec- tions of this document contain forward-looking state- ments that involve risks and uncertainties. Words such as “may,” “expects,” “projects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to iden- tify such forward-looking statements. Similarly, state- ments that describe our future plans, objectives, or goals also are forward-looking statements. Future events and actual results could differ materially from the results reflected in these forward-looking statements, as a result of certain of the factors set forth below and elsewhere in this analysis and in this Form 10-K for the year ended December 31, 2002 in Item 1 in the section entitled “Factors Influencing Future Results and Accuracy of Forward-Looking Statements.” O v e r v i e w We derive our revenue from providing primarily inbound outsourced customer management solutions and services. We provide customer support outsourcing with an emphasis on inbound technical support and customer service, delivered through multiple communication channels encompassing phone, e-mail, web and chat. Revenue from technical support and customer service, provided through our support centers, is recognized as services are rendered. These services are billed on an amount per e-mail, a fee per call, a rate per minute or on a time and material basis. Revenue from fulfillment serv- ices is generally billed on a per unit basis. We also provide a range of enterprise support services for companies’ internal support operations including technical staffing services and outsourced corporate help desk solutions. Revenues usually are billed on a time and material basis, generally by the hour, and revenues generally are recognized as the services are provided. Revenues from fixed price contracts, generally with terms of less than one year, are recognized using the percent- age-of-completion method. A significant majority of our revenue is derived from non-fixed price contracts. We have not experienced material losses due to fixed price contracts and do not anticipate a significant increase in revenue derived from such contracts in the future. Direct salaries and related costs include direct person- nel compensation, statutory and other benefits associated with such personnel and other direct costs associated with providing services to customers. General and administrative expenses include administrative, sales and marketing, occupancy, depreciation and amortization, and other costs. Restructuring and other charges consist of the following: 2002 charges of $20.8 million related to the closure and consolidation of two U.S. and three European customer support centers, capacity reductions within the European fulfillment operations, the write-off of certain assets, lease termination and severance and related costs; 2001 charges of $14.6 million related to the closure and consolidation of two U.S. customer support centers, two U.S. technical staffing offices and one European fulfillment center, the elimination of redun- dant property, leasehold improvements and equipment and lease termination and severance and related costs; and 2000 charges of $30.5 million related to the closure of the U.S. fulfillment operations and the Tampa, Florida technical support center, the elimination of the world- wide translation and localization businesses, the closure or consolidation of six of our technical staffing offices, the elimination of redundant property, leasehold improve- ments and equipment and lease termination and sever- ance and related costs. Impairment of long-lived assets charges of $1.5 million in each of 2002 and 2001 consist of the following: 2002 charges related to the write-off of certain intangible assets associated with a customer support agreement for which the level of call volumes fell below anticipated levels and the 2001 charges related to the write-off of certain non- performing assets, including software and equipment no longer used by Sykes. Other income (expense) consists primarily of interest expense, net of interest income, foreign currency transac- tion gains and losses, the $84.0 million gain on sale of 93.5% of our equity interest in SHPS in June 2000, the $1.6 million net gain on sale of facilities in September 2002 and a $13.8 million charge for the uninsured por- tion of the litigation settlement and associated legal costs in September 2002. Foreign currency transaction gains and losses generally result from exchange rate fluctua- tions on intercompany transactions. Recognition of income associated with grants from local or state governments of land and the acquisition of property, buildings and equipment is deferred and recog- nized as a reduction of depreciation expense included within general and administrative costs over the corre- sponding useful lives of the related assets. Amounts received in excess of the cost of the building are 2 3 allocated to equipment and, only after the grants are released from escrow, recognized as a reduction of depreciation expense over the weighted average useful life of the related equipment, which approximates five years. Deferred property and equipment grants, net of amortization, totaled $35.1 million and $39.5 million at December 31, 2002 and 2001, respectively. The Company’s effective tax rate for the periods presented reflects the effects of foreign taxes, net of foreign income not taxed in the United States, non- deductible expenses for income tax purposes and a tax basis difference on the sale of an equity interest in SHPS during 2000. R e s u l t s o f O p e r a t i o n s The following table sets forth for the periods indicated the percentage of revenues represented by certain items reflected in our statements of operations: Years Ended December 31, 2000 2001 2002 100.0% 100.0% 100.0% 63.4 34.4 63.4 33.3 63.3 32.4 PERCENTAGES OF REVENUES: Revenues ............................. Direct salaries and related costs..................... General and administrative... Compensation expense associated with exercise of options ........... Restructuring and other charges ................... Impairment of long-lived assets............... Income (loss) from — 4.6 0.3 operations ........................ Other income (expense)(1) .... (2.7) (2.7) Income (loss) before pro- vision (benefit) for income taxes and cumulative effect of change in accounting principle ........ Provision (benefit) for (5.4) income taxes.................... (1.3) Income (loss) before cumula- tive effect of change in accounting principle ........ Cumulative effect of change in accounting principle.... (4.1) — — 2.9 0.3 0.1 — 0.1 — 0.1 — 1.3 5.0 — (2.0) 13.4 11.4 3.5 7.9 (0.2) Net income (loss)......... (4.1)% 0.1% 7.7% (1) Includes gain on sale of a 93.5% ownership interest in SHPS of 13.9% in 2000 and litigation settlement of 3.1% in 2002. 2 4 2 0 0 2 C o m p a r e d t o 2 0 0 1 Revenues During 2002, we recorded consolidated revenues of $452.7 million, a decrease of $44.0 million or 8.9%, from $496.7 million of consolidated revenues for 2001. Exclusive of the remaining results of operations from those businesses we exited in connection with the fourth quarter 2000 restructuring, including U.S. fulfillment and distribution operations, revenues decreased $43.3 mil- lion or 8.7% for 2002 from $496.0 million for 2001. On a geographic segmentation, revenues from the Americas region, including the United States, Canada, Latin America, India and the Asia Pacific Rim, repre- sented 66.1%, or $299.2 million for 2002 compared to 66.0%, or $327.5 million, exclusive of U.S. fulfillment and distribution operations for 2001. Revenues from the EMEA region, including Europe, the Middle East and Africa, represented 33.9%, or $153.5 million for 2002 compared to 34.0%, or $168.5 million for 2001. The decrease in Americas’ revenue of $28.3 million, or 8.6%, for 2002 was primarily attributable to the overall reduction in client call volumes resulting from the eco- nomic downturn and the phasing out of an original equipment manufacturer (“OEM”) technology client on June 1, 2002. This decrease was partially offset by an increase in our revenues from our operations in offshore markets, including India, the Asia Pacific Rim and Costa Rica operations. These offshore operations represented over 9.4% of consolidated revenues for 2002 compared to 4.9% for 2001, exclusive of U.S. fulfillment and distribution operations. As our offshore business grows and becomes a larger percentage of revenues, the total revenue and revenue growth rate may decline since the average revenue per seat generated offshore is less than it is in the United States and Europe. Although the average offshore revenue per seat is less than it is in the United States and Europe, the lower average revenue is somewhat offset by higher operating margins in the off- shore operations. The decrease in EMEA’s revenue of $15.0 million, or 8.9%, for 2002 was primarily related to the loss of a dot.com client that filed for bankruptcy in 2001 as well as a decline in client volumes affected by the economic downturn in both customer support and fulfillment serv- ices. This decrease was partially offset by the strengthen- ing Euro, which positively impacted revenues for 2002 by approximately $7.8 million compared to the Euro in 2001. Direct Salaries and Related Costs Direct salaries and related costs decreased $28.0 mil- lion or 8.9% to $287.1 million for 2002, from $315.1 million in 2001. As a percentage of revenues, direct salaries and related costs remained unchanged at 63.4% in each of 2002 and 2001. Exclusive of U.S. fulfillment operations, direct salaries and related costs, as a per- centage of revenues, decreased to 63.4% in 2002 from 63.5% for 2001. General and Administrative General and administrative expenses decreased $9.8 million or 6.0% to $155.6 million for 2002, from $165.4 million in 2001. As a percentage of revenues, general and administrative expenses increased to 34.4% in 2002 from 33.3% for 2001. The decrease in the dollar amount of general and administrative expenses was attributable to a $4.9 million decrease in salaries and benefits related to reductions in certain administrative and operating personnel, a $0.6 million decrease in net depreciation expense related principally to the Company’s elimination of certain under-performing operations and goodwill amortization, a $2.8 million decrease in telephone costs, a $0.4 million decrease in general and administrative expenses associated with U.S. fulfillment operations eliminated in 2001, a $0.6 million decrease in bad debt expense, a $1.3 million decrease in consulting costs, a $0.7 million decrease in legal and professional fees and a $4.6 million decrease in other general and administrative expenses. These decreases were partially offset by a $6.1 million increase in rent, equipment rental and utilities costs, principally related to offshore expansion and new sites in India, Italy, Finland and Spain. Although the strengthening Euro positively impacted revenues, it nega- tively impacted the general and administrative expenses for 2002 by approximately $4.6 million compared to the Euro in 2001. Restructuring and Other Charges We recorded restructuring and other charges of $20.8 million and $14.6 million during 2002 and 2001, respec- tively. The 2002 charges included the write-off of certain assets, lease terminations and severance costs, related to the closure and consolidation of two U.S. and three European customer support centers, capacity reductions within the European fulfillment operations and the elimi- nation of specialized e-commerce assets primarily in response to the October 2002 notification of the contrac- tual expiration of two technology client programs in March 2003 with approximate annual revenues of $25.0 million. The restructuring plan was designed to reduce costs and bring the Company’s infrastructure in-line with the current business environment. In connection with the 2002 restructuring, we recorded additional depreciation expense of $1.2 million in 2002 related to a specialized technology platform which will no longer be utilized upon the expiration of the previously mentioned client contracts in March 2003. We also reduced the number of employees by 470 during 2002 and plan to reduce the number of employees by an additional 330 by the end of April 2003. We estimate the 2002 restructuring may achieve up to approximately $6.0 million in annualized savings related to the closed operations. The 2001 charges included the closure and consoli- dation of two U.S. customer support centers, two U.S. technical staffing offices and one European fulfillment center; the elimination of redundant property, leasehold improvements and equipment; lease termination costs associated with vacated properties and equipment; and severance and related costs. In connection with the 2001 restructuring, we reduced the number of employees by 230 during 2002. Impairment of Long-Lived Assets We recorded an impairment of long-lived assets of $1.5 million during each of 2002 and 2001. The 2002 impairment charge related to the write-off of certain intangible assets associated with a customer support agreement for which the level of call volumes fell below anticipated levels. The 2001 impairment charge related to the write-off of certain non-performing assets, including software and equipment no longer used by Sykes. Other Income and Expense Other expense was $12.2 million for 2002, compared to other income of $0.1 million during 2001. The increase of $12.3 million in other expense was primarily attributa- ble to a $13.8 million charge for the uninsured portion of the class action litigation settlement offset by a $1.6 mil- lion net gain on the sale of facilities. Benefit for Income Taxes The benefit for income taxes increased $5.6 million to $5.8 million for 2002 from $0.2 million for 2001. This increase was primarily attributable to the increase in the loss for 2002 and a decrease in the effective tax rate as the result of shifts in our mix of earnings within tax juris- dictions and the tax benefits associated with the imple- mentation of findings from a strategic tax review initiated during 2001. The benefit for income taxes differs from the expected benefit for income taxes, when applying the statutory federal income tax rate, primarily due to the beneficial effects of the disposition of a foreign subsidiary in 2001, the effects of foreign, state and local income taxes, foreign income not subject to federal and state income taxes, valuations on net operating loss carry- forwards and foreign asset basis step up, non-deductible intangibles and other permanent differences. 2 5 Net Income (Loss) As a result of the foregoing, we experienced a loss from operations for 2002 of $12.3 million compared to income from operations of $0.1 million for 2001, a change of $12.4 million. This change was principally attributable to a $44.0 million decrease in revenues, a $6.2 million increase in restructuring and other charges offset by a $28.0 million decrease in direct salaries and related costs and a $9.8 million decrease in general and administrative costs, as previously discussed. The $12.3 million loss from operations and the $13.8 million litigation settlement which was partially offset by the $1.6 million net gain on sale of facilities and a $5.8 mil- lion benefit for income taxes resulted in a net loss of $18.6 million for 2002 compared to net income of $0.4 million 2001. 2 0 0 1 C o m p a r e d t o 2 0 0 0 Revenues During 2001, we recorded consolidated revenues of $496.7 million, a decrease of $106.9 million or 17.7%, from $603.6 million of consolidated revenues for the comparable period during 2000. Exclusive of SHPS, in which 93.5% of Sykes’ ownership interest was sold on June 30, 2000, and exclusive of U.S. fulfillment and the worldwide localization operations, from which we exited in connection with the fourth quarter 2000 restructuring, revenues decreased $39.3 million or 7.3% for 2001 to $496.0 million, from $535.3 million for the comparable period during 2000. On a geographic segmentation, this decrease in revenue was the result of a $12.1 million or 3.6% decrease in the Americas’ revenues, exclusive of SHPS and U.S. fulfillment operations, and a decrease of $27.2 million or 13.9% from EMEA’s revenues, exclusive of the worldwide localization operations. The decrease in the Americas’ revenues for 2001 was primarily attributable to continued delays in new sales due to cautious spending decisions and reductions in clients and client volumes as a result of the economic slowdown and our decision to unwind certain relation- ships with high-risk dot.com companies. Our revenues were also affected by competitive pricing pressures and a decline in the demand for consultative professional serv- ices, including technical staffing, from clients who have been affected by the economic slowdown and have reacted by delaying technical projects and a $3.5 million one-time licensing fee recorded during the comparable period in 2000. The decrease in EMEA’s revenues for 2001 was prima- rily due to continued declines in European fulfillment revenues due to lower overall demand and cutbacks from clients that are challenged by the current economic and market environment. Direct Salaries and Related Costs Direct salaries and related costs decreased $67.1 mil- lion or 17.6% to $315.1 million for 2001, from $382.2 million in 2000. As a percentage of revenues (excluding the $3.5 million one-time licensing fee in 2000), direct salaries and related costs decreased slightly to 63.4% in 2001 from 63.7% for the comparable period in 2000. The decrease in direct salaries and related costs was pri- marily attributable to a $49.5 million decrease in direct salaries and related costs associated with SHPS, U.S. ful- fillment and the worldwide localization operations and an $8.5 million decrease in direct material costs asso- ciated primarily with the European fulfillment services. As a percentage of revenues (excluding the $3.5 million one-time licensing fee in 2000), direct salaries and related costs, exclusive of SHPS, U.S. fulfillment and the worldwide localization operations, increased to 63.5% in 2001 from 62.5% for the comparable period in 2000. General and Administrative General and administrative expenses decreased $30.0 million or 15.4% to $165.4 million for 2001, from $195.4 million in 2000. As a percentage of revenues (excluding the $3.5 million one-time licensing fee in 2000), general and administrative expenses increased to 33.3% in 2001 from 32.6% for the comparable period in 2000. The decrease in the dollar amount of general and administrative expenses was primarily attributable to a $28.2 million decrease in general and administrative expenses associated with SHPS, U.S. fulfillment and the worldwide localization operations, a $2.6 million decrease in telephone expense and a $4.7 million decrease in bad debt expense offset by a $3.9 million increase in depreciation and amortization associated with facility and capital equipment expenditures incurred in connec- tion with both technology infrastructure and the expan- sion of our technical and customer support centers. As a percentage of revenues (excluding the $3.5 million one- time licensing fee in 2000), general and administrative expenses, exclusive of SHPS, U.S. fulfillment and the worldwide localization operations, increased to 33.3% in 2001 from 32.8% for the comparable period in 2000. 2 6 Compensation Expense Income Taxes The benefit for income taxes was $0.2 million for 2001, compared to a provision for income taxes of $21.2 mil- lion for 2000. The decrease of $21.4 million in the provi- sion (benefit) for income taxes was primarily attributable to the decrease in income for 2001 (as the comparable period in 2000 included the gain on sale of SHPS), shifts in our mix of earnings within tax jurisdictions and the tax benefit associated with the disposition of a foreign sub- sidiary initiated during the third quarter of 2001. The pro- vision (benefit) for income taxes differs from the expected provision (benefit) for income taxes, when applying the statutory federal income tax rate, primarily due to the beneficial effects of the disposition of a foreign sub- sidiary, the effects of foreign, state and local income taxes, foreign income not subject to federal and state income taxes, valuations on net operating loss carryfor- wards and foreign asset basis step up, non-deductible intangibles and other permanent differences. Net Income As a result of the foregoing, we recognized income from operations for 2001 of $0.1 million compared to a loss from operations of $12.3 million for 2000, a change of $12.4 million. This change was principally attributable to a $106.9 million decrease in revenues and a $1.5 mil- lion increase in impairment of long-lived assets offset by a $67.1 million decrease in direct salaries and related costs, a $30.0 million decrease in general and adminis- trative costs, a $7.8 million decrease in compensation expense associated with exercise of options and a $15.9 million decrease in restructuring and other changes as previously discussed. Income from operations of $0.1 million, other income of $0.1 million and a $0.2 million benefit from income taxes resulted in net income of $0.4 million for 2001 compared to net income of $46.8 million in 2000. Compensation expense associated with the exercise of options was $7.8 million for 2000 (none in 2001). The charge in 2000 related to payments made to certain SHPS’ option holders as part of the sale of a 93.5% own- ership interest in SHPS that occurred on June 30, 2000. Restructuring and Other Charges We recorded restructuring and other charges of $14.6 million and $30.5 million during 2001 and 2000, respec- tively. The 2001 charges included the closure and consol- idation of two U.S. customer support centers, two U.S. technical staffing offices and one European fulfillment center; the elimination of redundant property, leasehold improvements and equipment; lease termination costs associated with vacated properties and equipment; and severance and related costs. The 2000 charges included the closure of our U.S. fulfillment operations and the Tampa, Florida technical support center and the elimina- tion of the worldwide translation and localization busi- ness; the closure or consolidation of six of our technical staffing offices; elimination of redundant property, lease- hold improvements and equipment; lease termination costs associated with vacated properties and equipment; and severance and related costs. Impairment of Long-Lived Assets We recorded an impairment charge of $1.5 million during 2001 related to the write-off of certain non- performing assets, including software and equipment no longer used by Sykes. Other Income and Expense Other income was $0.1 million during 2001 com- pared to other expense of $2.8 million during 2000, exclusive of the gain on the sale of SHPS of $84.0 mil- lion. This decrease was attributable to a decrease of $3.4 million in interest expense associated with a decrease in our average outstanding debt position. Our average out- standing debt balance for 2001 was $1.4 million com- pared to $54.4 million for 2000. The decrease in the average debt balance is principally due to the repayment of debt from net cash flows provided by operating activi- ties and the proceeds generated from the sale of SHPS. On June 30, 2000, we sold 93.5% of our ownership interest in SHPS for $165.5 million cash. The sale of SHPS resulted in a gain for financial accounting purposes of $84.0 million ($59.9 million net of taxes) in 2000. 2 7 Q u a r t e r l y R e s u l t s The following information presents our unaudited quarterly operating results for 2002 and 2001. The data has been prepared on a basis consistent with the Consolidated Financial Statements included elsewhere in this Form 10-K, and include all adjustments, consisting of normal recurring accruals that we consider necessary for a fair presentation thereof. (In thousands, except per share data) 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01 Revenues........................................................... $113,507 $109,658 $112,829 $116,743 $120,307 $112,742 $123,252 $140,421 88,712 Direct salaries and related costs ........................ 43,247 General and administrative................................ — Restructuring and other charges(1) ...................... — Impairment of long-lived assets(2) ....................... 76,670 41,431 14,600 1,480 74,353 40,554 20,814 1,475 69,910 37,585 — — 78,413 40,193 — — 70,156 38,033 — — 71,323 40,518 — — 72,722 39,375 — — Income (loss) from operations............................ Other income (expense)(3).................................. (23,689) 344 2,163 (12,269) 4,640 (369) 4,646 88 (13,874) 114 901 139 4,646 158 8,462 (360) Income (loss) before provision (benefit) for income taxes ................................................. Provision (benefit) for income taxes................... (23,345) (5,441) (10,106) (3,436) 4,271 1,547 4,734 1,515 (13,760) (4,412) 1,040 (667) 4,804 1,777 8,102 3,079 Net income (loss) .............................................. $ (17,904) $ (6,670) $ 2,724 $ 3,219 $ (9,348) $ 1,707 $ 3,027 $ 5,023 Net income (loss) per basic share(4).................... $ (0.44) $ (0.17) $ 0.07 $ 0.08 $ (0.23) $ 0.04 $ 0.08 $ 0.13 Total weighted average basic shares .................. 40,396 40,411 40,432 40,346 40,242 40,175 40,164 40,137 Net income (loss) per diluted share(4)................. $ (0.44) $ (0.17) $ 0.07 $ 0.08 $ (0.23) $ 0.04 $ 0.07 $ 0.12 Total weighted average diluted shares ............... 40,396 40,411 40,772 40,633 40,242 40,520 40,463 40,251 (1) The quarter ended December 31, 2002 includes restructuring and other charges of $20.8 million related to the closure and consolidation of two U.S. and three European customer support centers, capacity reductions within the European fulfillment operations, the write-off of certain assets, lease termination and severance and related costs. The quarter ended December 31, 2001 includes restructuring and other charges of $14.6 million related to the closure and consolidation of two U.S. customer support centers, two U.S. technical staffing offices, one European fulfillment center, the elimination of redundant property, leasehold improvements and equipment, lease termination and severance and related costs. (2) The quarter ended December 31, 2002 includes impairment of long-lived assets of $1.5 million for certain intangible assets associated with a customer support agreement for which the level of call volumes fell below anticipated levels. The quarter ended December 31, 2001 includes impairment of long-lived assets of $1.5 million in connection with the 2001 restructuring plan related to the write-off of certain non-performing assets, including software and equipment no longer used by Sykes. (3) The quarter ended September 30, 2002 includes the $13.8 million charge for the uninsured portion of the Class Action Litigation settlement offset by a $1.6 million net gain on sale of facilities. (4) Net income (loss) per basic and diluted share are computed independently for each of the quarters presented and therefore may not sum to the total for the year. L i q u i d i t y a n d C a p i t a l R e s o u r c e s Our primary sources of liquidity are cash flows gen- erated by operating activities and from available borrow- ings under our credit facilities. We have utilized our capital resources to make capital expenditures associated primarily with our technical and customer support serv- ices, invest in technology applications and tools to further develop our service offerings and for working capital and other general corporate purposes. In future periods, we intend similar uses of these funds. During the fourth quarter of 2002, we paid $13.4 mil- lion for the $13.8 million uninsured portion of the Class Action Litigation settlement and will pay approximately $10.0 million to $12.0 million (which has been accrued for in 2002) through the first half of 2003 in connection with the 2002 restructuring plan to close and consolidate several customer support centers in the United States and Europe. We may also use capital resources to fund possi- ble acquisitions and repurchase common stock in the open market. On August 5, 2002, we announced that our Board of Directors authorized the repurchase of up to three million shares of our outstanding common stock. The shares of common stock will be purchased, from time to time, through open market purchases or in nego- tiated private transactions, and the purchases will be based on factors such as, including but not limited to, the stock price and general market conditions. The amend- ment to our revolving credit facility, which was effective as of September 30, 2002 (see Note 10 “Long-Term Debt”), limits the dollar amount of stock that we may 2 8 repurchase to no more than $5.0 million and the amount of cash we may spend in making acquisitions. At December 31, 2002, we have repurchased 99,000 com- mon shares under the 2002 repurchase program at prices ranging from $3.15 to $6.75 per share for a total cost of $0.6 million. In 2002, we generated $43.3 million in cash from operating activities, $2.2 million in funds from the sale of facilities, property and equipment and $1.0 million in funds from issuance of stock to provide a $29.5 million increase in available cash (net of the effects of interna- tional currency exchange rates on cash of $5.6 million), used $20.2 million in funds for investments in capital expenditures and $1.9 million for acquisition of intan- gible assets and purchased $0.6 million of stock in the open market. Net cash flows provided by operating activities for 2002 were $43.3 million compared to $60.7 million for 2001. The $17.4 million decrease in net cash flows provided by operating activities was due to a decrease in net income of $19.0 million and a net decrease in assets and liabilities of $3.3 million offset by a net increase in non-cash expenses of $4.9 million. The net decrease in assets and liabilities of $3.3 million was due to a $24.6 million decrease in receivables (primarily due to a decrease in revenues and concentrated efforts to reduce trade days sales outstanding), a decrease of $2.2 million in other assets offset by an increase in income taxes receivable of $14.1 million (primarily due to increases in refunds due on carry back of net operating losses), an increase in deferred revenue of $2.8 million and an increase in accounts payable and other accrued accounts of $6.6 million. Capital expenditures, which are generally funded by cash generated from operating activities and borrowings available under our credit facilities, were $20.2 million for 2002 compared to $39.1 million for 2001, a decline of $18.9 million. In 2002, approximately 81.5% of the capital expenditures were the result of investing in new and existing customer support centers, primarily offshore, and 18.5% was expended primarily for systems infra- structure. In 2003, we anticipate capital expenditures in the range of $20.0 million to $25.0 million. The primary sources of cash flows from financing activities are from borrowings under our credit facility. We amended our revolving credit facility with a group of lenders (the “Amended Credit Facility”), effective as of September 30, 2002, as a result of a $13.8 million charge for the uninsured portion of the class action litigation set- tlement in the third quarter of 2002 (see Note 15 “Commitments and Contingencies”). According to the terms of the Amended Credit Facility, the amount of the revolving credit facility was reduced, at our request, from $60.0 million to a maximum of $40.0 million, subject to certain borrowing limitations. The $40.0 million revolv- ing credit facility includes a $10.0 million swingline sub- facility, a $15.0 million letter of credit subfacility and a $25.0 million multi-currency subfacility. Borrowings under the Amended Credit Facility are restricted to 85% of eligible accounts receivable. Terms of the amendment increased the interest rate 25-basis points to 50-basis points depending on debt levels, reduced the maximum judgment limitation to $2.5 mil- lion (previously $5.0 million) and other unsecured indebtedness to $2.0 million (previously $10.0 million), required cash and cash equivalents of $40.0 million and minimum eligible accounts receivable of $23.8 million and further limited certain investments and capital expenditures. The Amended Credit Facility, which includes certain financial covenants, may be used to provide for working capital and general corporate purposes and to fund future acquisitions. The Amended Credit Facility accrues inter- est, at our option, at (a) the lender’s base rate plus an applicable margin up to 1.5%, (b) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin up to 2.5%, or (c) the Interbank Offered Rate (“IBOR”) plus an applicable margin up to 2.5%, that varies with our debt levels and certain financial ratios. In addition, a commit- ment fee of up to 0.75% is charged on the unused por- tion of the Amended Credit Facility on a quarterly basis. The borrowings under the Amended Credit Facility, which terminates May 31, 2005, are guaranteed by a pledge of all of the common stock of each of our material domestic subsidiaries and 65% of the stock of each of our material direct foreign subsidiaries. The Amended Credit Facility prohibits, without the consent of the lenders, Sykes from incurring additional indebtedness, limits cer- tain investment advances or loans and restricts substan- tial asset sales, capital expenditures, stock repurchases and dividends. There were no outstanding balances on the Amended Credit Facility as of December 31, 2002. At December 31, 2002, we were in compliance with all loan requirements of the Amended Credit Facility. At December 31, 2002, we had $79.5 million in cash and approximately $23.8 million of availability under the Amended Credit Facility. Approximately $64.4 million of our cash balances at December 31, 2002 were held in international operations and may be subject to additional taxes if repatriated to the United States. We believe that our current cash levels, accessible funds under our credit facilities and cash flows from future operations will be adequate to meet anticipated working capital needs, future debt repayment require- ments (if any), continued expansion objectives and anticipated levels of capital expenditures for the fore- seeable future. 2 9 The following summarizes our contractual cash obligations at December 31, 2002, and the effect these obligations are expected to have on liquidity and cash flow in future periods. (In thousands) Total Less Than 1 Year 1–3 Years 4–5 Years After 5 Years CONTRACTUAL CASH OBLIGATIONS: Capital lease obligations ...................................................... Operating leases................................................................... Unconditional purchase obligations ..................................... $ 52 77,235 1,822 Total contractual cash obligations .................................... $79,109 $ 52 11,671 911 $12,634 $ — 16,600 911 $ — 9,451 — $ — 39,513 — $17,511 $9,451 $39,513 Payments Due By Period At December 31, 2002 and 2001, we did not have any other material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as struc- tured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. C r i t i c a l A c c o u n t i n g P o l i c i e s a n d E s t i m a t e s The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires estimations and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under dif- ferent assumptions or conditions. We believe the following accounting policies are the most critical since these policies require significant judg- ment or involve complex estimations that are impor- tant to the portrayal of our financial condition and operating results: • We recognize revenue associated with the grants of land and the grants for the acquisition of property, buildings and equipment for customer support centers over the corresponding useful lives of the related assets. Should the useful lives of these assets change for reasons such as the sale or disposal of the property, the amount of revenue recognized would be adjusted accordingly. Deferred grants totaled $35.1 million as of December 31, 2002. • We maintain allowances for doubtful accounts of $5.1 million as of December 31, 2002, or 6.4% of receiv- ables, for estimated losses arising from the inability of our customers to make required payments. If the finan- cial condition of our customers were to deteriorate, resulting in a reduced ability to make payments, addi- tional allowances may be required which would reduce income. • We maintain valuation allowances of $19.9 million as of December 31, 2002, or 52.7% of deferred tax assets, for the amount of deferred tax assets that is more likely than not to be recognized. While we con- sider taxable income in assessing the need for a valua- tion allowance, in the event we determine we would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment would be made and income increased in the period of such determination. Likewise, in the event we deter- mine we would not be able to realize all or part of the deferred tax assets in the future, an adjustment would be made and charged against income in the period of such determination. • We hold a minority interest in SHPS, Incorporated as a result of the sale of a 93.5% ownership interest in June 2000, that we account for at cost which was $2.1 million as of December 31, 2002. We would record an impairment charge or loss if we believe the invest- ment has experienced a decline in value that is other than temporary. Future adverse changes in mar- ket conditions or poor operating results of the under- lying investment could result in losses or an inability to recover the carrying value of the investment; and therefore, might require an impairment charge in the future. 3 0 • We review long-lived assets, which had a carrying value of $114.5 million as of December 31, 2002, including goodwill and property and equipment, for impairment whenever events or changes in circum- stances indicate that the carrying value of an asset may not be recoverable. Upon our determination that the carrying value of the asset is impaired, we would record an impairment charge or loss. Future adverse changes in market conditions or poor operating results of the underlying investment could result in losses or an inability to recover the carrying value of the invest- ment; and therefore, might require an impairment charge in the future. • Self-insurance related liabilities of $2.2 million as of December 31, 2002 include estimates for, among other things, projected settlements for known and antici- pated claims for worker’s compensation and employee health insurance. Key variables in determining such estimates include past claims history, number of covered employees and projected future claims. We periodically evaluate and, if necessary, adjust the esti- mates based on information currently available. Revisions to these estimates, which could result in adjustments to the liability and additional charges, would be recorded in the period when these adjust- ments or charges are known. R e l a t e d P a r t y Tr a n s a c t i o n s During 2000, we terminated a ten-year operating lease agreement with our Chairman (and majority shareholder) for the corporate aircraft and paid a lease termination fee of $3.5 million. This lease termination payment is included in restructuring and other charges in the accom- panying Consolidated Statement of Operations for the year ended December 31, 2000. Since the lease termination, we paid the Chairman (and majority shareholder) $0.6 million, $0.8 million and $0.2 million for the use of the corporate aircraft in 2002, 2001 and 2000, respectively. The lease expense for the year ended December 31, 2000, exclusive of lease termination payments, was $0.3 million. In 2001, the Board of Directors determined that a note receivable of $0.4 million due from our Chairman (and majority shareholder) was a corporate expense to be forgiven and charged against income for the year ended December 31, 2001. During 2001, we terminated an arrangement with a company, in which the Chairman (and majority share- holder) has an 80% equity interest. For the years ended December 31, 2001 and 2000, we paid this company $0.5 million and $0.3 million, respectively, for manage- ment and site development services. A member of our Board of Directors received broker commissions from our 401(k) investment firm of $0.05 million, $0.03 million and $0.03 million for the years ended December 31, 2002, 2001 and 2000, respectively, and insurance commissions for the placement of vari- ous corporate insurance programs of $0.08 million for each of the three years ended December 31, 2002, 2001 and 2000, respectively. This arrangement was terminated in 2002. R e c e n t A c c o u n t i n g P r o n o u n c e m e n t s In June 2001, the FASB issued SFAS No. 143, “Account- ing for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associ- ated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, con- struction, and development and (or) normal use of the asset. We implemented SFAS No. 143 effective January 1, 2003. The impact of this adoption is not anticipated to have a material effect on the our consolidated finan- cial statements. In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long- Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement addresses finan- cial accounting and reporting for the impairment or dis- posal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). This statement also amends Accounting Research Board No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for subsidiaries for which con- trol is likely to be temporary. We adopted SFAS No. 144 on January 1, 2002. The impact of this adoption did not have a material effect on our consolidated financial statements. 3 1 In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other provisions, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt are no longer reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 must be reclassified to income from continuing operations in all prior periods presented. We implemented SFAS No. 145 effective January 1, 2003. The impact of this adoption is not antic- ipated to have a material effect on our consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, “Account- ing for Costs Associated with Exit or Disposal Activities,” which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, facilities closing, or other exit or disposal activity initiated after December 31, 2002. This statement requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 will be applied prospectively to exit or disposal activities that are initiated after December 31, 2002. We implemented SFAS No. 146 effective January 1, 2003. The impact of this adop- tion is not anticipated to have a material effect on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Finan- cial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed finan- cial statements for interim periods. We have not yet determined whether we will change to the fair-value based method of accounting for stock-based employee compensation. In November 2002, the FASB issued FASB Interpreta- tion (“FIN”) No. 45, “Guarantor’s Accounting and Dis- closure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” This statement requires Sykes to record, at the inception of a guarantee, the fair value of the guarantee as a liability, with the off- setting entry being recorded based on the circumstances in which the guarantee was issued. Fundings under the guarantee are to be recorded as a reduction of the liabil- ity. After funding has ceased, the remaining liability is recognized in the income statement on a straight-line basis over the remaining term of the guarantee. We adopted the disclosure provisions of FIN No. 45 in the fourth quarter of 2002 and will apply the initial recognition and initial measurement provisions on a pro- spective basis for all guarantees issued after December 31, 2002. Adoption of FIN No. 45 will have no impact on our historical consolidated financial statements as exist- ing guarantees are not subject to the measurement provi- sions of FIN No. 45. The existing guarantees, which are not subject to the measurement provisions of FIN No. 45, relate to guarantees in connection with debt between Sykes Enterprises, Incorporated and certain of its consoli- dated subsidiaries totaling $8.3 million as of December 31, 2002. The impact on future consolidated financial statements will depend on the nature and extent of any issued guarantees but is not expected to have a material effect on our consolidated financial statements. Item 7a. Quantitative and Qualitative Disclosures About Market Risk F o r e i g n C u r r e n c y a n d I n t e r e s t R a t e R i s k Our earnings and cash flows are subject to fluctuations due to changes in non-U.S. currency exchange rates. We are exposed to non-U.S. exchange rate fluctuations as the financial results of non-U.S. subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, those results, when translated, may vary from expecta- tions and adversely impact overall expected profitability. The cumulative translation effects for subsidiaries using functional currencies other than the U.S. dollar are included in accumulated other comprehensive loss in shareholders’ equity. Movements in non-U.S. currency exchange rates may affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. Under our current policy, we do not use non-U.S. exchange derivative instruments to manage exposure to changes in non-U.S. currency exchange rates. 3 2 During 2002, we had no debt outstanding at variable interest rates. We have not historically used derivative instru- ments to manage exposure to changes in interest rates. Since the date of this evaluation, there have not been any significant changes in internal controls, or in other factors that could significantly affect these controls since the evaluation date. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this item are located beginning on page 41 and page 28 of this report, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. P A R T I I I P A R T I V Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ( a ) T h e f o l l o w i n g d o c u m e n t s a r e f i l e d a s p a r t o f t h i s r e p o r t : (1) Consolidated Financial Statements The Index to Consolidated Financial Statements is set forth on page 41 of this report. (2) Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts is set forth on page 66 of this report. Items 10. through 13. (3) Exhibits All information required by Items 10 through 13, with the exception of information on Executive Officers which appears in the report under the caption “Executive Officers of the Registrant,” is incorporated by reference to Sykes’ Proxy Statement for the 2003 Annual Meeting of Shareholders. Item 14. Controls and Procedures Within 90 days prior to the date of this report, we, under the supervision and with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of Sykes’ disclosure controls and procedures. Based on this evaluation, our principal exec- utive officer and principal financial officer concluded that the disclosure controls and procedures are alerting them in a timely manner to material information required to be included in our periodic Securities and Exchange Commission reports. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assur- ance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Exhibit No. 2.1 2.2 2.3 2.4 Exhibit Description Articles of Merger between Sykes Enterprises, Incorporated, a North Carolina Corporation, and Sykes Enterprises, Incorporated, a Florida Corporation, dated March 1, 1996.(1) Articles of Merger between Sykes Enterprises, Incorporated and Sykes Realty, Inc.(1) Stock Purchase Agreement dated July 1, 1996 among Sykes Enterprises, Incorporated and Johan Holm, Arne Weinz and Norhold Invest AB.(2) Stock Purchase Agreement dated August 30, 1996 among Sykes Enterprises, Incorporated and Gordon H. Kraft.(3) 2.6 2.5 Merger Agreement dated as of January 10, 1997 among Sykes Enterprises, Incorporated, Info Systems of North Carolina, Inc. and ISNC Acquisition Co.(4) Stock Purchase Agreement dated March 28, 1997 among Sykes Enterprises, Incorporated, Sykes Holdings of Belgium, B.V.B.A., Cycle B.V.B.A. and Michael McMahon.(5) Joint Integration, Marketing and Distribution Agreement dated April 30, 1997 by and between Sykes Enterprises, Incorporated and SystemSoft Corporation.(8) Stock Purchase Agreement dated May 6, 1997 by and between Sykes Enterprises, Incorporated and SystemSoft Corporation.(9) 2.7 2.8 3 3 2.9 Acquisition Agreement, dated May 30, 1997, by and among the holders of all of the capital interests of Telcare Gesellschaft fur Telekommunikations-Mehrwertdienste mbH, Sykes Enterprises GmbH, and Sykes Enterprises, Incorporated.(6) 2.10 Acquisition Agreement, dated September 19, 1997, by and among the holders of all of the capital interests of TAS Telemarketing Gesellschaft fur Kommunikation und Dialog mbH, Sykes Enterprises, GmbH, and Sykes Enterprises, Incorporated.(7) 2.11 Acquisition Agreement, dated September 25, 1997, by and among the holders of all of the capital interests of TAS Hedi Fabinyi GmbH, Sykes Enterprises, GmbH, and Sykes Enterprises, Incorporated.(10) 2.12 Shareholder Agreement dated December 11, 1997, by and among Sykes Enterprises, Incor- porated and HealthPlan Services Corporation.(12) 2.13 Acquisition Agreement, dated December 31, 1997, by and among the holders of all of the capital interests of McQueen International Limited and Sykes Enterprises, Incorporated.(11) 2.14 Stock Purchase Agreement, dated September 1, 1998, between HealthPlan Services Corporation and Sykes Enterprises, Incorporated.(16) 2.15 Acquisition Agreement, dated November 23, 1998, by and among the holders of all of the capital interests of TAS GmbH Nord Telemarketing und Vertriebsberatung, Sykes Enterprises, GmbH, and Sykes Enterprises, Incorporated.(18) 2.16 Combination Agreement, dated December 29, 1998, by and among the holders of all of the capital interests of Oracle Service Networks Corporation and Sykes Enterprises, Incorporated.(17) 3.1 Sykes Enterprises, 2.17 Merger Agreement, dated as of June 9, 2000, among Incorporated, SHPS, Incorporated, Welsh Carson Anderson and Stowe, VIII, LP (“WCAS”) and Slugger Acquisition Corp.(35) Articles of Incorporation of Sykes Enterprises, Incorporated, as amended.(19) Articles of Amendment to Articles of Incor- poration of Sykes Enterprises, Incorporated, as amended.(20) Bylaws of Sykes Enterprises, Incorporated, as amended.(21) Specimen certificate for the Common Stock of Sykes Enterprises, Incorporated.(1) 4.1 3.3 3.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Credit Agreement between NationsBank N.A. and Sykes Enterprises, Incorporated dated as of February 17, 1998.(14) Amendment No. 1 to Credit Agreement between NationsBank N.A. and Sykes Enterprises, Incor- porated dated as of March 20, 1998.(15) Amended and Restated Credit Agreement among Sykes Enterprises, Incorporated and Bank of America, NA, dated May 2, 2000.(21) Amendment No. 1 to Amended and Restated Credit Agreement among Sykes Enterprises, Incorporated and Bank of America, N.A., dated June 22, 2001.(38) Amendment No. 2 to Amended and Restated Credit Agreement among Sykes Enterprises, Incorporated and Bank of America, N.A., dated December 21, 2001. Credit Agreement among Sykes Enterprises, Incorporated and Bank of America, N.A. (for- merly NationsBank, N.A.) dated February 27, 1998, as amended October 1998, January 18, 2000, May 2, 2000 and June 22, 2001.(39) Amendment No. 5 to Credit Agreement among Sykes Enterprises, Incorporated and Bank of America, N.A., dated December 21, 2001. Employment Agreement dated as of March 6, 2000 between James E. Lamar and Sykes Enterprises, Incorporated.(23)* Amended and Restated Employment Agreement dated as of February 18, 2002, between Charles E. Sykes and Sykes Enterprises, Incorporated.* 10.10 Stock Option Agreement between Sykes Enterprises, Incorporated and David E. Garner dated as of December 31, 1995.(41)* 10.11 Amended and Restated 1996 Employee Stock Option Plan.(36)* 10.12 Amended and Restated 1996 Non-Employee Director Stock Option Plan.(36)* 10.13 1996 Non-Employee Directors’ Fee Plan.(1)* 10.14 Form of Split Dollar Plan Documents.(1)* 10.15 Form of Split Dollar Agreement.(1)* 10.16 Form of Indemnity Agreement between directors and executive officers and Sykes Enterprises, Incorporated.(1) 10.17 Aircraft Lease Agreement between JHS Leasing of Tampa, Inc. as lessor and Sykes Enterprises, Incorporated as lessee, dated December 1, 1995.(1) 10.18 Single Tenant Property Lease Agreement between Sykes Investments as landlord and Sykes Enterprises, Incorporated as tenant dated October 31, 1989, for building in Charlotte, North Carolina.(1) 3 4 10.19 Tax Indemnification Agreement between Sykes Enterprises, Incorporated and John H. Sykes.(1)* 10.20 Consultant Agreement between Sykes Enterprises, Incorporated and E.J. Milani Consulting Corp. dated April 1, 1996.(1)* 10.21 1997 Management Stock Incentive Plan.(13)* 10.22 1999 Employees’ Stock Purchase Plan.(22)* 10.23 2000 Stock Option Plan.(24)* 10.24 Employment Agreement dated as of March 6, 2000 between David L. Grimes and Sykes Enterprises, Incorporated.(25)* 10.25 Termination of aircraft Lease Agreement between JHS Leasing of Tampa, Inc., as lessor and Sykes Enterprises, Incorporated as lessee dated June 30, 2000.(29) 10.26 Employment Agreement dated July 31, 2000 between James E. Lamar and Sykes Enterprises, Incorporated.(30)* 10.27 Employment Separation Agreement dated as of September 20, 2000 between Dale W. Saville and Sykes Enterprises, Incorporated.(31)* 10.28 Employment Separation Agreement dated as of September 22, 2000 between Scott J. Bendert and Sykes Enterprises, Incorporated.(32)* 10.29 Employment Separation Agreement dated November 10, 2000 between David L. Grimes and Sykes Enterprises, Incorporated.(33)* 10.30 Employment Agreement dated July 31, 2000 between Mitchell I. Nelson and Sykes Enterprises, Incorporated.(34)* 10.31 Amended and Restated Employment Agree- ment dated as of October 1, 2001, between W. Michael Kipphut and Sykes Enterprises, Incorporated.* 10.32 2001 Equity Incentive Plan.(37)* 10.33 Employment Agreement dated as of March 6, 2000 between Scott J. Bendert and Sykes Enterprises, Incorporated.(26)* 10.34 Employment Agreement dated as of March 6, 2000 between Dale W. Saville and Sykes Enterprises, Incorporated.(27)* 10.35 Employment Separation Agreement dated July 5, 2001 between James E. Lamar and Sykes Enterprises, Incorporated.(40)* 10.36 Amended and Restated Employment Agreement dated as of February 18, 2002, between Jenna R. Nelson and Sykes Enterprises, Incorporated.(42)* 10.37 Amended and Restated Employment Agreement dated as of February 18, 2002, between Gerry L. Rogers and Sykes Enterprises, Incorporated.(42)* 10.38 Amended and Restated Executive Employment Agreement dated as of October 1, 2001 between John H. Sykes and Sykes Enterprises, Incorporated.(42)* 10.39 Employment Agreement dated as of October 1, 2001, between James T. Holder and Sykes Enterprises, Incorporated.(42)* 10.40 Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and James T. Holder.(42)* 10.41 Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and W. Michael Kipphut.(42)* 10.42 Stock Option Agreement dated as of January 8, 2002, between Sykes Enterprises, Incorporated and John H. Sykes.(42)* 10.43 Amended and Restated Employment Agreement dated as of March 6, 2002, between Sykes Enter- prises, Incorporated and Harry A. Jackson, Jr.(42)* 10.44 Employment Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and William N. Rocktoff.(42)* 10.45 Employment Separation Agreement dated as of November 5, 2001, between Mitchell Nelson and Sykes Enterprises, Incorporated.(42)* 10.46 Senior Revolving Credit Facility between SunTrust, Wachovia and BNP Paribas and Sykes Enterprises, Incorporated dated as of April 5, 2002 and Schedule I-1.(43) 10.47 Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and Jenna R. Nelson.(43)* 10.48 Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and Gerry Rogers.(43)* 10.49 Stock Option Agreement dated as of March 15, 2002 between Sykes Enterprises, Incorporated and Charles E. Sykes.(43)* 10.50 Stock Option Agreement dated as of March 15, 2002 between Sykes Enterprises, Incorporated and Charles E. Sykes.(43)* 10.51 Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and William Rocktoff.(43)* 10.52 Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and William Rocktoff.(43)* 10.53 Stock Option Agreement dated as of March 6, 2002 between Sykes Enterprises, Incorporated and Harry A. Jackson, Jr.(43)* 3 5 (9) Filed as Exhibit 2.7 to the Registrant’s Form 10-Q filed with the Commission on August 18, 1997, and incorporated herein by reference. (10) Filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 1998, and incorporated herein by reference. (11) Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on dated January 15, 1998, and incorporated herein by reference. (12) Filed as Exhibit 2.12 to the Registrant’s Form 10-K filed with the Commission on March 16, 1998, and incorporated herein by reference. (13) Filed as Exhibit 10 to the Registrant’s Form 10-Q filed with the Commission on July 28, 1998, and incorporated herein by reference. (14) Filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on April 28, 1998, and incorporated herein by reference. (15) Filed as Exhibit 10.2 to the Registrant’s Form 10-Q filed with the Commission on April 28, 1998, and incorporated herein by reference. (16) Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on September 25, 1998, and incorporated herein by reference. (17) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 29, 1998, and incorporated herein by reference. (18) Filed as Exhibit 2.15 to the Registrant’s Form 10-K filed with the Commission on March 29, 1999, and incorporated herein by reference. (19) Filed as Exhibit 3.1 to the Registrant’s Registration State- ment on Form S-3 filed with the Commission on October 23, 1997, and incorporated herein by reference. (20) Filed as Exhibit 3.2 to the Registrant’s Form 10-K filed with the Commission on March 29, 1999, and incorporated herein by reference. (21) Filed as Exhibit 3.2 to the Registrant’s Registration State- ment on Form S-3 filed with the Commission on October 23, 1997, and incorporated herein by reference. (22) Filed as Exhibit 10.19 to the Registrant’s Form 10-K filed with the Commission on March 29, 1999, and incorporated herein by reference. (23) Filed as Exhibit 10.8 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. (24) Filed as Exhibit 10.23 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. 21.1 10.54 Amendment No. 1 to Revolving Credit Agreement without exhibits between Sun Trust, Wachovia and BNP Paribas and Sykes Enterprises, Incorpo- rated dated as of September 30, 2002.(44) 10.55 Stock Option Agreement dated as of December 23, 2002 between Sykes Enterprises, Incorporated and Harry A. Jackson, Jr.(45)* List of subsidiaries of Sykes Enterprises, Incorporated. Consent of Deloitte & Touche LLP. Consent of Ernst & Young LLP. Power of Attorney relating to subsequent amendments (included on the signature page of this report). Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. 23.1 23.2 24.1 99.1 99.2 * (1) (2) (3) (4) (5) (6) (7) (8) Indicates management contract or compensatory plan or arrangement Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-2324) and incorporated herein by reference. Filed as Exhibit 2.1 to the Registrant’s Form 8-K dated July 31, 1996, and incorporated herein by reference. Filed as Exhibit 2.1 to the Registrant’s Form 8-K dated September 16, 1996, and incorporated herein by reference. Included as Appendix A to the Proxy Statement/Prospectus contained in the Registrant’s Registration Statement on Form S-4 (Registration No. 333-20465) filed with the Commission on January 27, 1997, and incorporated herein by reference. Filed as Exhibit 2.6 to the Registrant’s Form 10-Q filed with the Commission on May 8, 1997, and incorporated herein by reference. Filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 21, 1997, and incorporated herein by reference. Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 1998, and incorporated herein by reference. Filed as Exhibit 2.8 to the Registrant’s Form 10-Q filed with the Commission on August 18, 1997, and incorporated herein by reference. 3 6 (25) Filed as Exhibit 10.3 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. (26) Filed as Exhibit 10.4 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. (27) Filed as Exhibit 10.6 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. (28) Filed as Exhibit 10.24 to the Registrant’s Form 10-Q filed with the Commission on August 14, 2000, and incorpo- rated herein by reference. (29) Filed as Exhibit 10.25 to the Registrant’s Form 10-Q filed with the Commission on August 14, 2000, and incorpo- rated herein by reference. (30) Filed as Exhibit 10.26 to the Registrant’s Form 10-Q filed with the Commission on November 20, 2000, and incorpo- rated herein by reference. (31) Filed as Exhibit 10.27 to the Registrant’s Form 10-Q filed with the Commission on November 20, 2000, and incorpo- rated herein by reference. (32) Filed as Exhibit 10.28 to the Registrant’s Form 10-Q filed with the Commission on November 20, 2000, and incorpo- rated herein by reference. (33) Filed as Exhibit 10.29 to the Registrant’s Form 10-K filed with the Commission on March 27, 2001, and incorporated herein by reference. (34) Filed as Exhibit 10.30 to the Registrant’s Form 10-K filed with the Commission on March 27, 2001, and incorporated herein by reference. (35) Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 17, 2000, and incorporated herein by reference. (36) Filed as Exhibit 10.12 to Registrant’s Form 10-Q filed with the Commission on May 7, 2001, and incorporated herein by reference. (37) Filed as Exhibit 10.32 to Registrant’s Form 10-Q filed with the Commission on May 7, 2001, and incorporated herein by reference. (38) Filed as Exhibit 10.33 to Registrant’s Form 10-Q filed with the Commission on August 14, 2001, and incorporated herein by reference. (39) Filed as Exhibit 10.34 to Registrant’s Form 10-Q filed with the Commission on August 14, 2001, and incorporated herein by reference. (40) Filed as Exhibit 10.35 to Registrant’s Form 10-Q filed with the Commission on August 14, 2001, and incorporated herein by reference. (41) Filed as Exhibit 10.9 to the Registrant’s Form 10-K filed with the Commission on March 29, 2000, and incorporated herein by reference. (42) Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 15, 2002, and incorporated herein by reference. (43) Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on May 9, 2002, and incorporated herein by reference. (44) Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on November 14 2002, and incorporated herein by reference. (45) Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 24, 2003, and incorporated herein by reference. ( b ) R e p o r t s o n F o r m 8 - K We filed the following report on Form 8-K during the quarter ended December 31, 2002: A current report on Form 8-K, dated October 21, 2002, with the Securities and Exchange Commission, containing our press release dated October 21, 2002, announcing that Sykes’ third quarter 2002 operating results remain on target, exclusive of a non-recurring charge related to the share- holder class action litigation settlement. We also announced updated fourth quarter financial guidance for 2002 and a cost reduction plan to be implemented in the fourth quar- ter of 2002 that will result in restructuring and other charges in the range of $19.0 million to $23.0 million. 3 7 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, in the City of Tampa, and State of Florida, on this 24th day of March 2003. SYKES ENTERPRISES, INCORPORATED (Registrant) By: /s/ W. Michael Kipphut W. Michael Kipphut, Group Executive, Senior Vice President—Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the follow- ing persons in the capacities and on the dates indicated. Each person whose signature appears below constitutes and appoints W. Michael Kipphut his true and lawful attorney-in-fact and agent, with full power of substitution and revoca- tion, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or should do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. Signature /s/ John H. Sykes John H. Sykes /s/ Gordon H. Loetz Gordon H. Loetz Title Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date March 24, 2003 Vice Chairman of the Board and Director March 24, 2003 /s/ Furman P. Bodenheimer, Jr. Director Furman P. Bodenheimer, Jr. /s/ H. Parks Helms H. Parks Helms Director /s/ Linda F. McClintock-Greco Director Linda F. McClintock-Greco /s/ Hugh L. McColl, Jr. Hugh L. McColl, Jr. /s/ William J. Meurer William J.Meurer /s/ Ernest J. Milani Ernest J. Milani /s/ Thomas F. Skelly Thomas F. Skelly /s/ Peter C. Browning Peter C. Browning 3 8 Director Director Director Director Director March 24, 2003 March 24, 2003 March 24, 2003 March 24, 2003 March 24, 2003 March 24, 2003 March 24, 2003 March 24, 2003 Certifications I, John H. Sykes, Chairman and Chief Executive Officer of Sykes Enterprises, Incorporated, certify that: 1. I have reviewed this annual report on Form 10-K of Sykes Enterprises, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a.) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c.) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the regis- trant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ John H. Sykes John H. Sykes, Chairman and Chief Executive Officer (Principal Executive Officer) 3 9 I, W. Michael Kipphut, Group Executive, Senior Vice President—Finance of Sykes Enterprises, Incorporated, certify that: 1. I have reviewed this annual report on Form 10-K of Sykes Enterprises, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a.) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c.) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the regis- trant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ W. Michael Kipphut W. Michael Kipphut Group Executive, Senior Vice President—Finance (Principal Financial and Accounting Officer) 4 0 Table of Contents Report of Independent Auditors—Deloitte & Touche LLP................................................................................ Report of Independent Certified Public Accountants—Ernst & Young LLP ....................................................... Consolidated Balance Sheets as of December 31, 2002 and 2001 ................................................................. Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 ................. Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000.......................................................................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000................. Notes to Consolidated Financial Statements.................................................................................................... Page No. 42 43 44 45 46 47 48 4 1 Independent Auditors’ Report To the Board of Directors and Stockholders of Sykes Enterprises, Incorporated: We have audited the accompanying consolidated balance sheets of Sykes Enterprises, Incorporated and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years then ended. Our audits also included the financial statement schedules as of and for the years ended December 31, 2002 and 2001, listed in the Index at Item 15. These financial statements and financial state- ment schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sykes Enterprises, Incorporated and subsidiaries at December 31, 2002 and 2001 and the results of their operations and their cash flows for the years then ended, in conformity with accounting princi- ples generally accepted in the United States of America. Also in our opinion, such financial statement schedules as of and for the years ended December 31, 2002 and 2001, when considered in relation to the basic consoli- dated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Certified Public Accountants Tampa, Florida February 10, 2003 4 2 Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Sykes Enterprises, Incorporated We have audited the accompanying consolidated statements of operations, changes in shareholders’ equity, and cash flows of Sykes Enterprises, Incorporated and Subsidiaries for the year ended December 31, 2000. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the finan- cial statements are free of material misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the account- ing principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consoli- dated results of operations and cash flows of Sykes Enterprises, Incorporated and Subsidiaries for the year ended December 31, 2000, in conformity with account- ing principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic finan- cial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1, the Company changed its method of accounting for certain revenues. Tampa, Florida February 15, 2001, except for Note 1, as to which the date is July 26, 2001 4 3 SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents ........................................................................................... Receivables .................................................................................................................. Prepaid expenses and other current assets.................................................................... Total current assets ............................................................................................... Property and equipment, net ............................................................................................ Goodwill, net ................................................................................................................... Deferred charges and other assets .................................................................................... December 31, 2002 2001 $ 79,480 74,303 9,724 163,507 109,618 4,834 17,585 $ 50,002 93,522 11,750 155,274 140,551 4,816 9,139 $295,544 $309,780 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current installments of long-term debt ......................................................................... Accounts payable ......................................................................................................... Accrued employee compensation and benefits ............................................................ Other accrued expenses and current liabilities............................................................. Total current liabilities .......................................................................................... Deferred grants................................................................................................................. Deferred revenue ............................................................................................................. Other long-term liabilities ................................................................................................ $ 52 12,200 33,792 16,348 62,392 35,067 15,739 1 $ 94 12,982 29,862 15,789 58,727 39,543 20,298 — Total liabilities ...................................................................................................... 113,199 118,568 Commitments and contingencies (Note 15) Shareholders’ equity: Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding ............................................................................. — — Common stock, $0.01 par value; 200,000 shares authorized; 43,491 and 43,300 issued........................................................................................ Additional paid-in capital............................................................................................. Retained earnings......................................................................................................... Accumulated other comprehensive loss ....................................................................... Treasury stock at cost; 3,099 shares and 3,000 shares .................................................. 435 162,117 72,208 (11,101) 223,659 (41,314) Total shareholders’ equity..................................................................................... 182,345 433 160,907 90,839 (20,212) 231,967 (40,755) 191,212 $295,544 $309,780 See accompanying notes to consolidated financial statements. 4 4 SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data) Years Ended December 31, 2001 2002 2000 Revenues ........................................................................................................ $452,737 $496,722 $603,606 Operating expenses: Direct salaries and related costs ................................................................. General and administrative......................................................................... Compensation expense associated with exercise of options ....................... Restructuring and other charges ................................................................. Impairment of long-lived assets .................................................................. 287,141 155,547 — 20,814 1,475 315,118 165,389 — 14,600 1,480 382,236 195,374 7,836 30,468 — Total operating expenses ........................................................................ 464,977 496,587 615,914 Income (loss) from operations......................................................................... (12,240) 135 (12,308) Other income (expense): Litigation settlement ................................................................................... Gain on sale of facilities, net ...................................................................... Interest, net................................................................................................. Gain on sale of equity interest in SHPS ...................................................... Other.......................................................................................................... (13,800) 1,599 517 — (522) — — 408 — (357) — — (2,942) 84,036 111 Total other income (expense).................................................................. (12,206) 51 81,205 Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle .................................. (24,446) 186 68,897 Provision (benefit) for income taxes: Current ....................................................................................................... Deferred ..................................................................................................... Total provision (benefit) for income taxes ............................................... Income (loss) before cumulative effect of change in accounting principle ...... Cumulative effect of change in accounting principle, 2,790 (8,605) (5,815) (18,631) (4,873) 4,650 (223) 409 24,794 (3,603) 21,191 47,706 net of income taxes of $580 ....................................................................... — — (919) Net income (loss) .......................................................................................... $ (18,631) Net income (loss) per basic share: Income (loss) before cumulative effect of change in accounting principle .. Cumulative effect of change in accounting principle.................................. Net income (loss) per basic share ............................................................... Total weighted average basic shares ........................................................... Net income (loss) per diluted share: Income (loss) before cumulative effect of change in accounting principle .. Cumulative effect of change in accounting principle.................................. Net income (loss) per diluted share ............................................................ $ $ $ $ (0.46) — (0.46) 40,405 (0.46) — (0.46) $ $ $ $ $ 409 $ 46,787 0.01 — 0.01 40,183 0.01 — 0.01 $ $ $ $ 1.15 (0.02) 1.13 41,518 1.15 (0.02) 1.13 Total weighted average diluted shares ........................................................ 40,405 40,468 41,645 Pro forma amounts assuming accounting change is applied retroactively: Net income ................................................................................................ Net income per basic share ........................................................................ Net income per diluted share ..................................................................... $ 47,706 1.15 $ 1.15 $ See accompanying notes to consolidated financial statements. 4 5 SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders’ Equity (In thousands) Balance at January 1, 2000............... Issuance of common stock................ Tax benefit of exercise of non-qualified stock options .......... Purchase of treasury stock ................ Comprehensive income: Net income .................................. Foreign currency translation adjustment................................ Total ..................................... Balance at December 31, 2000 ........ Issuance of common stock................ Tax benefit of exercise of non-qualified stock options .......... Purchase of treasury stock ................ Comprehensive loss: Net income .................................. Foreign currency translation adjustment................................ Total ..................................... Balance at December 31, 2001 ........ Issuance of common stock................ Tax benefit of exercise of non-qualified stock options .......... Purchase of treasury stock ................ Comprehensive loss: Net loss ........................................ Foreign currency translation adjustment................................ Total ..................................... Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Retained Comprehensive Earnings Loss Treasury Stock Total 42,734 350 $427 4 $155,023 3,208 $ 43,643 — $ (5,860) — $ — $193,233 3,212 — — — — — — — — — 1,465 — — — 46,787 — — — (8,222) — — — — (40,583) 1,465 (40,583) — — 46,787 (8,222) 38,565 43,084 216 431 2 159,696 973 90,430 — (14,082) — (40,583) — 195,892 975 — — — — — — — — 238 — — — — — 409 — — — — (6,130) — (172) — — 238 (172) 409 (6,130) (5,721) 43,300 191 433 2 160,907 984 90,839 — (20,212) — (40,755) — 191,212 986 — — — — — — — — 226 — — — — (18,631) — — — — — 9,111 — (559) 226 (559) — — (18,631) 9,111 (9,520) Balance at December 31, 2002........ 43,491 $435 $162,117 $ 72,208 $(11,101) $(41,314) $182,345 See accompanying notes to consolidated financial statements. 4 6 SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ........................................................................................... Depreciation and amortization ....................................................................... Impairment of long-lived assets ...................................................................... Cumulative effect of accounting change, net of tax ........................................ Gain on sale of equity interest in SHPS .......................................................... Restructuring and other charges ..................................................................... Litigation settlement, including cash paid of $13.4 million ............................ Gain on sale of facilities, net .......................................................................... Deferred income tax provision (benefit).......................................................... Tax benefit from stock options ........................................................................ Loss on disposal of property and equipment .................................................. Changes in assets and liabilities: Receivables ................................................................................................ Prepaid expenses and other current assets.................................................. Intangible assets ......................................................................................... Deferred charges and other assets .............................................................. Accounts payable ....................................................................................... Income taxes receivable/payable ................................................................ Accrued employee compensation and benefits........................................... Customer deposits, net of restricted cash.................................................... Other accrued expenses and current liabilities ........................................... Deferred revenue........................................................................................ Other long-term liabilities .......................................................................... Years Ended December 31, 2001 2000 2002 $(18,631) 34,338 1,475 — — 20,814 13,800 (1,599) (8,605) 226 858 22,159 2,758 — (113) (2,134) 2,122 (2,038) — (18,052) (3,946) (121) $ 409 $ 46,787 36,829 — 919 (84,036) 30,468 — — (3,603) 1,465 — 34,937 1,480 — — 14,600 — — 4,650 238 495 46,708 1,759 — 5,520 (15,459) (14,328) (3,490) — (9,711) (6,750) (358) (30,515) 3,761 926 3,154 (12,320) 6,015 9,384 10,921 1,250 3,314 (1,392) Net cash provided by operating activities ............................................... 43,311 60,700 23,327 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures....................................................................................... Acquisition of intangible assets....................................................................... Proceeds from sale of facilities ....................................................................... Proceeds from sale of equity interest in SHPS (less cash sold) ........................ Proceeds from sale of property and equipment .............................................. Net cash (used for) provided by investing activities ................................ CASH FLOWS FROM FINANCING ACTIVITIES Paydowns under revolving line of credit agreements ...................................... Borrowings under revolving line of credit agreements .................................... Payments of long-term debt ............................................................................ Borrowings under long-term debt ................................................................... Proceeds from issuance of stock ..................................................................... Proceeds from grants ...................................................................................... Purchase of treasury stock .............................................................................. Net cash provided by (used for) financing activities................................ Effects of exchange rates on cash................................................................... Net increase (decrease) in cash and cash equivalents..................................... CASH AND CASH EQUIVALENTS—BEGINNING ......................................... (20,203) (1,901) 2,000 — 244 (19,860) — — (42) — 986 — (559) 385 5,642 29,478 50,002 (72,334) (39,058) — — — — — 159,776 — 682 (38,376) 87,442 (13,363) 13,336 (8,430) 106 975 9,156 (172) (198,301) 124,607 (1,103) 367 3,212 8,394 (40,583) 1,608 (103,407) (4,071) (8,222) 19,861 30,141 (860) 31,001 CASH AND CASH EQUIVALENTS—ENDING................................................ $ 79,480 $ 50,002 $ 30,141 Supplemental disclosures of cash flow information Cash paid during the year for: Interest ................................................................................................... Income taxes .......................................................................................... $ 1,155 $ 10,531 896 $ $ 4,254 $ 8,461 $ 17,130 See accompanying notes to consolidated financial statements. 4 7 SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements Sykes Enterprises, Incorporated and consolidated subsidiaries (“Sykes” or the “Company”) provides cus- tomer management solutions and services to companies, primarily within the technology/consumer, communica- tions, financial services and transportation and leisure industries. Sykes provides customer support outsourcing solutions with an emphasis on inbound technical sup- port and customer service. These services are delivered through multiple communication channels encompassing phone, e-mail, web and chat. Sykes complements its customer support outsourcing services with technical staffing (in the United States), and fulfillment services (in Europe) designed to deliver services that are customized to meet each company’s unique customer management needs. The Company has operations in two geographic regions entitled (1) the Americas, which includes the United States, Canada, Latin America, India and the Asia Pacific Rim, in which the client base is primarily com- panies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East, and Africa. N o t e 1 . S u m m a r y o f A c c o u n t i n g P o l i c i e s Principles of Consolidation—The consolidated financial statements include the accounts of Sykes and its wholly- owned subsidiaries and controlled majority-owned sub- sidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates—The preparation of consolidated financial statements in conformity with accounting prin- ciples generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recognition of Revenue—The Company primarily rec- ognizes its revenue from services as those services are performed under a fully executed contractual agreement. Royalty revenue is recognized at the time royalties are earned and the remaining revenue is recognized on fixed price contracts using the percentage-of-completion method of accounting. Adjustments to fixed price con- tracts and estimated losses, if any, are recorded in the period when such adjustments or losses are known. Product sales are recognized upon shipment to the cus- tomer and satisfaction of all obligations. The Company recognizes revenue from software and contractually provided rights in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2” (“SOP 98-4”), Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Trans- actions” (“SOP 98-9”), and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Revenue is recognized from licenses of the Company’s software products and rights when the agreement has been executed, the product or right has been delivered or provided, collectibility is probable and the software license fees or rights are fixed and deter- minable. Contracts that provide for multiple elements are accounted for pursuant to the above standards. If any portion of the license fees or rights is subject to forfeiture, refund or other contractual contingencies, the Company will postpone revenue recognition until these contingen- cies have been removed. Sykes generally accounts for consulting services separate from software license fees for those multi-element arrangements where consulting serv- ices are a separate element and are not essential to the customer’s functionality requirements and there is vendor- specific objective evidence of fair value for these serv- ices. Revenue from support and maintenance activities is recognized ratably over the term of the maintenance period and the unrecognized portion is recorded as deferred revenue. Accounting Change for Revenue Recognition— During the fourth quarter of 2000, the Company adopted SAB 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial state- ments filed with the Securities and Exchange Commission (“SEC”). Based on criteria established by SAB 101, adopted retroactive to January 1, 2000, the Company modified its accounting treatment for the recognition 4 8 of revenue as it related to contract services. As a result of the adoption of SAB 101, revenues in certain limited situ- ations that were recognized as services were performed and as the related fees became collectible under agree- ments between the Company and its customers were deferred until either a final contract or purchase order was fully executed. The cumulative effect of the change on prior years resulted in a charge to income of $0.9 million (net of income taxes of $0.6 million) or $0.02 per diluted share, which was deducted in the determination of income dur- ing the three month period ended March 31, 2000. The effect of this change for the year ended December 31, 2000 was to increase income before cumulative effect of the change in accounting principle by $0.9 million or $0.02 per diluted share. The pro forma amounts pre- sented in the statements of operations were presented as if the change in accounting principle had been made retroactively to prior periods. Cash and Cash Equivalents—Cash and cash equiva- lents consist of highly liquid short-term investments clas- sified as available for sale as defined under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Cash in the amount of $73.1 million and $27.5 million was held in taxable interest bearing investments, which are classified as available for sale and have an average matu- rity of approximately 30 days, at December 31, 2002 and 2001, respectively. Cash and cash equivalents of $64.4 million and $48.8 million at December 31, 2002 and 2001, respectively, were held in international operations and may be subject to additional taxes if repatriated to the United States. Property and Equipment—Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Improvements to leased premises are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Cost and related accu- mulated depreciation on assets retired or disposed of are removed from the accounts and any gains or losses resulting therefrom are credited or charged to income. Depreciation expense was $36.8 million, $36.0 million and $35.4 million, for the years ended December 31, 2002, 2001 and 2000, respectively. Property and equip- ment includes $0.7 million and $0.5 million of additions included in accounts payable at December 31, 2002 and 2001, respectively. Accordingly, these non-cash transac- tions have been excluded from the accompanying con- solidated statements of cash flows for the years ended December 31, 2002 and 2001, respectively. During 1999, the Company capitalized certain costs incurred to internally develop software upon the estab- lishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility were expensed as incurred. Capitalized internally developed software costs, net of accumulated amortization, were $2.9 million and $0.5 million at December 31, 2002 and 2001, respectively. Land received from various local and state governmen- tal agencies under grants is recorded at fair value at date of grant. During the years ended December 31, 2001 and 2000, the Company recorded $1.0 million and $1.3 million, respectively, in land acquisitions as a result of such grants (none for 2002). Accordingly, these non-cash transactions have been excluded from the accompanying Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000. Investment in SHPS—The Company has a 6.5% remaining ownership interest in SHPS, Incorporated (“SHPS”) that is accounted for at cost. At December 31, 2002 and 2001, the carrying value of this investment was $2.1 million, which approximates the Company’s pro rata share of the underlying value, which is included in “Deferred charges and other assets” in the accompany- ing Consolidated Balance Sheets. (See Note 7.) Goodwill—Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” According to this statement, goodwill and other intangi- ble assets with indefinite lives are no longer subject to amortization, but instead must be reviewed annually for impairment by applying a fair-value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values as appropriate. Under SFAS No. 142, the carrying value of assets is calculated at the lowest levels for which there are identifiable cash flows. SFAS No. 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the 4 9 reporting unit is less than its carrying value. Upon adop- tion and during 2002, the Company completed an impairment review and did not recognize any impair- ment of goodwill. The Company expects to receive future benefits from previously acquired goodwill over an indefi- nite period of time. Accordingly, beginning January 1, 2002, the Company has foregone all related amortization expense. Prior to the adoption of this statement, the amortization of goodwill as it was reported on December 31, 2001 would have increased the 2002 net loss by approximately $0.4 million, or $0.01 per diluted share. Prior to January 1, 2002, the Company amortized good- will over an estimated useful life of 10 to 20 years using the straight-line method. Amortization expense related to goodwill totaled $1.2 million and $3.1 million for the years ended December 31, 2001 and 2000, respectively. Accumulated amortization of goodwill was $3.2 million as of December 31, 2001. For the three years ended December 31, 2002, the rec- onciliation of reported net income (loss) and net income (loss) per share to adjusted net income (loss) and adjusted net income (loss) per share reflecting the elimination of goodwill amortization is as follows (in thousands, except per share data): December 31, 2001 2002 2000 (unaudited) $(18,631) $ 409 $46,787 Net income (loss): Reported net income (loss).... Elimination of goodwill amortization, net of taxes... — 782 2,464 Adjusted net income (loss) .... $(18,631) $1,191 $49,251 Net income (loss) per basic share: Reported net income (loss).... Elimination of goodwill $ (0.46) $ 0.01 $ 1.13 amortization, net of taxes... — 0.02 0.06 Adjusted net income (loss) .... $ (0.46) $ 0.03 $ 1.19 Net income (loss) per diluted share: Reported net income (loss).... Elimination of goodwill $ (0.46) $ 0.01 $ 1.13 amortization, net of taxes... — 0.02 0.05 Adjusted net income (loss) .... $ (0.46) $ 0.03 $ 1.18 Intangible Assets—Intangible assets, primarily exist- ing technologies and covenants not to compete, are amortized using the straight-line method over their esti- mated period of benefit, generally ranging from two to five years. The Company periodically evaluates the recov- erability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that an impair- ment exists. Amortization expense related to these intan- gible assets was $0.5 million, $0.1 million and $0.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Income Taxes—Sykes uses the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differ- ences are expected to affect taxable income. Self-Insurance Programs—The Company self-insures for certain levels of workers’ compensation and employee health insurance. Estimated costs of these self-insurance programs are accrued at the projected settlements for known and anticipated claims. Self-insurance liabilities of the Company amounted to $2.2 million and $2.3 million at December 31, 2002 and 2001, respectively. Deferred Grants—Recognition of income associated with grants of land and the acquisition of property, build- ings and equipment is deferred until after the completion and occupancy of the building and title has passed to the Company and the funds have been released from escrow. The deferred amounts for both land and building are amortized and recognized as a reduction of depreciation expense included within general and administrative costs over the corresponding useful lives of the related assets. Amounts received in excess of the cost of the building are allocated to the cost of equipment and, only after the grants are released from escrow, recognized as a reduc- tion of depreciation expense over the weighted average useful life of the related equipment, which approximates five years. Amortization of the deferred grants that is included in income was approximately $3.0 million, $2.3 million and $2.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. 5 0 Deferred Revenue—The Company invoices certain contracts in advance. The deferred revenue is earned over the lives of the respective contracts, which range from six months to three years. Stock-Based Compensation—The Company has adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under SFAS No. 123, companies have the option to measure compensation costs for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under APB No. 25, compensation expense is generally not recognized when both the exercise price is the same as the market price and the number of shares to be issued is set on the date the employee stock option is granted. Since employee stock options are granted on this basis and the Company has chosen to use the intrinsic value method, no com- pensation expense is recognized for stock option grants. If the Company had elected to recognize compensa- tion expense for the issuance of options to employees of the Company based on the fair value method of account- ing prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts as follows (in thousands except per share amounts): Years Ended December 31, 2000 2001 2002 Net income (loss) as reported ..................... $(18,631) $ 409 $46,787 Pro forma compensation expense, net of tax ......... (11,163) (3,594) (5,058) Pro forma net income (loss) ............................... $(29,794) $(3,185) $41,729 Net income (loss) per basic share as reported ... $ (0.46) $ 0.01 $ 1.13 Pro forma net income (loss) per basic share ...... $ (0.74) $ (0.08) $ 1.01 Net income (loss) per diluted share as reported ..................... Pro forma net income $ (0.46) $ 0.01 $ 1.13 (loss) per diluted share.... $ (0.74) $ (0.08) $ 1.00 The pro forma amounts were determined using the Black-Scholes valuation model with the following key assumptions: (i) discount rates ranging from 3.0% to 3.82% for 2002, a discount rate of 6.0% for 2001, and a discount rate of 6.2% for 2000; (ii) a volatility factor of 85.1% based upon the average trading price of the Company’s common stock since it began trading on the NASDAQ National Market; (iii) no dividend yield; and (iv) an average expected option life of five years (three years for the ESPP). In addition, the pro forma amount for 2002, 2001 and 2000 includes approximately $0.2 mil- lion for each year related to purchase discounts offered under the ESPP. Fair Value of Financial Instruments—The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: • Cash, Accounts Receivable and Accounts Payable. The carrying amount reported in the balance sheet for cash, accounts receivable and accounts payable approximates their fair value. • Long-Term Debt. The fair value of the Company’s long-term debt, including the current portion thereof, is estimated based on the quoted market price for the same or similar types of borrowing arrangements. The carrying value of the Company’s long-term debt approximates fair value because the debt bears vari- able interest rates. Foreign Currency Translation—The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted aver- age exchange rate during the period. The net effect of translation gains and losses is not included in determin- ing net income, but is included in accumulated other comprehensive income (loss), which is reflected as a separate component of shareholders’ equity. Foreign currency transactional gains and losses are included in determining net income. Such gains and losses are not material for any period presented. Recent Accounting Pronouncements—In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the asso- ciated asset retirement costs. This statement applies to legal obligations associated with the retirement of long- lived assets that result from the acquisition, construction, and development and (or) normal use of the asset. The Company implemented SFAS No. 143 effective January 1, 2003. The impact of this adoption is not anticipated to have a material effect on the Company’s consolidated financial statements. 5 1 In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long- Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement addresses finan- cial accounting and reporting for the impairment or dis- posal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). This statement also amends Accounting Research Board No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for subsidiaries for which con- trol is likely to be temporary. The Company adopted SFAS No. 144 on January 1, 2002. The impact of this adoption did not have a material effect on the Company’s consoli- dated financial statements. In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other provisions, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt will no longer be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 will be reclassified to income from continuing operations in all prior periods presented. The Company implemented SFAS No. 145 effective January 1, 2003. The impact of this adoption is not anticipated to have a material effect on the Company’s consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, “Account- ing for Costs Associated with Exit or Disposal Activities,” which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, facilities closing, or other exit or disposal activity initiated after December 31, 2002. This statement requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 will be applied prospectively to exit or disposal activities that are initiated after December 31, 2002. The Company implemented SFAS No. 146 effective January 1, 2003. The impact of this adoption is not anticipated to have a material effect on the Company’s consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Finan- cial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether it will change to the fair- value based method of accounting for stock-based employee compensation. In November 2002, the FASB issued FASB Interpre- tation (“FIN”) No. 45, “Guarantor’s Accounting and Dis- closure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” This statement requires the Company to record, at the inception of a guarantee, the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the cir- cumstances in which the guarantee was issued. Fundings under the guarantee are to be recorded as a reduction of the liability. After funding has ceased, the remaining lia- bility is recognized in the income statement on a straight- line basis over the remaining term of the guarantee. 5 2 The Company adopted the disclosure provisions of FIN No. 45 in the fourth quarter of 2002 and will apply the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002. Adoption of FIN No. 45 will have no impact on our historical consolidated financial statements as existing guarantees are not subject to the measurement provisions of FIN No. 45. The existing guarantees, which are not subject to the measurement provisions of FIN No. 45, relate to guarantees in connec- tion with debt between Sykes Enterprises, Incorporated and certain of its consolidated subsidiaries totaling $8.3 million as of December 31, 2002. The impact on future consolidated financial statements will depend on the nature and extent of any issued guarantees but is not expected to have a material effect on the Company’s consolidated financial statements. Reclassifications—Certain amounts from prior years have been reclassified to conform to the current year’s presentation. N o t e 2 . A c q u i s i t i o n s a n d D i s p o s i t i o n s On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS for approximately $165.5 mil- lion cash. The cash proceeds reflected in the Statement of Cash Flows for 2000 is net of approximately $0.7 million used to retire other debt and approximately $5.0 million of cash recorded on SHPS’ balance sheet as of the date of the sale. The sale of SHPS resulted in a gain for financial reporting purposes of approximately $84.0 million ($59.9 million net of taxes). The Consolidated Statement of Operations for 2000 includes the results of SHPS through June 30, 2000, its disposition date. SHPS generated rev- enue and income from operations during 2000 of $35.7 million and $1.7 million, respectively, for the year ended December 31, 2000, exclusive of compensation expense associated with the exercise of options. In April 2002, the Company acquired the rights to a multi-year customer service and technical support agree- ment and the net assets of a call center in Bocholt, Germany for $1.9 million in cash. In connection with the purchase, the Company recognized identifiable intangi- ble assets of $1.8 million related to the underlying cus- tomer support agreement and recorded net assets of $0.1 million. During the fourth quarter of 2002, call volumes fell below anticipated levels and, after the Company eval- uated the Bocholt assets for recoverability, the remaining balance of the intangible asset was written off and a $1.5 million impairment charge was recorded in 2002. On July 1, 2002, the Company sold the land and building related to one of its Bismarck, North Dakota facilities for $2.0 million cash, resulting in a pre-tax gain of $1.8 million. The net book value of the facilities of $1.7 million was offset by the related deferred grants of $1.5 million previously provided by the governmental agencies to assist in developing the facility. In addition, on September 30, 2002, the Company sold certain assets of its print facilities in Galashiels, Scotland having a net book value of $1.1 million for $0.9 million for which the Company received $0.2 million cash and a $0.7 million note receivable. The balance due under the note is due in varying monthly installments over a two-year period. The net pre-tax gain on the sale of the Bismarck facility of $1.8 million less the net pre-tax loss on the sale of the print facilities in Galashiels of $0.2 million is included in “Gain on sale of facilities, net” in the accompanying 2002 Consolidated Statements of Operations. N o t e 3 . C o n c e n t r a t i o n s o f C r e d i t R i s k Financial instruments that potentially subject the Company to concentrations of credit risk consist princi- pally of trade receivables. The Company’s credit concen- trations are limited due to the wide variety of customers and markets in which the Company’s services are sold, with the exception of two major customers as discussed in Note 18. N o t e 4 . R e c e i v a b l e s Receivables consist of the following (in thousands): December 31, 2002 2001 Trade accounts receivable ................... Income taxes receivable ...................... Other................................................... $69,000 7,205 3,200 $85,233 9,634 2,838 Less allowance for doubtful accounts ............................ 5,102 4,183 79,405 97,705 $74,303 $93,522 5 3 N o t e 5 . P r o p e r t y a n d E q u i p m e n t N o t e 8 . A c c r u e d E m p l o y e e Property and equipment consist of the following (in thousands): Land ................................................. Buildings and leasehold improvements ............................... Equipment, furniture and fixtures...... Capitalized software development costs ........................ Transportation equipment ................. Construction in progress ................... Less accumulated depreciation ......... December 31, 2002 2001 $ 6,875 $ 7,296 59,363 164,955 60,435 188,378 5,260 176 475 2,191 171 4,796 237,104 127,486 263,267 122,716 C o m p e n s a t i o n a n d B e n e f i t s Accrued employee compensation and benefits consist of the following (in thousands): Accrued compensation ......................... Accrued employment taxes ................... Accrued vacation .................................. Other .................................................... December 31, 2002 2001 $18,066 5,724 5,897 4,105 $16,014 4,991 5,939 2,918 $33,792 $29,862 N o t e 9 . O t h e r A c c r u e d E x p e n s e s a n d C u r r e n t L i a b i l i t i e s $109,618 $140,551 Other accrued expenses and current liabilities consist of the following (in thousands): N o t e 6 . M a r k e t a b l e S e c u r i t i e s During 1997, the Company purchased SystemSoft Corp. common stock in conjunction with a strategic tech- nology exchange agreement between the parties that had an original cost basis of $8.0 million. During 1998, the Company wrote down its investment in SystemSoft Corp., which was classified as available for sale securities in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” by approximately $7.3 mil- lion due to a significant reduction in its market value, which was determined to be other than temporary. The remaining investment was written off in 2000. Accrued restructuring charges (see Note 13)..................................... Deferred revenue, current ..................... Accrued roadside assistance claim costs ........................................ Accrued telephone charges ................... Accrued legal and professional fees ...... Accrued interest .................................... Accrued property taxes ......................... Accrued marketing ................................ Other .................................................... December 31, 2002 2001 $ 4,506 4,699 $ 5,010 3,214 924 794 1,877 106 716 300 2,426 911 646 1,975 420 222 482 2,909 $16,348 $15,789 N o t e 7 . D e f e r r e d C h a r g e s a n d O t h e r N o t e 1 0 . L o n g - Te r m D e b t A s s e t s Deferred charges and other assets consist of the fol- lowing (in thousands): December 31, 2002 2001 Non-current deferred tax asset, net (see Note 12)..................................... $13,763 $5,424 Investment in SHPS, Incorporated, at cost ............................................... Other .................................................... 2,089 1,733 2,089 1,626 Long-term debt consists of the following (in thousands): Notes payable and capital leases, principal and interest payable in monthly installments through December 2003, interest at varying rates up to prime plus 1 percent, collateralized by certain equipment .......... Total debt ...................................................... Less current portion ....................................... December 31, 2001 2002 $52 $ 94 52 52 94 94 $17,585 $9,139 Long-term debt .............................................. $ — $ — 5 4 Principal maturities of total debt as of December 31, 2002 are as follows (in thousands): Year 2003 ......................................................................... 2004 ......................................................................... Total Amount $52 — $52 The Company amended its revolving credit facility with a group of lenders (the “Amended Credit Facility”), effective as of September 30, 2002, as a result of a $13.8 million charge for the uninsured portion of the class action litigation settlement in the third quarter of 2002 (See Note 15 “Commitments and Contingencies”). Accord- ing to the terms of the Amended Credit Facility, the amount of the Company’s revolving credit facility was reduced, at the request of the Company, from $60.0 mil- lion to a maximum of $40.0 million, subject to certain borrowing limitations. The $40.0 million revolving credit facility includes a $10.0 million swingline subfacility, a $15.0 million letter of credit subfacility and a $25.0 mil- lion multi-currency subfacility. Borrowings under the Amended Credit Facility are restricted to 85% of eligible accounts receivable. Terms of the amendment increase the interest rate 25-basis points to 50-basis points depending on debt levels, reduce the maximum judgment limitation to $2.5 million (previously $5.0 million) and other unsecured indebtedness to $2.0 million (previously $10.0 million), require cash and cash equivalents of $40.0 million and minimum eligible accounts receivable of $23.8 million and further limit certain investments and capital expenditures. The Amended Credit Facility, which is subject to cer- tain financial covenants, may be used to provide for working capital and general corporate purposes and to fund future acquisitions. The Amended Credit Facility accrues interest, at the Company’s option, at (a) the lender’s base rate plus an applicable margin up to 1.5%, (b) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin up to 2.5%, or (c) the Interbank Offered Rate (“IBOR”) plus an applicable margin up to 2.5%, that varies with the Company’s debt levels and cer- tain financial ratios. In addition, a commitment fee of up to 0.75% is charged on the unused portion of the Amended Credit Facility on a quarterly basis. The bor- rowings under the Amended Credit Facility, which termi- nates May 31, 2005, are guaranteed by a pledge of all of the common stock of each of the Company’s material domestic subsidiaries and 65% of the stock of each of the Company’s material direct foreign subsidiaries. The Amended Credit Facility prohibits, without the consent of the lenders, the Company from incurring additional indebtedness, limits certain investment advances or loans and restricts substantial asset sales, capital expenditures, stock repurchases and dividends. At December 31, 2002, the Company had $23.8 million of availability under the Amended Credit Facility. There were no out- standing balances on the Amended Credit Facility as of December 31, 2002. N o t e 1 1 . A c c u m u l a t e d O t h e r C o m p r e h e n s i v e L o s s The Company presents data in the Consolidated Statements of Changes in Shareholders’ Equity in accor- dance with SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes rules for the reporting of comprehensive income (loss) and its components. The components of other accumulated comprehensive loss include foreign currency translation adjustments as follows (in thousands): Accumulated Other Comprehensive Loss Balance at January 1, 2000 ........................... Foreign currency translation adjustment........ $ (5,860) (8,222) Balance at December 31, 2000 .................... Foreign currency translation adjustment........ Balance at December 31, 2001 .................... Foreign currency translation adjustment........ (14,082) (6,130) (20,212) 9,111 Balance at December 31, 2002 .................... $(11,101) Earnings associated with the Company’s investments in its foreign subsidiaries are considered to be permanently invested and no provision for United States federal and state income taxes on those earnings or translation adjustments has been provided. N o t e 1 2 . I n c o m e Ta x e s The components of income (loss) before provision (benefit) for income taxes are as follows (in thousands): Years Ended December 31, 2001 2002 2000 Domestic........................... Foreign .............................. Total income (loss) before provision (benefit) for income taxes............. $(35,662) $(21,553) $43,797 25,100 21,739 11,216 $(24,446) $ 186 $68,897 5 5 Provision (benefit) for income taxes consists of the following (in thousands): December 31, 2002 2001 Years Ended December 31, 2000 2001 2002 Domestic non-current: Deferred tax asset: Current: Federal........................... State............................... Foreign........................... $(4,628) (569) 7,987 $(5,775) (960) 1,862 $14,507 2,412 7,875 Total current provision (benefit) for income taxes .......................... Deferred: Federal........................... State............................... Foreign........................... Total deferred provision (benefit) for income taxes .......................... Total provision (benefit) for income taxes...... 2,790 (4,873) 24,794 (5,126) (452) (3,027) (678) 395 4,933 (4,306) (716) 1,419 (8,605) 4,650 (3,603) Foreign non-current: Deferred tax asset: $(5,815) $ (223) $21,191 The components of the net deferred tax asset (liability) are as follows (in thousands): December 31, 2002 2001 Domestic current: Deferred tax asset: Accrued expenses............................. Bad debt reserve............................... Other................................................ $3,878 997 — $ 3,891 848 13 Goodwill and intangible assets ....... Deferred revenue............................ Foreign tax credit carryforward ....... Net operating loss carryforward ...... Valuation allowance ....................... $ 650 1,015 3,052 11,933 (4,312) $ 689 3,228 3,052 3,912 (3,912) Total non-current deferred tax asset.................................. 12,338 6,969 Deferred tax liability: Property and equipment ................. (1,493) (1,214) Total non-current deferred tax liability.............................. (1,493) (1,214) Net domestic non-current deferred tax asset .................... 10,845 5,755 Goodwill and intangible assets ....... Net operating loss carryforward ...... Deferred revenue............................ Valuation allowance ....................... 6,238 11,942 2,488 (15,602) 7,591 3,799 3,253 (11,390) Total non-current deferred tax asset.................................. 5,066 3,253 Deferred tax liability: Property and equipment ................. Deferred commissions .................... Goodwill and intangible assets ....... Untaxed reserve.............................. Other .............................................. Total non-current deferred (272) (228) (172) (1,297) (179) (1,141) (1,348) — (1,095) — Total current deferred tax liability.............................. (2,148) (3,584) tax asset.................................... 4,875 4,752 Net foreign non-current Deferred tax liability: Prepaid expenses.............................. (754) (1,120) Total current deferred tax liability ............................... (754) (1,120) Net domestic current deferred tax asset...................... 4,121 3,632 Foreign current: Total foreign current deferred tax asset...................... — — Net current deferred tax asset, included in prepaid expenses and other current assets.................... $4,121 $ 3,632 deferred tax asset (liability) ..... 2,918 (331) Net non-current deferred tax asset, included in deferred charges and other assets ..................................... $ 13,763 $ 5,424 The Company has established a valuation allowance against those deferred tax assets for which it cannot be established that it is more likely than not that the Company will realize the benefit of those assets. The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign sub- sidiaries that are indefinitely reinvested in foreign opera- tions. Undistributed earnings amounted to approximately $90.2 million at December 31, 2002. It is not practical to estimate the amount of unrecognized deferred U.S. income taxes on these undistributed earnings. 5 6 At December 31, 2002, the Company had federal net operating loss carryforwards of $30.9 million, of which $10.1 million can only be offset against the future earn- ings of an acquired subsidiary which expire through the year 2022. The Company also has foreign tax credit car- ryforwards of $3.1 million that expire through the year 2006. In addition, the Company has net operating loss carryforwards of $29.3 million for France, Germany, the United Kingdom, the Netherlands, Turkey, Italy, Finland, Spain and India, which expire through 2012. The net operating loss carryforwards for Germany, the United Kingdom, the Netherlands and Italy, which total $13.3 million, have unlimited carryforward periods. The following summarizes the principal differences between income tax amounts at the federal statutory rate at 35% and amounts at the effective income tax rates reflected in the financial statements of (24%), (12%) and 31%, respectively (in thousands): Statutory tax....................... State income taxes, net of federal tax benefit .......... Effect of foreign income not subject to federal and state income tax...... Effect of foreign income subject to federal and state income tax net of foreign tax credits .......... Effect of basis step up in foreign assets ................. Effect of loss on disposition of domestic investment .. Effect of disposition of foreign subsidiary........... Valuation on unrealized loss on marketable security .......................... Valuation on foreign and domestic net operating loss carryforwards and foreign asset basis step up........................... Non-deductible amortization................... Foreign taxes, net of foreign income not taxed in the United States.................. Tax basis difference on sale of equity interest in SHPS, Incorporated ........ Permanent differences........ Other ................................. Total provision (benefit) for income taxes ........ Years Ended December 31, 2000 2001 2002 $(8,556) $ 65 $24,113 (980) (448) 877 (1,393) (2,708) (3,017) — — — — — 340 (5,043) (3,307) (917) — — — — — (2,546) 4,615 10,598 3,412 — 262 410 (181) 774 5,647 — 680 — — 161 — (7,280) 296 (721) $(5,815) $ (223) $21,191 The Company is currently under examination by sev- eral states for sales and use taxes for a period covering November 1, 1996 through December 31, 2001 and for franchise tax for a period covering August 1, 1998 through July 31, 2001. The U.S. Internal Revenue Service has completed audits of the Company’s U.S. tax returns through July 31, 1999. The German subsidiaries of the Company are under examination by the German tax authorities for a period covering January 1, 1997 through December 31, 2000. In the opinion of management, any liability that may arise from the prior periods as a result of these examinations is not expected to have a material effect on the Company’s financial condition, results of operations or cash flows. N o t e 1 3 . R e s t r u c t u r i n g a n d O t h e r C h a r g e s 2002 Charges In October 2002, the Company approved a restructur- ing plan to close and consolidate two U.S. and three European customer support centers, to reduce capacity within the European fulfillment operations and to write- off certain specialized e-commerce assets primarily in response to the October 2002 notification of the contrac- tual expiration of two technology client programs in March 2003 with approximate annual revenues of $25.0 million. The restructuring plan was designed to reduce costs and bring the Company’s infrastructure in-line with the current business environment. Related to these actions, the Company recorded restructuring and other charges in the fourth quarter of 2002 of $20.8 million primarily for the write-off of certain assets, lease termina- tion and severance costs. In connection with the 2002 restructuring, the Company reduced the number of employees by 470 during 2002 and plans to reduce the number of employees by an additional 330 by April 2003. The plan is expected to be completed by the fourth quarter of 2003. In connection with the contractual expiration of the two technology client contracts previously mentioned, the Company also recorded additional depreciation expense of $1.2 million in the fourth quarter of 2002 and expects to record additional depreciation expense of $1.3 million in the first quarter of 2003 primarily related to a specialized technology platform, which will no longer be utilized upon the expiration of the contracts in March 2003. 5 7 The following table summarizes the 2002 restructuring and other charges and related activity in 2002 (in thousands): Severance and related costs ........................................ Lease termination costs ............................................... Write-down of property, equipment, and capitalized costs............................................... Other restructuring costs ............................................. Balance at January 1, 2002 $ — — — — $ — 2002 Charges $ 5,012 1,827 12,017 1,958 $20,814 Cash Outlays $(316) — (106) $(422) Other Non-Cash Changes $ — — (12,017) — $(12,017) Balance at December 31, 2002(1) $4,696 1,827 — 1,852 $8,375 (1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets, except $4.2 million of severance and related costs which is included in “Accrued employee compensation and benefits.” 2001 Charges In December 2001, in response to the economic slow- down and increasing demand for the Company’s offshore capabilities, the Company approved a cost reduction plan designed to improve efficiencies in its core business. As a result of the Company’s cost reduction plan, the Company recorded $16.1 million in restructuring, other and impairment charges during the fourth quarter of 2001. This included $14.6 million in charges related to the closure and consolidation of two U.S. customer sup- port centers, two U.S. technical staffing offices, one European fulfillment center; the elimination of redundant property, leasehold improvements and equipment; lease termination costs associated with vacated properties and equipment and severance and related costs. In connec- tion with the fourth quarter 2001 restructuring, the Company reduced the number of employees by 230 dur- ing the first quarter of 2002. The restructuring charge also included $1.4 million for future lease obligations related to closed facilities. In connection with this restructuring, the Company also recorded a $1.5 million impairment charge related to the write-off of certain non-performing assets, including software and equipment no longer used by the Company. The following tables summarize the 2001 restructuring and other charges and related activity in 2002 and 2001 (in thousands): Severance and related costs ................................................................ Lease termination costs....................................................................... Write-down of property, equipment, and capitalized costs ...................................................................... Other restructuring costs..................................................................... Balance at January 1, 2002 $1,423 1,355 3,220 292 Cash Outlays $(1,270) (1,397) Other Non-Cash Changes $ — 203(2) — (260) (3,220) — Total............................................................................................ $6,290 $(2,927) $(3,017) Balance at December 31, 2002(1) $153 161 — 32 $346 (1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets, except severance and related costs which is included in “Accrued employee compensation and benefits.” (2) During 2002, the Company recorded $0.2 million in additional lease termination costs related to one of the European customer’s support centers. Severance and related costs ................................... Lease termination costs .......................................... Write-down of property, equipment, and capitalized costs.......................................... Write-down of intangible assets ............................. Other restructuring costs ........................................ Impairment of software and equipment .................. Balance at January 1, 2001 $ — — — — — — — 2001 Charges $ 1,456 1,426 8,826 2,600 292 14,600 1,480 Cash Outlays $ (33) (71) — — — (104) — Other Non-Cash Changes $ — — (5,606) (2,600) — (8,206) (1,480) Balance at December 31, 2001(1) $1,423 1,355 3,220 — 292 6,290 — Total ............................................................... $ — $16,080 $(104) $(9,686) $6,290 (1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets, except severance and related costs 5 8 which is included in “Accrued employee compensation and benefits.” 2000 Charges The Company recorded restructuring and other charges during the second and fourth quarters of 2000 approxi- mating $30.5 million. The second quarter restructuring and other charges approximating $9.6 million resulted from the Company’s consolidation of several European and one U.S. fulfillment center and the closing or consol- idation of six technical staffing offices. Included in the second quarter 2000 restructuring and other charges was a $3.5 million lease termination payment related to the corporate aircraft. As a result of the second quarter 2000 restructuring, the Company reduced the number of employees by 157 during 2000 and satisfied the remaining lease obligations related to the closed facilities during 2001. The Company also announced, after a comprehensive review of operations, its decision to exit certain non-core, lower margin businesses to reduce costs, improve operat- ing efficiencies and focus on its core competencies of technical support, customer service and consulting solu- tions. As a result, the Company recorded $20.9 million in restructuring and other charges during the fourth quarter of 2000 related to the closure of its U.S. fulfillment opera- tions, the consolidation of its Tampa, Florida technical support center and the exit of its worldwide localization operations. Included in the fourth quarter 2000 restruc- turing and other charges is a $2.4 million severance pay- ment related to the employment contract of the Company’s former President. In connection with the fourth quarter 2000 restructuring, the Company reduced the number of employees by 245 during the first half of 2001 and satisfied a significant portion of the remaining lease obligations related to the closed facilities during 2001. The following tables summarize the 2000 accrual for restructuring and other charges and related activity in 2002, 2001 and 2000 (in thousands): Balance at January 1, 2002 Severance and related costs.............................................................. Lease termination costs..................................................................... $ 1,485 143 Total ............................................................................................. $ 1,628 Severance and related costs.............................................................. Lease termination costs..................................................................... Other restructuring costs................................................................... Balance at January 1, 2001 $ 3,062 1,288 718 Cash Outlays $ (646) (23) $ (669) Cash Outlays $(1,288) (1,145) (718) Other Non-Cash Changes $ $ 214(2) — 214 Other Non-Cash Changes $ (289)(3) — — Total ............................................................................................. $ 5,068 $(3,151) $ (289) Balance at January 1, 2000 Severance and related costs ..................................... Lease termination costs ............................................ Write-down of property and equipment ................... Write-down of intangible assets ............................... Other restructuring costs .......................................... Total ..................................................................... $ — — — — — $ — 2000 Charges $ 3,974 5,404 14,191 6,086 813 $30,468 Cash Outlays $ (912) (4,116) — — (95) Other Non-Cash Changes $ — — (14,191) (6,086) — $(5,123) $(20,277) Balance at December 31, 2002(1) $1,053 120 $1,173 Balance at December 31, 2001(1) $1,485 143 — $1,628 Balance at December 31, 2000 $3,062 1,288 — — 718 $5,068 (1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets, except severance and related costs which is included in “Accrued employee compensation and benefits.” (2) During 2002, the Company recorded $0.2 million in additional severance and related costs primarily due to delays in closing its U.S. fulfillment center, which increased the cash outlay requirements for severance. (3) During 2001, the Company reduced the original severance accrual by $0.3 million for severance payments due to the Company’s former president. 5 9 N o t e 1 4 . E a r n i n g s P e r S h a r e N o t e 1 5 . C o m m i t m e n t s a n d Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock options using the treasury stock method. For the year ended December 31, 2002, the weighted average common shares outstanding are the same for basic and diluted as the Company generated a net loss in 2002. The number of shares used in the earnings per share computation are as follows (in thousands): C o n t i n g e n c i e s The Company leases certain equipment and buildings under operating leases having original terms ranging from one to twenty-two years. The building leases contain up to two five-year renewal options. Rental expense under operating leases for the years ended December 31, 2002, 2001 and 2000 was approximately $11.9 million, $12.1 million, and $17.4 million, respectively. The following is a schedule of future minimum rental payments under operating leases having a remaining non-cancelable term in excess of one year subsequent to December 31, 2002 (in thousands): Years Ended December 31, 2000 2001 2002 Year Total Amount $11,671 9,570 7,030 5,168 4,283 39,513 2003........................................................................ 2004........................................................................ 2005........................................................................ 2006........................................................................ 2007........................................................................ Thereafter ................................................................ Total minimum payments required ...................... $77,235 A lease agreement, relating to the Company’s customer support center in Ireland, contains a cancellation clause which requires the Company, in the event of cancella- tion, to restore the facility to its original state at an esti- mated cost of $0.5 million as of December 31, 2002 and pay a cancellation fee of $0.4 million, which approxi- mates the annual rental payments under the lease agree- ment. In addition, under certain circumstances (including cancellation of the lease and cessation of the support center’s operations in the facility), the Company is contin- gently liable until June 16, 2005 to repay any proceeds received in association with the facility’s grant agree- ment. As of December 31, 2002, the grant proceeds subject to repayment approximated $0.9 million. As of December 31, 2002, the Company had no plans to cancel this lease agreement. Basic: Weighted average common shares outstanding ............... 40,405 40,183 41,518 Diluted: Dilutive effect of stock options ....................... — 285 127 Total weighted average diluted shares outstanding.................. 40,405 40,468 41,645 On August 5, 2002, the Company’s Board of Directors authorized the purchase of up to three million shares of its outstanding common stock. The shares will be pur- chased, from time to time, through open market pur- chases or in negotiated private transactions, and the purchases will be based on factors such as, including but not limited to, the stock price and general market condi- tions. The amendment to the Company’s revolving credit facility, which was effective as of September 30, 2002 (see Note 10 “Long-Term Debt”), limits the dollar amount of stock that may be repurchased by the Company to no more than $5.0 million. As of December 31, 2002, the Company had repurchased 99,000 common shares under the 2002 repurchase program at prices ranging between $3.15 to $6.75 per share for a total cost of $0.6 million. 6 0 The Company entered into agreements with two third- party vendors whereby the Company committed to purchase goods and services used in its normal opera- tions during a three-year period. Future annual minimum purchases remaining under the agreements are $0.9 mil- lion and $0.9 million in 2003 and 2004, respectively. During 2002 and 2001, the Company’s total purchases under the agreements were $3.1 million and $2.3 mil- lion, respectively. During 2002, a consolidated class action lawsuit against the Company was pending in the United States District Court for the Middle District of Florida, Tampa Division, captioned: In re Sykes Enterprises, Inc. Securities Litigation (hereinafter the “Class Action Litigation”). The plaintiffs purported to assert claims on behalf of a class of purchasers of the Company’s common stock during the period from July 27, 1998 through September 18, 2000. The consolidated action claimed violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Among other things, the consolidated action alleged that during 2000, 1999 and 1998, the Company and certain of its officers made materially false state- ments concerning the Company’s financial condition and its future prospects. The consolidated complaint also claimed that certain of the Company’s quarterly financial statements during 1999 and 1998 were not prepared in accordance with accounting principles generally accepted in the United States of America. The consoli- dated action sought compensatory and other damages, and costs and expenses associated with the litigation. Although the Company denied the plaintiff’s allegations and defended the action vigorously, due to the extremely high costs and risks of litigation, as well as the drain on management time and attention, the Company agreed to a settlement of the Class Action Litigation with the plain- tiffs. The settlement resulted in a cash payment of $30.0 million. Insurance amounts, after payment of litigation expenses, covered $16.6 million of the settlement and the Company paid the remaining amount of $13.4 mil- lion. The Company recorded a $13.8 million charge for the uninsured portion of the Class Action Litigation settle- ment and associated legal costs during the third quarter of 2002. The settlement was approved by the court and the Class Action Litigation was dismissed March 7, 2003. During 2002, two shareholder derivative lawsuits were pending in the Hillsborough County, Florida, Circuit Court against certain current and former members of the Company’s Board of Directors and Officers. These suits were captioned Clarence S. Gurerra v. Sykes Enterprises, Incorporated, et. al., and James Bunde v. Sykes Enter- prises, Incorporated, et. al. While the Company was a nominal defendant in these suits, both were purportedly instituted by shareholders of the Company on the Company’s behalf, and no damages or other relief were sought from the Company. Both suits alleged breach of fiduciary duties and mismanagement by the defendant directors and officers arising out of the facts and circum- stances alleged in the Class Action Litigation. The Bunde lawsuit also named Ernst & Young LLP, the Company’s former accountants, as a defendant and alleges breach of contract and negligence by Ernst & Young LLP arising out of the facts and circumstances alleged in the Class Action Litigation. The suits sought, on behalf of the Company, disgorgement of profits allegedly made by certain officers and directors through the sale of Company stock while in possession of inside information and other unspecified damages and relief. The Board of Directors established a Special Committee to investigate the allegations made in the derivative suits. During the investigation, a motion was pending in the Gurerra case to continue a stay of the proceedings pending the completion of the investigation 6 1 of the claims made in the complaints by the Special Committee. The Special Committee completed its investi- gation related to the Gurerra case in October 2002, and determined that the Gurerra case should be dismissed. As a result of that finding, the Company filed a motion with the court seeking to have the Gurerra case terminated, which motion is pending. There can be no assurance this motion will be granted. The plaintiffs voluntarily dis- missed the Bunde case in February 2003. The Company from time to time is involved in other legal actions arising in the ordinary course of business. With respect to these matters, management believes that it has adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s financial position or results of operations. N o t e 1 6 . E m p l o y e e B e n e f i t P l a n The Company maintains a 401(k) plan covering defined employees who meet established eligibility requirements. Under the plan provisions, the Company matched 50% of participant contributions to a maximum matching amount of 2% of participant compensation. The Company contribution was $0.8 million, $1.0 million and $0.9 mil- lion for the years ended December 31, 2002, 2001 and 2000, respectively. N o t e 1 7 . S t o c k O p t i o n s The Company maintains various stock option plans for its employees. Options to employees are granted at not less than fair market value on the date of the grant and generally vest over one to four years except for 0.4 million outstanding options converted pursuant to the 1997 acquisition of McQueen International Limited (“McQueen”), which were immediately exercisable. All options granted to employees under the Company’s stock option plans expire if not exercised by the tenth anniver- sary of their grant date with the exception of the McQueen outstanding options, which expire five years from their grant date. The Company also maintains a stock option plan that provides the automatic grant of non-qualified stock options to members of the Board of Directors who are not employees of the Company. Under the plan, each new non-employee director is granted an option to pur- chase 25.0 thousand shares of common stock upon his or her election to the Board. Each continuing non-employee director is granted an option to purchase an additional 10.0 thousand shares of common stock on the day after each annual shareholders’ meeting. All of the options have an exercise price equal to the fair market value on the date of grant, and become exercisable ratably over three years, one third at the end of each year. All options granted to non-employees expire if not exercised by the tenth anniversary of their grant date. At December 31, 2002, there were 7.4 million shares of common stock reserved for issuance under all of the Company’s stock option plans. For all plans, options of 2.3 million, 1.6 million, and 0.4 million were exercisable at December 31, 2002, 2001 and 2000 with a weighted average exercise price of $11.39, $14.70 and $22.54, respectively. There were 4.4 million, 6.6 million and 6.3 million shares available for grant under the plans at December 31, 2002, 2001, and 2000, respectively. The following table summarizes stock option activity for each of the three years ended December 31: Weighted Average Exercise Price Shares (In thousands) Outstanding at January 1, 2000 ............ Granted............................................. Exercised........................................... Expired or terminated........................ Outstanding at December 31, 2000...... Granted............................................. Exercised........................................... Expired or terminated........................ Outstanding at December 31, 2001...... Granted............................................. Exercised........................................... Expired or terminated........................ 1,930 3,115 (91) (1,480) 3,474 496 (116) (1,114) 2,740 2,052 (124) (1,168) $23.23 $14.32 $20.81 $21.00 $16.25 $ 7.67 $ 4.05 $18.38 $14.35 $ 8.76 $ 4.15 $17.57 Outstanding at December 31, 2002 ..... 3,500 $10.39 6 2 The following table further summarizes significant ranges of outstanding and exercisable options at December 31, 2002: Range Of Exercise Prices Number Outstanding at Dec. 31, 2002 (In thousands) Weighted Weighted Average Average Exercise Remaining Price Life Number Exercisable at Dec. 31, 2002 (In thousands) Weighted Average Exercise Price under $4.00 ........................................................................ $ 4.01 to $ 6.00 ................................................................ $ 6.01 to $ 9.00 ................................................................ $ 9.01 to $13.00 ................................................................ $13.01 to $19.00 ................................................................ $19.01 to $28.00 ................................................................ over $28.00 ........................................................................ Total................................................................................ 96 610 437 1,731 283 258 85 3,500 9.9 8.2 8.8 9.0 7.2 5.3 6.1 8.4 $ 3.21 $ 4.73 $ 8.46 $ 9.34 $16.06 $23.90 $30.76 $10.39 1 465 86 1,147 226 254 85 2,264 $ 3.77 $ 4.49 $ 8.36 $ 9.24 $16.26 $23.96 $30.76 $11.39 Employee Stock Purchase Plan—The Company’s Employee Stock Purchase Plan (the “ESPP”) allows eligi- ble employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP, which qualifies under Section 423 of the Internal Revenue Code of 1986, was adopted by the Company’s Board of Directors on April 1, 1999 and approved by the shareholders. Pursuant to the ESPP, Sykes reserved 1.0 million shares of its common stock for issuance. Under the ESPP, eligible employees may purchase the Company common stock at 87.5% of the market price on the last day of the offering period. The maximum each employee may purchase within an offering period can- not exceed $6.25 thousand in market value of Company common stock. The Company will typically have four three-month offering periods each year. The weighted average fair value share price of the pur- chase rights granted under the ESPP during the year ended December 31, 2002 was $5.35. For the years ended December 31, 2002 and 2001, 0.07 million and 0.06 million, respectively, of such shares were purchased and 0.77 million shares remain available for future issuance. N o t e 1 8 . S e g m e n t s a n d G e o g r a p h i c I n f o r m a t i o n The Company operates within two regions, the “Americas” and “EMEA” which represented 66.1% and 33.9%, respectively, of the Company’s consolidated revenues for 2002. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteris- tics. The Company aligned its business into these two segments to more effectively manage the business and support the customer care needs of every client and in response to the changing demands of the Company’s global customers and the implementation of the cus- tomer centric model. The customer centric model reflects the philosophy throughout the organization and was for- mally implemented in connection with the Company’s continued efforts to concentrate resources on its core competencies and focus on the needs of its clients. The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, India and the Asia Pacific Rim, and provides customer out- sourcing solutions (with an emphasis on technical sup- port and customer service) and technical staffing and (2) EMEA. EMEA, which includes Europe, the Middle East and Africa, provides customer outsourcing solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within India and the Asia Pacific Rim are included in the Americas region given the nature the business and client profile, which is primarily made up of companies in the United States that are using the Company’s services to support their cus- tomer management needs. 6 3 Information about the Company’s reportable segments for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands): Americas EMEA Reconciling Items(1) Consolidated Total For the Year Ended December 31, 2002: Revenues ................................................................................................. Depreciation and amortization ................................................................ Income (loss) from operations before restructuring and other charges and impairment of long-lived assets .................................................... Restructuring and other charges............................................................... Impairment of long-lived assets ............................................................... Loss from operations................................................................................ Other expense ......................................................................................... Benefit for income taxes .......................................................................... Net loss ................................................................................................... For the Year Ended December 31, 2001: Revenues ................................................................................................. Depreciation and amortization ................................................................ Income from operations before restructuring and other charges and impairment of long-lived assets..................................................... Restructuring and other charges............................................................... Impairment of long-lived assets ............................................................... Income from operations........................................................................... Other income .......................................................................................... Benefit for income taxes .......................................................................... Net income.............................................................................................. For the Year Ended December 31, 2000: Revenues ................................................................................................. Depreciation and amortization ................................................................ Income from operations before compensation expense associated with exercise of options and restructuring and other charges............... Compensation expense associated with exercise of options .................... Restructuring and other charges............................................................... Loss from operations................................................................................ Other income .......................................................................................... Provision for income taxes....................................................................... Cumulative effect of change in accounting principle ............................... Net income.............................................................................................. $299,185 23,145 $153,552 11,193 $ 13,335 $ (3,286) $328,207(2) 26,337 $168,515 8,600 $ 8,011(2) $ 8,204 $ — (20,814) (1,475) (12,206) 5,815 $ — (14,600) (1,480) 51 223 $404,281(2) 24,935 $199,325(2) 11,894 $ 9,838(2) $ 16,158(2) $ — (7,836) (30,468) 81,205 (21,191) (919) $452,737 34,338 $ 10,049 (20,814) (1,475) (12,240) (12,206) 5,815 $ (18,631) $496,722 34,937 $ 16,215 (14,600) (1,480) 135 51 223 409 $ $603,606 36,829 $ 25,996 (7,836) (30,468) (12,308) 81,205 (21,191) (919) $ 46,787 (1) Items are shown for purposes of reconciling to the Company’s consolidated totals as shown in the table above for the three years ended December 31, 2002. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the performance of its geographic segments based on revenues and income (loss) from operations, and does not include segment assets or other income and expense items for management reporting purposes. (2) The Americas’ revenue includes $0.7 million and $59.7 million for the years ended December 31, 2001 and 2000, respectively, from U.S. fulfillment, a business which the Company exited in connection with the fourth quarter 2000 restructuring, and SHPS, Incorporated, a previously wholly-owned subsidiary of the Company, which was sold in June 2000. The Company continues to operate its European fulfillment business. Additionally, income (loss) from operations includes income of $0.1 million and a loss of $1.4 million for the years ended December 2001 and 2000, respectively, from SHPS and U.S. fulfillment. The Americas’ and EMEA’s revenue also includes $5.0 million and $3.6 million, respectively, for the year ended December 31, 2000 from the Company’s localization operations, a business which the Company exited in connection with the fourth quarter 2000 restructuring. Additionally, income (loss) from operations for the Americas and EMEA includes a loss of $0.5 million and $0.3 million, respectively, for the year ended December 31, 2000 from localization. 6 4 The Americas’ revenue includes $71.6 million, or 15.8% of consolidated revenues, $58.5 million, or 11.8% of consolidated revenues, and $35.6 million, or 6.3% of consolidated revenues, for the years ended December 31, 2002, 2001 and 2000, respectively, from a major provider of communications services. In addition, revenues include $54.6 million, or 12.1% of consolidated revenues, $46.2 million, or 9.3% of consolidated revenues, and $38.6 million, or 6.8% of consolidated revenues, for the years ended December 31, 2002, 2001 and 2000, respectively, from a major provider of software and related services. This includes $52.3 million, $43.8 million and $28.2 million in rev- enue from the Americas for the years ended December 31, 2002, 2001 and 2000, respectively, and $2.3 million, $2.4 million and $10.4 million in revenue from EMEA for the years ended December 31, 2002, 2001 and 2000, respectively. Information about the Company’s operations by geo- graphic location is as follows (in thousands): Years Ended December 31, 2001 2000 2002 Revenues(1): United States ............... Canada........................ Costa Rica ................... Philippines .................. Other........................... $201,497 57,297 19,992 17,951 2,448 $250,285 51,229 11,131 14,606 956 $335,166 46,792 8,310 13,140 873 Total Americas......... 299,185 328,207 404,281 Germany ..................... United Kingdom.......... Sweden ....................... Other........................... 57,191 48,976 24,682 22,703 68,856 57,690 19,927 22,042 70,024 78,758 24,008 26,535 Total EMEA.............. 153,552 168,515 199,325 Total .................... $452,737 $496,722 $603,606 Long-lived assets: United States ................ Canada ......................... Costa Rica .................... Philippines.................... Other ............................ $ 71,667 8,831 3,966 4,857 1,716 $100,125 9,791 3,361 1,975 473 $110,660 8,948 1,665 1,193 475 Total Americas .......... 91,037 115,725 122,941 Germany....................... United Kingdom ........... Sweden......................... Other ............................ 6,604 9,537 1,428 5,846 7,572 15,553 1,606 4,911 Total EMEA ............... 23,415 29,642 7,533 21,932 2,060 6,237 37,762 Total ..................... $114,452 $145,367 $160,703 (1) Revenues are attributed to countries based on location of customer. Revenues for the Company’s products and services are as follows (in thousands): Years Ended December 31, 2001 2002 2000 Technical support and customer service and fulfillment ................ Technical staffing and consultative professional services ....... $428,081 $460,142 $550,920 24,656 36,580 52,686 Total............................ $452,737 $496,722 $603,606 N o t e 1 9 . R e l a t e d P a r t y Tr a n s a c t i o n s During 2000, the Company terminated its ten-year operating lease agreement with the Company’s Chairman (and majority shareholder) for its corporate aircraft and paid a lease termination fee of $3.5 million. This lease termination payment is included in restructuring and other charges in the accompanying Consolidated State- ment of Operations for the year ended December 31, 2000. Since the lease termination, the Company has paid the Chairman (and majority shareholder) $0.6 million, $0.8 million and $0.2 million for the use of the corporate aircraft in 2002, 2001 and 2000, respectively. The lease expense for the year ended December 31, 2000, exclu- sive of lease termination payments, was $0.3 million. The Board of Directors determined that a note receiv- able of $0.4 million due from the Company’s Chairman (and majority shareholder) was a corporate expense to be forgiven and charged against income for the year ended December 31, 2001. During 2001, we terminated an arrangement with a company, in which the Chairman (and majority share- holder) has an 80% equity interest. For the years ended December 31, 2001 and 2000, we paid this company $0.5 million and $0.3 million, respectively, for manage- ment and site development services. A member of the Board of Directors of the Company received broker commissions from the Company’s 401(k) investment firm of $0.05 million, $0.03 million and $0.03 million for the years ended December 31, 2002, 2001 and 2000, respectively, and insurance commissions for the placement of the Company’s various corporate insurance programs of $0.08 million for each of the three years ended December 31, 2002, 2001 and 2000, respectively. This arrangement was terminated in 2002. 6 5 Schedule II—Valuation and Qualifying Accounts Years ended December 31, 2002, 2001 and 2000 (In thousands) Allowance for doubtful accounts: Additions Balance at Charged to Costs and Beginning Expenses of Period Reclassifications (1) Deductions (2) Balance at End of Period Year ended December 31, 2002 .................... Year ended December 31, 2001 ..................... Year ended December 31, 2000 ..................... $ 4,183 7,260 2,440 $1,472 2,575 7,621 $ — — — $ 553 5,652 2,801 $ 5,102 4,183 7,260 Domestic current deferred tax asset valuation allowance: Year ended December 31, 2002 .................... Year ended December 31, 2001 ..................... Year ended December 31, 2000 ..................... Foreign current deferred tax asset valuation allowance: Year ended December 31, 2002 .................... Year ended December 31, 2001 ..................... Year ended December 31, 2000 ..................... Domestic non-current deferred tax asset valuation allowance: $ $ — 1,819 — — 1,815 1,240 $ — — 1,819 $ — — 1,593 Year ended December 31, 2002 .................... Year ended December 31, 2001 ..................... Year ended December 31, 2000 ..................... $ 3,912 348 2,894 $ 400 3,564 — Foreign non-current deferred tax valuation allowance: Year ended December 31, 2002 .................... Year ended December 31, 2001 ..................... Year ended December 31, 2000 ..................... $11,390 — — $5,587 7,034 — (1) Amounts have been reclassified for reporting purposes. (2) Write-offs and recoveries. $ — (1,819) — $ — (1,815) — $ — — — $ — 4,363 — $ — — — $ — — 1,018 $ $ — — 1,819 — — 1,815 $ — — 2,546 $ 4,312 3,912 348 $1,375 7 — $15,602 11,390 — 6 6 C o r p o r a t e I n f o r m a t i o n B o a r d o f D i r e c t o r s P r i n c i p a l O f f i c e r s C o r p o r a t e I n f o r m a t i o n John H. Sykes Chairman of the Board and Chief Executive Officer Sykes Enterprises, Incorporated Furman P. Bodenheimer, Jr. President and Chief Executive Officer Nantahala Lumber Company and Zickgraf Enterprises, Inc. Peter C. Browning President and Chief Executive Officer (retired) Sonoco Products Company Non-executive Chairman of Nucor Corporation Director of Wachovia Corporation; Lowes Companies, Inc.; The Phoenix Companies; and Acuity Brands, Inc. H. Parks Helms, Esq. Managing Partner for Helms, Henderson & Fulton, P.A. Gordon H. Loetz Vice Chairman of the Board Sykes Enterprises, Incorporated John H. Sykes Chairman of the Board and Chief Executive Officer W. Michael Kipphut Group Executive, Senior Vice President and Chief Financial Officer David P. Reule President, Sykes Realty, Inc. (a real estate subsidiary) Charles E. Sykes General Manager, Senior Vice President–Americas Harry A. Jackson, Jr. General Manager, Senior Vice President–EMEA Gerry L. Rogers Group Executive and Senior Vice President, Chief Information Officer Linda F. McClintock-Greco M.D. President and Chief Executive Officer Greco & Associates Consulting (Healthcare) Jenna R. Nelson Group Executive and Senior Vice President, Human Resources and Administration James T. Holder General Counsel and Corporate Secretary William N. Rocktoff Vice President and Corporate Controller Conway W. Jensen Vice President, Marketing and Public Relations Hugh L. McColl, Jr. Chairman and Chief Executive Officer (retired) Bank of America Director of Ruddick Corporation; Sonoco Products Company; and Cousins Properties, Inc. William J. Meurer Managing Partner (retired) for Arthur Andersen’s Central Florida operations Director of Heritage Family of Funds Ernest J. Milani President (retired) of CDI Corporation Northeast and CDI Technical Services, Ltd. Thomas F. Skelly Senior Vice President of Finance and Chief Financial Officer (retired) The Gillette Company Director of Signal Technology m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D Corporate Headquarters: 400 North Ashley Drive Suite 2800 Tampa, FL USA 33602 (813) 274-1000 Fax (813) 273-0148 www.sykes.com Independent Auditors: Deloitte & Touche LLP 201 E. Kennedy Boulevard Suite 1200 Tampa, FL USA 33602 Registrar and Transfer Agent: SunTrust Bank Mail Code 258 P.O. Box 4625 Atlanta, GA 30302-4625 (800) 568-3476 Sykes’ shares trade on The Nasdaq Stock Market(cid:1) under the symbol “SYKE” Annual Meeting: Sykes’ annual meeting of shareholders will be held at 10:00 a.m. (EST) Thursday, May 1, 2003. The meeting will be held at: Tampa Marriott Waterside 700 South Florida Avenue Tampa, FL USA 33602 Investor Information: Quarterly reports on Form 10-Q and the Form 10-K Annual Report filed with the Securities and Exchange Commission are available on the Company’s website at www.sykes.com/english/investors.asp under the heading “Financial Reports—SEC Filings,” or upon written request to Sykes’ Investor Relations department in Tampa, Florida, or by contacting: Kristin L. Wiemer Director, Investor Relations (813) 274-1000 Sykes Enterprises, Incorporated 400 North Ashley Drive Suite 2800 Tampa, Florida 33602 www.sykes.com