The attached 2004 Annual Report of Sykes Enterprises, Incorporated for the year ended
December 31, 2004 includes information taken from our Form 10-K for such year as filed with
the Securities and Exchange Commission on March 23, 2005. Such Form 10-K was amended
and restated in its entirety by the filing of a Form 10-K/A with the Commission on December 22,
2005. That Form 10-K/A also is included herein, following the last page of the 2004 Annual
Report, and the reader’s attention is directed to the Form 10-K/A for the revised information,
including restated financial statements.
WORKING IN UNISON
WITH OUR CUSTOMERS
‘04
C u s t o m e r C o n t a c t
M a n a g e m e n t S e r v i c e s
2 0 0 4 A N N U A L R E P O R T
GLOBAL DELIVERY FOOTPRINT
U.S. • CANADA • COSTA RICA • EL SALVADOR • THE PHILIPPINES/CEBU
INDIA • CHINA • IRELAND • GERMANY • U.K. • AMSTERDAM • SWEDEN
HUNGARY • SPAIN • ITALY • SOUTH AFRICA • FINLAND
CORPORATE PROFILE
SYKES is a global leader in providing customer contact management solutions and services in the business
process outsourcing (BPO) arena. SYKES provides an array of sophisticated customer contact manage-
ment solutions to Fortune 1000 companies around the world, primarily in the communications, financial
services, healthcare, technology and transportation and leisure industries. SYKES specializes in providing
flexible, high quality customer support outsourcing solutions with an emphasis on inbound technical
support and customer service. Headquartered in Tampa, Florida, with customer contact management
centers throughout the world, SYKES provides its services through multiple communication channels
encompassing phone, e-mail, web and chat. Utilizing its integrated onshore/offshore global delivery
model, SYKES serves its 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 also provides various enterprise support services in the Americas and fulfillment services in EMEA,
which include multi-lingual sales order processing, payment processing, inventory control, product
delivery and product returns handling. For additional information please visit www.sykes.com.
TO OUR SHAREHOLDERS
W. MICHAEL KIPPHUT
CHARLES E. SYKES
2004 was a year marked by significant milestone
the accomplishment of each milestone challenged and tested
achievements for our company. We rapidly repositioned
us in many ways, each achievement strengthened our
our domestic based delivery model to a globally based
position to compete in the new world of globalization
delivery model, where 75% of the Americas infrastructure
and, once again, demonstrated the “can-do” spirit at the
(U.S., Canada, The Philippines, Costa Rica, El Salvador and
core of our culture that has always been the foundation of
India) resides offshore versus 55% in 2003. We transitioned
our success.
our dependence away from the technology vertical, as part
of an on-going effort since 2000, where we once derived
63% of our revenues to a more distributed revenue base
Overall, we made tremendous progress on the strategy
roadmap outlined in our 2003 annual report.
across the technology, communication, financial services
• We indicated we would grow our offshore seat count
and healthcare verticals. And we successfully transitioned
to between 10,000 and 11,000 seats, and we did —
the
leadership of our company
from our
founder,
exiting the year with 10,000 seats. More importantly,
Chairman and Chief Executive Officer John Sykes to Paul
in the midst of the migration, we won greater account
Whiting, our non-executive Chairman of the Board, and
share from the clients we migrated, while simultane-
Chuck Sykes, President and Chief Executive Officer. While
ously ramping up new clients.
1
WE MADE TREMENDOUS PROGRESS ON THE STRATEGY
ROADMAP OUTLINED IN OUR 2003 ANNUAL REPORT.
• We indicated we would return cash back to shareholders as
performed remarkably well given the economic challenges
a method of creating shareholder value, and we did. In
and on-going pricing pressures. Year over year EMEA
2004, we bought back approximately 1.1 million shares,
revenues increased approximately 15% and operating
or more than a third of the 3 million shares authorized.
income before corporate expenses and other charges
• We promised we would diversify beyond the technology
vertical, and we did. In 2004, the communications and
technology verticals were 32% and 36% of revenues,
respectively, versus 43% and 33% in 2003. Similarly,
financial services, transportation & leisure and health-
care combined were 21% versus 17% in 2003. However,
transportation and leisure fell short of expectations, due
increased more than three-fold to $10.5 million. In 2005, due
to persistent economic sluggishness, the EMEA market could
test us in ways similar to the ways the U.S. market tested us
in 2003 and 2004. However, it is our belief the challenges in
Europe will be on a much smaller scale than the U.S.
2005 BLUEPRINT FOR PROFITABILITY
to our decision that certain travel programs were not
Looking to 2005 and beyond, our focus is to improve
conducive for offshore delivery, yet we still believe this
profitability with the aim of driving operating margins
sector is attractive for domestic based delivery.
toward the four-to-five percent range and start the growth
Our earnings in 2004 fell short of our target, due largely
to our rapid repositioning, but we finished the year with
operating momentum. The Americas segment proved most
challenging. Our team had to focus on migrating two of
our largest clients, representing 29% of total revenues in
2003, from the United States to our offshore operations,
engine. This will be achieved through the optimization of our
delivery processes and assets, the alignment of sales and
delivery operations in EMEA, the ability to leverage
technology and process innovation, the process of developing
new services and markets, and the capacity to identify
attractive and value-enhancing acquisitions.
while simultaneously building new operations in offshore
Optimization
markets to meet new demand, and closing various opera-
tions in the United States. The challenges were enormous
and created many cost inefficiencies as overlapping costs
and a decline in the Americas revenue due to lower per unit
revenues offshore created a burden on our financial perfor-
mance. Yet, in the end, the team prevailed brilliantly and
SYKES exited the year with a greatly enhanced competitive
position due to its repositioning. Our European team also
Given the scale and speed of our offshore expansion effort,
the scope of duplicative costs related to running our systems
in parallel was significant. We are going to continue to
selectively unwind underutilized seat capacity and monetize
it. We have already seen some progress in that direction,
resulting in U.S. capacity utilization rates rising from 51% in
third quarter of 2004 to 56% at the end of the year. In light
2
of the aggressive ramp-up of seats offshore, we are going to
help us strategically bundle our offerings to drive margins
assess both the quality and profitability of client programs
and enable us to capture growth in new services resulting
across all our verticals. Further, there will be on-going
from a proliferation of technology devices and markets.
focus on cost rationalization of direct and indirect agent
and management costs. We will harvest excess returns from
New Services and New Markets
our existing capital investments, thereby lowering capital
In addition to augmenting our vertical markets, we will
intensity and improving free cash flow.
continue to pursue new avenues of services and markets that
EMEA Sales and Delivery Alignment
will leverage our customer care expertise and assets. These
new services will revolve around the product lifecycle: from
The EMEA market, especially the Pan-European region,
the initial phase of helping our clients identify and target
usually lags the U.S. in growth and corporate decision mak-
their end clients to providing support around a product to
ing, as it relates to outsourcing and off-shoring. While the
providing selective back-end logistical support surrounding
off-shoring and near-shoring trends to Eastern Europe will
that product. All will leverage our customer care expertise
certainly not be as pronounced as they are in the U.S., due
to augment our focus and open up new vertical markets to
to heavy localization and regulation, nonetheless, they have
drive revenues for SYKES.
the potential to translate into significant sales opportunities.
To be better positioned to capture those opportunities, we
Acquisitions
are going to invest in our sales effort and judiciously build
In the midst of migration offshore, we have been very
on our existing delivery model in the Eastern Europe.
disciplined about mitigating the distractions in order to
Expand Delivery Technology
demonstrate success in executing our current offshore
delivery strategy. While we continue to pursue organic
Currently, our dominant delivery channel of customer care
growth to build on our service portfolio as it matures over
transactions is in the form of voice. We believe we have an
the long-term, we will opportunistically seek out acquisi-
opportunity to exploit our nascent, yet growing, email and
tions. SYKES has demonstrated tremendous discipline in
chat delivery efforts. Growing these delivery channels will
managing its cash position. We have and will continue to
LOOKING TO 2005 AND BEYOND, OUR FOCUS IS TO
IMPROVE PROFITABILITY WITH THE AIM OF DRIVING
OPERATING MARGINS TOWARD THE FOUR-TO-FIVE
PERCENT RANGE AND START THE GROWTH ENGINE.
3
SYKES HAS SHOWN TREMENDOUS LEADERSHIP,
RESILIENCY, ADAPTIVENESS AND RESPONSIVENESS.
look at platform acquisitions that will accelerate our entry
As we embark on our initiatives for 2005, we are entering
into growing markets, change our growth and margin profile
the year with healthy operating momentum as highlighted
and give us a competitive advantage in the marketplace.
by our fourth quarter 2004 results. Now, we have to demon-
SUSTAINING THE MANTLE OF LEADERSHIP
expectations. To be sure, there will be challenges along the
strate that we can deliver results and consistently meet investor
In closing, I want to personally thank the people who make
it all happen — our shareholders, our customers and our
employees. For without their continued support, SYKES
would not be a key player and a change-agent in the
customer contact management industry.
SYKES is a company that has shown tremendous leader-
ship, resiliency, adaptiveness and responsiveness. From its
uncharted and differentiated rural delivery model during
way. The forces of competition, technological shifts, substi-
tution and growth trends, dictated by shifts in consumer
behavior and globalization, will require great focus and
discipline. But with every great challenge comes great
opportunity, and we have positioned our company to seize
the day!
the dot-com era of the mid-1990s to the worldwide delivery
CHARLES E. SYKES
model in this age of globalization, the spirit of leadership
President & Chief Executive Officer
is the defining trait of our organization. Our founder, John
Sykes, instilled this defining trait throughout his twenty-
seven years of running our company. So, I want to thank
John for his vision and leadership, and for challenging us as
W. MICHAEL KIPPHUT
a company to pursue excellence and expanding the frontiers
Senior Vice President and Chief Financial Officer
of opportunity. John has built a great organization, and I
know I speak on behalf of the entire organization when I say
that it has been an honor to have the opportunity to work
under his stewardship.
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CORPORATE INFORMATION
BOARD OF DIRECTORS
PRINCIPAL OFFICERS
CORPORATE INFORMATION
Paul L. Whiting
Chairman of the Board
Chief Executive Officer (retired)
Spalding and Evenflo
Gordon H. Loetz
Vice Chairman of the Board
Charles E. Sykes
Director (Principal Executive Officer)
President and Chief Executive Officer
Sykes Enterprises, Incorporated
Mark C. Bozek
Director
Chief Executive Officer
Halo Entertainment
Furman P. Bodenheimer, Jr.
Director
President and Chief Executive Officer
Nantahala Lumber Company and
Zickgraf Enterprises, Inc.
Lt. Gen. Michael P. DeLong (Ret.)
Director
Corporate Vice President of Strategic
Planning and Operations
The Shaw Group
H. Parks Helms, Esq.
Director
Managing Partner for Helms,
Henderson & Fulton, P.A.
Iain MacDonald
Director
Chairman of Yakara, plc
Linda F. McClintock-Greco M.D.
Director
President and Chief Executive Officer
Greco & Associates Consulting
(Healthcare)
William J. Meurer
Director
Managing Partner (retired) for Arthur
Andersen’s Central Florida operations
Director of Heritage Family of Funds
Ernest J. Milani
Director
President (retired) of CDI
Corporation Northeast and
CDI Technical Services, Ltd.
Charles E. Sykes
President and Chief Executive Officer
W. Michael Kipphut
Senior Vice President and
Chief Financial Officer
David P. Reule
President, Sykes Realty Inc.
(a real estate subsidiary)
James C. Hobby
Senior Vice President,
Global Operations
Jenna R. Nelson
Senior Vice President,
Human Resources
Daniel L. Hernandez
Senior Vice President, Global Strategy
David L. Pearson
Senior Vice President and
Chief Information Officer
James T. Holder
Vice President, General Counsel and
Corporate Secretary
William N. Rocktoff
Vice President and
Corporate Controller
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® under the symbol
“SYKE”
Annual Meeting:
Sykes’ annual meeting of shareholders
will be held at 9:00 a.m. (EST)
Tuesday, May 24, 2005. The meeting
will be held at:
Tampa Mariott Waterside
700 South Florida Avenue
Tampa, FL 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/
investors.asp under the heading
“Financial Reports—SEC Filings,”
or upon written request to Sykes’
Investor Relations department in
Tampa, Florida or by contacting:
Subhaash Kumar
Senior Director, Investor Relations
(813) 274-1000
S y k e s E n t e r p r i s e s , I n c o r p o r a t e d
4 0 0 N o r t h A s h l e y D r i v e
S u i t e 2 8 0 0
Ta m p a , F l o r i d a 3 3 6 0 2
w w w. s y k e s . c o m
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K /A
(Amendment No. 1)
[x] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the fiscal year ended December 31, 2004
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
Sykes Enterprises, Incorporated
(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)
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 on June 30, 2004, the last
business day of the Registrant’s most recently completed second fiscal quarter, was $297,417,725.
As of March 2, 2005, there were 39,187,157 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents ............................................................................................... Form 10-K/A Reference
Portions of the Proxy Statement for the year 2005
Annual Meeting of Shareholders ..........................................................
Part III Items 10–14
Explanatory Statement ......................................................................................................................................
Page No.
3
TABLE OF CONTENTS
PART I
Item 1 Business .............................................................................................................................................
Item 2 Properties ..........................................................................................................................................
Item 3 Legal Proceedings .............................................................................................................................
Item 4 Submission of Matters to a Vote of Security Holders .......................................................................
PART II
Item 5 Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities.......................................................................................................
Item 6 Selected Financial Data .....................................................................................................................
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............
Item 7A Quantitative and Qualitative Disclosures About Market Risk ...........................................................
Item 8 Financial Statements and Supplementary Data .................................................................................
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ..........
Item 9A Controls and Procedures ....................................................................................................................
Item 9B Other Information...............................................................................................................................
PART III
Item 10 Directors and Executive Officers ......................................................................................................
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 Principal Accountant Fees and Services ...........................................................................................
PART IV
Item 15 Exhibits and Financial Statement Schedule .......................................................................................
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16
18
18
19
20
21
35
35
35
36
40
41
41
41
41
41
42
2
EXPLANATORY STATEMENT
On November 11, 2005, Sykes Enterprises, Incorporated (the “Company”) determined that certain deferred
revenues should be classified as current liabilities rather than long-term liabilities in the Company’s Consolidated
Financial Statements. The deferred revenues relate to various contracts in the Company’s Canadian roadside
assistance program for which the Company is prepaid for roadside assistance services that are generally carried out
over a twelve-month or longer period. Accordingly, previously issued consolidated financial statements as presented
herein have been restated to correct the classification of deferred revenue and the related deferred income taxes.
This Amendment No. 1 on Form 10-K/A which amends and restates the Company’s Form 10-K for the year
ended December 31, 2004, initially filed with Securities and Exchange Commission (the “SEC”) on March 23, 2005
(the “Original Filing”), is being filed to reflect the restatement of the consolidated financial statements and other
financial information of the Company for the years ended December 31, 2004 and 2003. The Company reclassified
$19.0 million and $19.0 million of “deferred revenue” from long-term liabilities to current liabilities as of December
31, 2004 and 2003, respectively. Additionally, the Company reclassified $3.9 million and $4.5 million of deferred
revenue from “other accrued expenses and current liabilities” to “deferred revenue” in current liabilities as of
December 31, 2004 and 2003, respectively. Finally, the Company reclassified $2.1 million and $1.6 million of the
related “deferred income taxes” from long-term assets to current assets as of December 31, 2004 and 2003,
respectively. Net Cash provided by Operating Activities for the years ended December 31, 2004, 2003 and 2002
were not impacted by the corrections of deferred revenue and the related deferred income taxes. However, cash
flows in the amounts of $0.5 million and $0.4 million have been reclassified within operating cash flows from
“Prepaid expenses and other current assets” to “Deferred charges and other assets” for the years ended December
31, 2004 and 2002, respectively, and from “Deferred charges and other assets” to “Prepaid expenses and other
current assets” for the year ended December 31, 2003 in the amount of $0.6 million. See Note 2 to the consolidated
financial statements for further details.
For the convenience of the reader, this Form 10-K/A sets forth the Original Filing in its entirety except for certain
exhibits not affected by the restatement. This Form 10-K/A includes such restated consolidated financial statements
and related notes thereto for the years ended December 31, 2004, 2003 and 2002 and other information related to
such restated consolidated financial statements, including revisions to Item 6 of Part II, Selected Financial Data,
Item 9A of Part II, Controls and Procedures, and Item 15 of Part IV, Exhibits and Financial Statement Schedule.
The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or
update those disclosures affected by subsequent events. Pursuant to the rules of the SEC, Item 15 of Part IV of the
Original Filing has been amended to include an updated report and consent of the Company’s independent registered
public accounting firm and certifications re-executed as of the date of this Form 10-K/A from the Company’s Chief
Executive Officer and Chief Financial Officer. The certifications of the Chief Executive Officer and Chief Financial
Officer are included in this Form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as of the date
of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or
developments that occurred after the Original Filing, or to modify or update those disclosures affected by subsequent
events. Among other things, forward looking statements made in the Original Filing have not been revised to reflect
events, results or developments that occurred or facts that became known to the Company after the date of the
Original Filing (other than the restatement), and such forward looking statements should be read in their historical
context.
3
PART I
Item 1. Business
General
Sykes Enterprises, Incorporated and consolidated subsidiaries (“Sykes,” “our,” “us” or “we”) is a global leader in
providing outsourced customer contact management solutions and services in the business process outsourcing
(“BPO”) arena. We provide an array of sophisticated customer contact management solutions to Fortune 1000
companies and medium sized businesses around the world primarily in the communications, technology/consumer,
financial services, healthcare and transportation and leisure industries. We serve our clients through two geographic
operating regions: the Americas (United States, Canada, Latin America, India and the Asia Pacific Rim) and EMEA
(Europe, Middle East and Africa). Our Americas and EMEA groups primarily provide customer contact 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. We also provide various enterprise
support services in the United States that encompass services for our client’s internal support operations, from
technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment
services including multilingual sales order processing via the Internet and phone, inventory control, product delivery
and product returns handling. Our complete service offering helps our clients acquire, serve, retain and grow
relationships with their customers. We have developed an extensive global reach with state-of-the-art customer
contact management 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. Our 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 amendments
to those reports, as well as our proxy statements and other materials which are filed with or furnished to the
Securities and Exchange Commission (“SEC”) are made available, free of charge, on or through our Internet website
at www.sykes.com/investors.asp under the heading “Financial Reports — SEC Filings,” as soon as reasonably
practicable after they are filed with, or furnished to, the SEC.
Industry Overview
According to industry analysts, the outsourced customer contact management solutions market worldwide is
estimated to be approximately $51 billion in 2005. Also, the five primary verticals in which we participate —
communications, technology/consumer, financial services, healthcare and transportation and leisure — constitute
approximately 80% of the total worldwide market. We believe that growth for outsourced customer contact
management solutions and services will be fueled by the trend of global Fortune 1000 companies and medium sized
businesses turning to outsourcers to provide high quality, cost-effective, value added customer contact management
solutions. Increasingly they are moving towards balanced solutions that consist of a combination of onshore and
offshore support.
In today’s ever-changing marketplace, companies require innovative customer contact 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, turn cost centers into profit centers, efficiently and effectively
deliver human interaction when customers value it most, and deploy best in-class customer management strategies,
processes and technologies.
Global competition, pricing pressures, softness in the global economy and rapid changes in technology are
making it increasingly difficult for companies to cost effectively maintain the in-house personnel necessary to
handle all of their customer contact management needs. As a result, companies are increasingly turning to
outsourcers to perform specialized functions and services in the customer contact management arena. By working in
a partnership with outsourcers, companies can ensure that the crucial task of retaining and growing their customer
base is addressed without detracting from their competencies. Factors that are influencing companies to outsource
customer contact management solutions include the following:
4
(cid:131)
Increasing importance for companies to focus on customer-facing activities and retain and grow client
relationships;
(cid:131) Growing capital requirements for entrance into new geographic markets offering a lower cost solution;
(cid:131)
(cid:131)
Increasing need for companies to focus on core competencies;
Increasing need for better utilization of internal customer contact management assets and time-to-market
response;
(cid:131) Growing need for consistent multi-site and multi-region support;
(cid:131) Rapid changes in technology requiring personnel with specialized technical expertise;
(cid:131) Growing capital requirements for sophisticated technology needed to maintain the necessary infrastructure to
(cid:131)
provide timely support;
Increasing need to integrate and continually update complex systems incorporating a variety of hardware and
software components spanning a number of technology generations; and
(cid:131) Extensive and ongoing staff training and associated costs required for maintaining responsive, up-to-date, in-
house technical support and customer service solutions.
To address these market factors, we offer a full, global customer contact management solution that focuses on
proactively identifying and solving our clients’ business problems through understanding our clients industries and
challenges and recommending solutions. We then can provide consistent support for our clients’ customers across
the globe in most languages leveraging our dynamic, secure communications infrastructure and a global footprint
that reaches across 17 countries. This global footprint includes established operations in both onshore and highly
strategic offshore geographic markets where companies have access to high quality customer contact management
solutions at lower costs compared to other markets.
Business Strategy
Our goal is to provide enhanced customer contact management solutions and services in a proactive and
responsive manner, acting as a partner in our client’s business. Sykes anticipates trends and delivers new ways of
growing clients’ customer satisfaction and retention rates, thus profit, through timely, insightful and proven
solutions.
Our business strategy encompasses building long-term client relationships, capitalizing on our expert worldwide
response team, leveraging our depth of relevant experience, expanding both organically and through acquisitions
and diversifying our market reach. The principles of this strategy include the following:
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 consistency across each of our centers globally, we implemented an internally
developed quality program titled Sykes Standard of Excellence (SSE). This quality certification standard is a
compilation of more than 25 years of experience and best practices from industry standards such as the Malcom
Baldridge National Quality Award and COPC (Customer Operations Performance Center Inc.). Every customer
contact management center strives to meet or exceed the criteria set forth by SSE, which address leadership, hiring
and training, performance management down to the agent level, forecasting and scheduling, and the client
relationship including continuous improvement, disaster recovery plans and feedback.
Capitalize on an Expert Worldwide Response Team. Companies are demanding a customer contact management
solution that is global in nature — one of our key strengths. In addition to our network of customer contact
management centers throughout North America and Europe, we continue to develop our global delivery model with
operations in the Philippines, The Peoples Republic of China, Costa Rica and El Salvador, offering our clients a
secure, high quality solution tailored to the needs of their diverse and global markets. These customer contact
management centers were added to support the increasing demand for our worldwide customer contact management
solutions and are fully integrated through our internally developed digital private Asynchronous Transfer Mode
(“ATM”) communications network, which allows for effective call volume management and disaster recovery
backup. Our converged voice and data ATM communications network provides a high quality, fault tolerant global
network for the transport of Voice Over Internet Protocol communications and fully integrates with emerging
Internet Protocol telephony systems as well as traditional Time Domain Multiplexing telephony systems. We
continued to expand our global footprint, adding centers in El Salvador in 2004 and Slovakia in 2005. We also
expanded our global market reach with the addition of client accounts based in The Peoples Republic of China,
South Africa, and Latin America.
5
Maintain a Competitive Advantage Through Our Depth of Relevant Experience in Technology Solutions. For
more than 25 years, Sykes has been an innovative pioneer in delivering customer contact management solutions.
Through this experience, we have become a benchmark for innovation and excellent global solution delivery. We
seek to maintain a competitive advantage and differentiation by utilizing technology in new and creative ways to
consistently deliver innovative service solutions, ultimately enhancing the client’s relationship with its customers
and generating revenue growth. This includes knowledge solutions for agents and end customers, automatic call
distributors, intelligent call routing and workforce management capabilities based on agent skill and availability, call
tracking software, quality management systems and computer-telephony integration (CTI) that enable our customer
contact management centers to serve as transparent extensions 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. We are also continuing to capitalize on sophisticated and specialized technological capabilities,
including our current private ATM network that provides us the ability to manage call volumes more efficiently by
load balancing calls and data between customer contact management centers over the same network. Our 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, we
are able to provide fully integrated communication services encompassing e-mail, chat and Web self-service
platforms. In addition, the European deployment of Global Direct, our customer relationship management (“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.
Continue to Grow Our Business Organically and through Acquisitions. We have grown our customer contact
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 contact management centers in 1994 to 35 customer contact
management centers worldwide as of the end of 2004. Given the fragmented nature of the customer contact
management industry, there may be other companies that could bring us certain complementary competencies.
Acquisition candidates that can, among other competencies, expand our service offerings, broaden our geographic
footprint, allow us access to new technology and are synergistic in nature, will be given consideration. We have and
will continue to explore these options upon identification of strategic opportunities.
Diversify Our Market Reach. We market our services on a worldwide basis to Fortune 1000 and medium sized
businesses primarily in the communications, technology/consumer, financial services, healthcare, and transportation
and leisure industries. We built our industry knowledge by initially focusing on software publishers, personal
computer manufacturers and peripheral hardware manufacturers within the technology/consumer vertical market,
providing us with a competitive advantage in technical support. In 2004, the technology/consumer vertical market
represented 36% of our consolidated revenues. Beginning in 1999, our growth strategy targeted the communications
vertical market, where we leveraged our technical support capabilities to capitalize on dial-up Internet, broadband
Internet, wireless services and related opportunities. Revenues from the communications vertical market represented
32% of our consolidated revenues in 2004, compared to 9% in 1999. In 2001, we began targeting the financial
services vertical market recognizing the potential growth this market offered and the added stability this market
would provide our revenue mix. We entered into several new relationships with financial services companies in late
2001 and 2002, for which we provide an array of services from credit card inquiries to brokerage account assistance.
For 2004, revenues from this vertical market represented 8% of our consolidated revenues, an increase from 6% in
2003, and we expect this market to continue to increase in the future. The healthcare vertical, which is primarily
generated from our Canadian operations, represented 7% of our consolidated revenues in 2004 compared to 6% in
2003. While the transportation and leisure vertical market represented 6% of our consolidated revenues in 2004,
compared to 5% in 2003, other vertical markets represented 11% of our consolidated revenues in 2004, compared to
7% in 2003. We believe the diversification of our business into focused vertical markets allows for a more
predictable, steady revenue stream.
Services
We specialize in providing inbound outsourced customer contact management solutions in the BPO arena on a
global basis. Our customer contact management services are provided through two operating segments — the
Americas and EMEA. The Americas region, representing 60.7% of consolidated revenues in 2004, includes the
United States, Canada, Latin America and the Asia Pacific Rim. The sites within Latin America and the Asia Pacific
Rim are included in the Americas region as they provide a significant service delivery vehicle for U.S. based
companies that are utilizing our customer contact management solutions in these locations to support their customer
care needs. The EMEA region, representing 39.3% of consolidated revenues in 2004, includes Europe, the Middle
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East and Africa. The following is a description of our customer contact management solutions:
Outsourced Customer Contact Management Services. Our outsourced customer contact management services
represented approximately 93.9% of total 2004 consolidated revenues. Every year, we handle over 100 million
customer contacts including phone, e-mail, Web and chat throughout the Americas and EMEA regions. We provide
these services utilizing our advanced technology infrastructure, human resource management skills and industry
experience. These services include:
(cid:131) Customer care — Customer care contacts primarily include product information requests, describing product
features, activating customer accounts, resolving complaints, handling billing inquiries, changing addresses,
claims handling, ordering/reservations, prequalification and warranty management, providing health
information and roadside assistance;
(cid:131) Technical support — Technical support contacts primarily include handling inquiries regarding hardware,
software, communications services, communications equipment, Internet access technology and Internet portal
usage; and
(cid:131) Acquisition — Our acquisition services are primarily focused on inbound up-selling/cross-selling of our client’s
products and services.
We provide these services, primarily inbound customer calls, through our extensive global network of customer
contact management centers, where our customer contact agents provide support in over 30 languages. Our
technology infrastructure and managed service solutions allow for effective distribution of calls to one or more
centers. These technology offerings provide our clients and us with the leading edge tools needed to maximize
quality and customer satisfaction while controlling and minimizing costs.
Fulfillment Services. In Europe, we offer fulfillment services that are fully integrated with our customer care and
technical support services. Our fulfillment solutions include multilingual sales order processing via the Internet and
phone, payment processing, inventory control, product delivery and product returns handling.
Enterprise Support Services. In the United States, we provide a range of enterprise support services including
technical staffing services and outsourced corporate help desk solutions.
Operations
Customer Contact Management Centers. We operate seventeen stand-alone customer contact management
centers in Europe and South Africa, seven centers in the United States, one center in Canada and ten centers
offshore, including The Peoples Republic of China, the Philippines, India, Costa Rica and El Salvador.
In an effort to stay ahead of industry off-shoring trends, we opened our first customer contact management centers
in the Philippines and Costa Rica over seven years ago. By 2004, we expanded to five centers in the Philippines, two
in Costa Rica, one in The People’s Republic of China, one in India and one in El Salvador.
Due to shifts in business demand for offshore customer contact management centers, we closed several under-
utilized customer contact management centers in the United States in 2004 and 2003. In addition, related to our
efforts to reduce costs, we closed two centers in Europe and one center in the Middle East in 2004 and plan to close
the center in India in 2005.
We utilize a sophisticated workforce management system to provide efficient scheduling of personnel. Our
internally developed digital private communications network complements our workforce by allowing for effective
call volume management and disaster recovery backup. Through this network and our 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 centers, improving the responsiveness and productivity of our
agents. We also can offer cost competitive solutions for taking calls to our offshore locations.
Our sophisticated data warehouse captures and downloads customer contact information for reporting on a daily,
real time and historical basis. This data provides our clients with direct visibility into the services that we are
providing for them. The data warehouse supplies information for our performance management systems such as our
agent scorecarding application, which provides management with the information required for effective management
of our operations.
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Our customer contact management centers are protected by a fire extinguishing system, backup generators with
significant capacity and 24 hour refueling contracts and short-term battery backups in the event of a power outage,
reduced voltage or a power surge. Rerouting of call volumes to other customer contact management centers is also
available in the event of a telecommunications failure, natural disaster or other emergency. Security measures are
imposed to prevent unauthorized physical access. Software and related data files are backed up daily and stored off
site at multiple locations. We carry business interruption insurance covering interruptions that might occur as a
result of damage to our business.
Fulfillment Centers. We currently have three fulfillment centers located in Europe. We provide our fulfillment
services primarily to certain clients operating in Europe who desire this complementary service in connection with
outsourced customer contact management services.
Enterprise Support Services Offices. Our three enterprise support services offices are located in metropolitan
areas in the United States to provide a strong recruiting platform for high-end knowledge workers and to establish a
local presence to service major accounts.
Quality Assurance
We believe that providing consistent high 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
responsibility of each individual at every level of the organization. To ensure service excellence and continuity
across our organization, we have developed an integrated Quality Assurance program consisting of three major
components:
(cid:131) The certification of client accounts and customer contact management centers to the SSE program;
(cid:131) The application of continuous improvement to all business processes through application of Six Sigma
techniques; and
(cid:131) The application of process audits to all work procedures.
The SSE program is a quality certification standard that was developed based on our more than 25 years of
experience, and best practices from industry standards such as the COPC and Support Center Practices (SCP). It
defines the requirements across all aspects of the business, and has a well-defined auditing process to ensure
compliance and to gain certification.
The application of continuous improvement is established by SSE and is based upon the five-step Six Sigma
cycle, which we have tuned to apply specifically to our service industry. All managers are responsible for
continuous improvement in their operations.
Process audits are used to verify that client processes and procedures are consistently executed as required by
established documentation. Process audits are applicable to all services being provided for the client. Quality
monitoring and coaching are also core components of our approach to quality. We utilize industry best practices to
ensure that our employees handle customer interactions with the care, accuracy and timeliness needed.
Sales and Marketing
Our sales and marketing objective is to leverage our expertise and global presence to develop long-term
relationships with existing and potential clients. Our customer contact solutions have been developed to help our
clients acquire, retain, and increase the value of their customer relationships. We are implementing marketing and
business development plans to increase visibility of our solutions in the vertical markets we serve. We believe that
our client base provides excellent opportunities for further marketing and cross-selling of our customer contact
management services. Our plans for increasing our visibility include market focused advertising, consultative
personal visits with potential and existing clients, participation in market specific trade shows and seminars,
speaking engagements, articles and white papers and our website.
Our sales force is composed of business development managers who pursue new business opportunities and
strategic account managers that manage and grow relationships with existing accounts. We also have inside
customer sales representatives who receive customer inquiries and provide outbound lead generation for the
business development managers.
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As part of our marketing efforts, we invite potential and existing clients to visit our customer contact management
centers, where we can demonstrate the expertise of our skilled staff in partnering to deliver new ways of growing
clients’ customer satisfaction and retention rates, thus profit, through timely, insightful and proven solutions. During
these visits, we demonstrate our ability to quickly and effectively support a new client or scale business from an
existing client by emphasizing our systematic approach to implementing customer contact solutions throughout the
world.
We emphasize account development to strengthen relationships with existing clients. Business development and
strategic account managers are generally assigned to markets in their area of expertise in order to develop a
complete understanding of each client’s particular needs, to form strong client relationships and encourage cross-
selling of our other service offerings. We utilize our marketing and sales visibility in the markets to lead our product
development efforts to further meet growing market needs.
Clients
In 2004, we provided service to hundreds of clients from our locations 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 and medium sized businesses primarily within the communications, technology/consumer,
financial services, healthcare, and transportation and leisure industries. Revenue by vertical market for 2004, as a
percentage of our consolidated revenues, was 36% for technology/consumer, 32% for communications, 8% for
financial services, 7% for healthcare, 7% for retail, 6% for transportation and leisure, and 4% for all other vertical
markets, including, government-related and utilities. We believe our globally recognized client base presents
opportunities for further cross marketing of our services.
For the years ended December 31, 2004 and 2003, total revenues included $36.6 million, or 7.8% of consolidated
revenues, and $81.2 million, or 16.9% of consolidated revenues, respectively, from Accenture, a leading systems
integrator that represents a major provider of communication services to whom we provide various outsourced
customer contact management services. Effective May 1, 2003, we entered into a subcontractor services agreement
(the “Agreement”) with Accenture following the execution of a primary services agreement between the major
provider of communication services and Accenture. The revenues for the year ended December 31, 2002, as it
relates to this relationship were $71.6 million, or 15.8% of consolidated revenues. Under the terms of this three-year
Agreement, which contains penalty provisions for failure to meet minimum service levels and is cancelable with 6
months written notice, we will continue to provide the products and services necessary to support and assist
Accenture in the management and performance of its primary services agreement.
In addition, for the years ended December 31, 2004, 2003 and 2002, total revenues included $33.8 million, or 7.3%
of consolidated revenues, $58.5 million, or 12.2% of consolidated revenues, and $54.6 million, or 12.1% of
consolidated revenues, respectively, from Microsoft Corporation, a major provider of software and related services.
Although no client represented 10% or more of 2004 consolidated revenues, our top ten clients accounted for
approximately 45% of our consolidated revenues in 2004. The loss of (or the failure to retain a significant amount of
business with) Accenture, Microsoft or any of our other key clients could have a material adverse effect on our
performance. Many of our contracts contain penalty provisions for failure to meet minimum service levels and are
cancelable by the client at any time or on short-term notice. Also, clients may unilaterally reduce their use of our
services under our contracts without penalty.
Competition
The industry in which we operate is extremely competitive and highly fragmented. While many companies
provide customer contact management solutions and services, we believe no one company is dominant in the
industry.
In most cases, our principal competition stems from our existing and potential clients’ in-house customer contact
management operations. When it is not the in-house operations of a client, our direct competition includes TeleTech,
Sitel, APAC Customer Services, ICT Group, Client Logic, Convergys, West Corporation, Stream, PeopleSupport,
EDS, IBM and NCO Group as well as the customer care arm of such companies as Accenture, WIPRO, 24/7,
Infosys and SR Teleperformance. There are other numerous and varied providers of such services, including firms
specializing in various CRM consulting, other customer management solutions providers — niche or large market
companies, as well as product distribution companies that provide fulfillment services. Some of these companies
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possess substantially greater resources, greater name recognition and a more established customer base than we.
We believe that the most significant competitive factors in the sale of outsourced customer contact management
services include service quality, tailored value added service offering, industry experience, advanced technology
capabilities, global coverage, reliability, scalability, security and price. As a result of intense competition,
outsourced customer contact management solutions and services frequently are subject to pricing pressure. Clients
also require outsourcers to be able to provide services in multiple locations. Competition for contracts for many of
our services takes the form of competitive bidding in response to requests for proposals.
Intellectual Property
We rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology we
use at our customer contact management 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. We do not hold any patents
and do not have any patent applications pending. There can be no assurance that the steps we have taken to protect
our proprietary technology will be adequate to deter misappropriation of our proprietary rights or third-party
development of similar proprietary software. Sykes ®, REAL PEOPLE. REAL SOLUTIONS. ® and Sykes
Answerteam ® are our registered service marks. We hold a number of registered trademarks, including ETSC ®, FS
PRO ® and FS PRO MARKETPLACE ®.
Employees
At January 31, 2005, we had approximately 17,130 employees worldwide, consisting of 15,400 customer contact
agents handling technical and customer support inquiries at our centers, 1,440 in management, administration and
finance, 120 in enterprise support services, 150 in fulfillment services and 20 in sales and marketing. Our
employees, with the exception of approximately 500 employees in Europe, are not represented by a labor union and
we have never suffered an interruption of business as a result of a labor dispute. We consider our relations with our
employees to be good.
We employ 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 programs 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 engagements. Competition for such
personnel is intense and employee turnover in this industry is high.
Factors Influencing Future Results and Accuracy of Forward - Looking Statements
This report contains forward-looking statements (within the meaning of the Private Securities Litigation Reform
Act of 1995) that are based on current expectations, estimates, forecasts, and projections about us, our beliefs, and
assumptions made by us. In addition, we may make other written or oral statements, which constitute forward-
looking statements, from time to time. Words such as “may,” “expects,” “projects,” “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 statements. These statements are not guarantees of future performance and are subject to a number
of risks and uncertainties, including those discussed below and elsewhere in this report. Our actual results may differ
materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not
be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no
obligation to update any forward-looking statements, whether as a result of new information, future events or
otherwise.
Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-
looking statements include, but are not limited to: the marketplace’s continued receptivity to our terms and elements
of services offered under our standardized contract for future bundled service offerings; our ability to continue the
growth of our service revenues through additional customer contact management centers; our ability to further
penetrate into vertically integrated markets; our ability to expand revenues within the global markets; our ability to
continue to establish a competitive advantage through sophisticated technological capabilities, and the following risk
factors:
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Dependence on Key Clients
We derive a substantial portion of our revenues from a few key clients. For the years ended December 31, 2004
and 2003, total revenues included $36.6 million, or 7.8% of consolidated revenues, and $81.2 million, or 16.9% of
consolidated revenues, respectively, from Accenture, a leading systems integrator that represents a major provider of
communication services to whom we provide various outsourced customer contact management services. Effective
May 1, 2003, we entered into a subcontractor services agreement (the “Agreement”) with Accenture following the
execution of a primary services agreement between the major provider of communication services and Accenture.
The revenues for the year ended December 31, 2002, as it relates to this relationship were $71.6 million, or 15.8% of
consolidated revenues. Under the terms of this three-year Agreement, which contains penalty provisions for failure
to meet minimum service levels and is cancelable with 6 months written notice, we will continue to provide the
products and services necessary to support and assist Accenture in the management and performance of its primary
services agreement.
In addition, total revenue for the years ended December 31, 2004, 2003 and 2002, includes $33.8 million, or 7.3%
of consolidated revenues, $58.5 million, or 12.2% of consolidated revenues and $54.6 million, or 12.1% of
consolidated revenues, respectively, from Microsoft Corporation, a major provider of software and related services.
Our top ten clients accounted for approximately 45%, 59% and 60%, of consolidated revenue for the years ended
December 31, 2004, 2003, and 2002, respectively.
Our loss of, or the failure to retain a significant amount of business with Accenture, Microsoft or any of our other
key clients could have a material adverse effect on our business, financial condition and results of operations. Many
of our contracts contain penalty provisions for failure to meet minimum service levels and are cancelable by the
client at any time or on short-term notice. Also, clients may unilaterally reduce their use of our services under these
contracts without penalty. Thus, our contracts with our clients do not ensure that we will generate a minimum 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,
2004, our international operations were conducted from 24 customer contact management centers located in
Sweden, the Netherlands, Finland, Germany, South Africa, Scotland, India, Ireland, Italy, Hungary, Spain, The
Peoples Republic of China and the Philippines. Revenues from these operations for the years ended December 31,
2004, 2003, and 2002, were 59%, 44%, and 39% of consolidated revenues, respectively. We also conduct business
from four customer contact management centers located in Canada, Costa Rica and El Salvador. International
operations are subject to certain risks common to international activities, such as changes in foreign governmental
regulations, tariffs and taxes, import/export license requirements, the imposition of trade barriers, difficulties in
staffing and managing international operations, political uncertainties, longer payment cycles, foreign exchange
restrictions that could limit the repatriation of earnings, possible greater difficulties in accounts receivable
collection, potentially adverse tax consequences, and economic instability. As of December 31, 2004, we had cash
balances of approximately $79.0 million held in international operations, which may be subject to additional taxes if
repatriated to the United States.
We conduct business in various foreign currencies and are therefore exposed to market risk from changes in
foreign currency exchange rates and interest rates, which could impact our results of operations and financial
condition. We are also subject to certain exposures arising from the translation and consolidation of the financial
results of our foreign subsidiaries. We have, from time to time, taken limited actions, such as using foreign currency
forward contracts, to attempt to mitigate our 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 will be successful or
that future changes in currency exchange rates will not have a material impact on our future operating results. A
significant change in the value of the dollar against the currency of one or more countries where we operate may
have a material adverse effect on our results.
Fundamental Shift Towards Global Service Delivery Markets
Clients are increasingly requiring blended delivery models using a combination of onshore and offshore support.
Our offshore delivery locations include The Peoples Republic of China, the Philippines, Costa Rica and El Salvador,
and while we have operated in global delivery markets since 1996, there can be no assurance that we will be able to
successfully conduct and expand such operations, and a failure to do so could have a material adverse effect on our
11
business, financial condition, and results of operations. The success of our offshore operations will be subject to
numerous contingencies, some of which are beyond our control, including general and regional economic
conditions, prices for our services, competition, changes in regulation and other risks. In addition, as with all of our
operations outside of the United States, we are subject to various additional political, economic, and market
uncertainties (See “Risks Associated with International Operations and Expansion.”). Additionally, a change in the
political environment in the United States or the adoption and enforcement of legislation and regulations curbing the
use of offshore customer contact management solutions and services could effectively have a material adverse effect
on our business, financial condition and results of operations.
Existence of Substantial Competition
The markets for our services on a commoditized basis are highly competitive and subject to rapid change. While
many companies provide outsourced customer contact management services, we believe no one company is
dominant in the industry. There are numerous and varied providers of our services, including firms specializing in
call center operations, temporary staffing and personnel placement, consulting and integration firms, and niche
providers of outsourced customer contact management services, many of whom compete in only certain markets.
Our competitors include both companies who possess greater resources and name recognition than we do, as well as
small niche providers that have few assets and regionalized (local) name recognition instead of global name
recognition. In addition to our competitors, many companies who might utilize our services or the services of one of
our competitors may utilize in-house personnel to perform such services. Increased competition, our failure to
compete successfully, pricing pressures, loss of market share and loss of clients could have a material adverse effect
on our business, financial condition and results of operations.
Many of our large clients purchase outsourced customer contact management services from multiple preferred
vendors. We have experienced and continue 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 outsourced customer contact management services companies on price.
We believe that the most significant competitive factors in the sale of our core services include the standard
requirements of quality, tailored value added service offerings, industry experience, global coverage, reliability,
scalability, security and price.
Inability to Attract and Retain Experienced Personnel May Adversely Impact Our Business
Our business is labor intensive and places significant importance on our ability to recruit, train, and retain
qualified technical and consultative professional personnel. We generally experience high turnover of our personnel
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 the English language and/or
certain technologies may exceed supply, as new and additional skills are required to keep pace with evolving
computer technology. Our ability to locate and train employees is critical to achieving our growth objective. Our
inability to attract and retain qualified personnel or an increase in wages or other costs of attracting, training, or
retaining qualified personnel could have a material adverse effect on our business, financial condition and results of
operations.
Dependence on Senior Management
Our success is largely dependent upon the efforts, direction and guidance of our senior management. Our growth
and success also depend in part on our ability 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 our business, financial condition and results of operations.
Dependence on Trend Toward Outsourcing
Our business and growth depend in large part on the industry trend toward outsourced customer contact
management services. Outsourcing means that an entity contracts with a third party, such as us, to provide customer
contact services rather than perform such services 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
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material adverse effect on our business, financial condition and results of operations. Additionally, there can be no
assurance that our cross-selling efforts will cause clients to purchase additional services from us 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 strategies, and even if we identify a company that complements
our strategies, we may be unable to acquire or merge with the company. In addition, a decrease in the price of our
common stock could hinder our growth strategy by limiting growth through stock acquisitions.
Our acquisition strategy involves other potential risks. These risks include:
(cid:131) The inability to obtain the capital required to finance potential acquisitions on satisfactory terms;
(cid:131) The diversion of our attention to the integration of the businesses to be acquired;
(cid:131) The risk that the acquired businesses will fail to maintain the quality of services that we have historically
provided;
(cid:131) The need to implement financial and other systems and add management resources;
(cid:131) The risk that key employees of the acquired business will leave after the acquisition;
(cid:131) Potential liabilities of the acquired business;
(cid:131) Unforeseen difficulties in the acquired operations;
(cid:131) Adverse short-term effects on our operating results;
(cid:131) Lack of success in assimilating or integrating the operations of acquired businesses within our business;
(cid:131) The dilutive effect of the issuance of additional equity securities;
(cid:131) The impairment of goodwill and other intangible assets involved in any acquisitions;
(cid:131) The businesses we acquire not proving profitable; and
(cid:131) Potentially incurring additional indebtedness.
Uncertainties Relating to Future Litigation
We cannot predict whether any material suits, claims, or investigations may arise in the future. Regardless of the
outcome of any future actions, claims, or investigations, we may incur substantial defense costs and such actions
may cause a diversion of management time and attention. Also, it is possible that we 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 outsourced customer contact management services. Our future success will
depend in large part on our ability to service new products, platforms and rapidly changing technology. These
factors will require us to provide adequately trained personnel to address the increasingly sophisticated, complex
and evolving needs of our clients. In addition, our 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 us to anticipate or respond rapidly to technological advances, new products and
enhancements, or changes in client requirements could have a material adverse effect on our business, financial
condition and results of operations.
Reliance on Technology and Computer Systems
We have invested significantly in sophisticated and specialized communications and computer technology and
have focused on the application of this technology to meet our clients’ needs. We anticipate that it will be necessary
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 our technology up-to-date. There can be
no assurance that any of our information systems will be adequate to meet our future needs or that we 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 our
competitiveness. Our 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.
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Risk of Emergency Interruption of Customer Contact Management Center Operations
Our operations are dependent upon our ability to protect our customer contact management centers and our
information databases against damage that may be caused by fire and other disasters, power failure,
telecommunications failures, unauthorized intrusion, computer viruses and other emergencies. The temporary or
permanent loss of such systems could have a material adverse effect on our business, financial condition and results
of operations. Notwithstanding precautions taken to protect us 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
inadequacy, or other event would not result in a prolonged interruption in our ability to provide services to our
clients. Such an event could have a material adverse effect on our business, financial condition and results of
operations.
Control By Principal Shareholder and Anti-Takeover Considerations
As of March 2, 2005, John H. Sykes, our founder and former Chairman of the Board and Chief Executive Officer,
beneficially owned approximately 35.0% of our outstanding common stock. As a result, Mr. Sykes will have
substantial influence in the election of our directors and in determining the outcome of other matters requiring
shareholder approval.
Our 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 provisions contained in the Florida Business Corporation Act and
in our Articles of Incorporation and Bylaws, including the ability of the Board of Directors 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 control. This may adversely affect the market
price of our common stock or the ability of shareholders to participate in a transaction 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 our common stock has been and may continue to be subject to wide fluctuations over short
and long periods of time. We believe that market prices of outsourced customer contact management services stocks
in general have experienced volatility, which could affect the market price of our common stock regardless of our
financial results or performance. We further believe that various factors such as general economic conditions,
changes or volatility in the financial markets, changing market conditions in the outsourced customer contact
management services industry, quarterly variations in our financial results, the announcement of acquisitions,
strategic partnerships, or new product offerings, and changes in financial estimates and recommendations by
securities analysts could cause the market price of our common stock to fluctuate substantially in the future.
Executive Officers
The following table provides the names and ages of our executive officers, and the positions and offices currently
held by each of them:
Name
Charles E. Sykes
W. Michael Kipphut
James C. Hobby
Jenna R. Nelson
Daniel L. Hernandez
David L. Pearson
William N. Rocktoff
James T. Holder
Age
41
51
54
41
38
46
42
46
Principal Position
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
Senior Vice President, Global Operations
Senior Vice President, Human Resources
Senior Vice President, Global Strategy
Senior Vice President and Chief Information Officer
Vice President and Corporate Controller
Vice President, General Counsel and Corporate Secretary
14
Charles E. Sykes joined Sykes in 1986 and was named President and Chief Executive Officer in August 2004.
From July 2003 to August 2004, Mr. Sykes was the Chief Operating Officer. From March 2000 to June 2001,
Mr. Sykes was Senior Vice President, Marketing and in June 2001 he was appointed to the position of General
Manager, Senior Vice President — the Americas. From December 1996 to March 2000, he served as 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.
W. Michael Kipphut, C.P.A., joined Sykes in March 2000 as Vice President and Chief Financial Officer and
was named Senior Vice President and Chief Financial officer 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.
James C. Hobby joined Sykes in August 2003 as Senior Vice President, the Americas, overseeing the daily
operations, administration and development of Sykes’ customer care and enterprise support operations throughout
North America, Latin America, the Asia Pacific Rim and India and was named Senior Vice President, Global
Operations in January 2005. Prior to joining Sykes, Mr. Hobby held several positions at Gateway, Inc., most
recently serving as President of Consumer Customer Care since August 1999. From January 1999 to August 1999,
Mr. Hobby served as Vice President of European Customer Care for Gateway, Inc. From January 1996 to
January 1999, Mr. Hobby served as the Vice President of European Customer Service Centers at American Express.
Prior to January 1996, Mr. Hobby held various senior management positions in customer care at FedEx Corporation
since 1983, mostly recently serving as Managing Director, European Customer Service Operations.
Jenna R. Nelson joined Sykes in August 1993 and was named Senior Vice President, Human Resources in
July 2001. From January 2001 until July 2001, Ms. Nelson held the position of 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.
Daniel L. Hernandez joined Sykes in October 2003 as Senior Vice President, Global Strategy overseeing
marketing, operations strategy and client relations worldwide. Prior to joining Sykes, Mr. Hernandez served as
President and CEO of SBC Internet Services, a division of SBC Communications Inc., since March 2000. From
February 1998 to March 2000, Mr. Hernandez held the position of Vice President/General Manager, Internet and
System Operations at Ameritech Interactive Media Services. Prior to February 1998, Mr. Hernandez held various
management positions at U S West Communications since joining the telecommunications provider in 1990.
David L. Pearson joined Sykes in February 1997 as Vice President, Engineering and was named Vice President,
Technology Systems Management in 2000 and Senior Vice President and Chief Information Officer in August 2004.
Prior to Sykes, Mr. Pearson held various engineering and technical management roles over a fifteen year period,
including eight years at Compaq Computer Corporation and five years at Texas Instruments.
William N. Rocktoff, C.P.A., joined Sykes in August 1997 as Corporate Controller and was named Treasurer
and Corporate 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.
James T. Holder, J.D., C.P.A joined Sykes in December 2000 as General Counsel and was named Corporate
Secretary in January 2001 and Vice President in January 2004. 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.
15
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 customer contact management centers are available. The following table sets forth
additional information concerning our facilities:
Properties
UNITED STATES LOCATIONS
General Usage
Corporate headquarters
Customer contact management center(1)
Customer contact management center
Customer contact management center(1)
Customer contact management center
Customer contact management center (1)
Customer contact management center (2)
Tampa, Florida
Ada, Oklahoma
Bismarck, North Dakota
Palatka, Florida
Wise, Virginia
Greeley, Colorado
Manhattan, Kansas
Milton-Freewater, Oregon Customer contact management center
Customer contact management center
Morganfield, Kentucky
Customer contact management center (1)
Perry County, Kentucky
Customer contact management center
Minot, North Dakota
Customer contact management center (2)
Pikeville, Kentucky
Customer contact management center
Ponca City, Oklahoma
Customer contact management center
Sterling, Colorado
Office
Cary, North Carolina
Poughkeepsie, New York Office
Office
St. Louis, Missouri
Square
Feet
Lease Expiration
June 2010
67,645
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
42,000 Company owned
34,000 Company owned
3,400 March 2006
1,000
January 2006
3,751 September 2024
(1) Closed and held for sale.
(2) Closed and leased.
16
Properties
INTERNATIONAL
LOCATIONS
General Usage
Square
Feet
Lease Expiration
Amsterdam, The Netherlands
London, Ontario, Canada
Customer contact management center
Customer contact management center/
33,000 September 2009
50,000 Company owned
Budapest, Hungary
Budapest, Hungary
Edinburgh, Scotland
Headquarters
Customer contact management center
Customer contact management center
Customer contact management center/
Office /Headquarters
Customer contact management centers
Customer contact management center
Customer contact management center
Customer contact management center (3)
Customer contact management center (3)
LaAurora, Heredia,
Costa Rica (two)
San Salvador, El Salvador
Toronto, Ontario, Canada
North Bay, Ontario, Canada
Sudbury, Ontario, Canada
Moncton, New Brunswick,
Customer contact management center(3)
Canada
Customer contact management center(3)
Barthuste, New Brunswick
Turku, Finland
Customer contact management center
Bochum, Germany
Customer contact management center
Customer contact management center
Pasewalk, Germany
Wilhelmshaven, Germany (two) Customer contact management centers
Customer contact management center (4)
Bangalore, India
Customer contact management center
Makati City, The Philippines
Mandaue City, The Philippines
Johannesburg, South Africa
Pasig City, The Philippines
Quezon City, The Philippines
Ed, Sweden
Sveg, Sweden
Shanghai, The
Peoples Republic of China
Prato, Italy
Shannon, Ireland
Lugo, Spain
La Coruña, Spain
Kosice, Slovakia
Galashiels, Scotland
Upplands Vasby, Sweden
Turku, Finland
Frankfurt, Germany
Bangalore, India
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Customer contact management center
Fulfillment center
Fulfillment center and Sales office
Fulfillment center
Sales office
Technology development services
22,819 August 2023
23,895
35,870
17,830
June 2005
October 2019
March 2006
131,890 September 2023
32,600 November 2023
14,600 December 2006
5,571 March 2005
2,048 December 2007
July 2006
11,331 February 2009
1,856 December 2007
12,500 February 2006
43,226
41,900 March 2007
86,205 March 2009
94,727 May 2005
101,254 December 2005
136,895 March 2023
67,742 February 2023
98,967 March 2025
127,448 December 2023
80,137 May 2024
44,000 October 2009
35,100 November 2019
33,000 October 2005
10,000 October 2022
66,000 April 2013
27,703
June 2005
32,290 December 2024
11,193 December 2024
126,700 Company owned
23,498 October 2007
26,000 March 2006
1,700 September 2005
1,500
January 2006
(3) Considered part of the Toronto, Ontario, Canada customer contact management center.
(4) Lease assigned effective May 2005.
17
Item 3. Legal Proceedings
From time to time we are 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.
18
PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Securities
Our 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 our common stock
as quoted on the NASDAQ National Market.
High
Low
Year ended December 31, 2004:
Fourth Quarter ................................................ $
Third Quarter ..................................................
Second Quarter ...............................................
First Quarter ....................................................
7.20 $ 4.51
4.43
7.66
5.34
7.71
5.22
10.07
Year ended December 31, 2003:
Fourth Quarter ................................................ $ 10.50 $ 6.70
4.57
Third Quarter ..................................................
3.75
Second Quarter ...............................................
2.85
First Quarter ....................................................
8.29
5.30
4.34
Holders of our common stock are entitled to receive dividends out of the funds legally available when and if
declared by the Board of Directors. We have not declared or paid any cash dividends on our common stock in the
past and do not anticipate paying any cash dividends in the foreseeable future.
As of March 3, 2005, there were 1,320 holders of record of the common stock. We believe that there were 6,111
beneficial owners of our common stock.
Below is a summary of stock repurchases for the quarter ended December 31, 2004 (in thousands, except average
price per share). See Note 17, Earnings Per Share, to the Consolidated Financial Statements for information
regarding our stock repurchase program.
Period
Total Number
of Shares
Purchased (1)
October 1, 2004 – October 31, 2004.....................
November 1, 2004 – November 30, 2004.............
December 1, 2004 – December 31, 2004..............
—
—
—
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
Maximum
Number Of
Shares That May
Yet Be
Purchased
Under Plans or
Programs
1,644
1,644
1,644
1,356
1,356
1,356
Average
Price
Paid Per
Share
—
—
—
(1) All shares purchased as part of a repurchase plan publicly announced on August 5, 2002. Total number of shares approved for
repurchase under the plan was 3 million with no expiration date.
19
Item 6. Selected Financial Data
The following selected financial data has been derived from our consolidated financial statements, as restated (see
Note 2 to the 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 our Consolidated
Financial Statements and related notes.
(In thousands, except per share data)
INCOME STATEMENT DATA (8) :
2004
Years Ended December 31,
2002
2003
2001
2000
Revenues ............................................................. $ 466,713
Income (loss) from operations (1,2,3,5,6) .................
12,597
Net income (loss) (1,2,3,4,5,6,7) .................................
10,814
Net income (loss) per basic share (1,2,3,4,5,6,7) ........
0.27
Net income (loss) per diluted share (1,2,3,4,5,6,7) .....
0.27
$ 480,359
11,368
9,305
0.23
0.23
$ 452,737 $ 496,722 $ 603,606
(12,308 )
46,787
1.13
1.13
(11,295 )
(18,631 )
(0.46 )
(0.46 )
(360 )
409
0.01
0.01
BALANCE SHEET DATA (8) :
Total assets ..........................................................
Long-term debt, less current installments ...........
Shareholders’ equity ...........................................
312,526
—
210,035
318,175
—
200,832
296,841 309,780
—
182,345 191,212
—
357,954
8,759
195,892
(1)
The amounts for 2004 include a $7.1 million net gain on the sale of facilities, a $5.4 million net gain on
insurance settlement, a $0.1 million reversal of restructuring and other charges and $0.7 million of
charges associated with the impairment of long-lived assets.
(2)
The amounts for 2003 include a $2.1 million net gain on the sale of facilities and a $0.6 million reversal of
restructuring and other charges.
(3)
(4)
(5)
(6)
(7)
The amounts for 2002 include $20.8 million of restructuring and other charges, $1.5 million of charges
associated with the impairment of long-lived assets and a $1.6 million net gain on the sale of facilities.
The amounts for 2002 include $13.8 million of charges associated with the litigation settlement.
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.
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.
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 we provide customer support.
(8)
Certain amounts from prior years have been reclassified to conform to the current year’s presentation.
20
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, as restated, and the
notes thereto that appear elsewhere in this document. As discussed in the explanatory statement at the front of this
report, and also in Note 2 to the consolidated financial statements included herein, we have restated the
consolidated balance sheets as of December 31, 2004 and 2003 and the consolidated statements of cash flows for
the years ended December 31, 2004, 2003 and 2002. The following discussion and analysis compares the year
ended December 31, 2004 (“2004”) to the year ended December 31, 2003 (“2003”), and 2003 to the year ended
December 31, 2002 (“2002”).
The following discussion and analysis and other sections of this document contain forward-looking statements
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
identify such forward-looking statements. Similarly, statements 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/A for the year ended December 31, 2004 in Item 1 in the section entitled
“Factors Influencing Future Results and Accuracy of Forward-Looking Statements.”
Overview
We provide outsourced customer contact management solutions and services with an emphasis on inbound
technical support and customer service, which represented 93.9% of consolidated revenues in 2004, delivered
through multiple communication channels encompassing phone, e-mail, Web and chat. Revenue from technical
support and customer service, provided through our customer contact management 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 services is generally billed on a per unit basis.
We also provide a range of enterprise support services for our client’s internal support operations, from technical
staffing services to outsourced corporate help desk services. Revenues usually are billed on a time and material
basis, generally by the minute or 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 percentage-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 personnel 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.
Recognition of income associated with grants from local or state governments of land and the acquisition of
property, buildings and equipment is deferred 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 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 $20.6 million
and $27.4 million at December 31, 2004 and 2003, respectively.
The net (gain) loss on disposal of property and equipment includes the net gain on the sale of various facilities in
2004 and 2003 offset by the net loss on the disposal of property and equipment.
The net gain on insurance settlement includes the insurance proceeds received for damage to our Marianna,
Florida customer contact management center in September 2004.
Restructuring and other charges (reversals) consist of the following: 2004 and 2003 reversals of certain accruals
related to the 2002, 2001 and 2000 restructuring plans; and 2002 charges of $20.8 million related to the closure and
consolidation of two U.S. and three European customer contact management centers, capacity reductions within the
21
European fulfillment operations, the write-off of certain assets, lease termination and severance and related costs.
Impairment of long-lived assets charges of $0.7 million in 2004 relate to certain property and equipment in
Bangalore, India as a result of our plans to migrate the call volumes of the customer contact management services
and related operations in India to other facilities in the Asia Pacific region in 2005. As a result of this plan of
migration, the Company estimates that during the first quarter of 2005 it will incur charges of approximately $0.3
million as a result of severance and related costs and $0.3 million related to other exit costs. In connection with this
migration, the Company expects to redeploy property and equipment located in India totaling approximately $1.9
million to other more strategically-aligned offshore facilities in the Asia Pacific region. The total charges related to
the plan of migration are anticipated to be approximately $1.3 million. In 2002, impairment of long-lived assets
charges of $1.5 million include the write-off of certain intangible assets associated with a customer contact
management agreement for which the level of call volumes fell below anticipated levels.
Other income (expense) consists primarily of interest income, net of interest expense, foreign currency transaction
gains and losses, and a $13.8 million charge for the uninsured portion of a litigation settlement and associated legal
costs in September 2002. Foreign currency transaction gains and losses generally result from exchange rate
fluctuations on intercompany transactions and the revaluation of cash and other current assets that are settled in a
currency other than functional currency.
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, and nondeductible expenses for income tax purposes.
22
Results of Operations
The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items
reflected in our Statements of Operations:
PERCENTAGES OF REVENUES:
Revenues .............................................................................
Direct salaries and related costs ..........................................
General and administrative .................................................
Net gain on disposal of property and equipment .................
Net gain on insurance settlement .........................................
Restructuring and other charges (reversals) ........................
Impairment of long-lived assets ..........................................
Income (loss) from operations ............................................
Other income (expense) (1) ..................................................
Income (loss) before provision (benefit) for income taxes ..
Provision (benefit) for income taxes ...................................
Net income (loss) ................................................................
(1)
Includes litigation settlement of 3.1% in 2002.
Years Ended December 31,
2003
2002
2004
100.0%
64.4
35.4
(1.5)
(1.2)
0.0
0.2
2.7
0.7
3.4
1.1
2.3%
100.0 %
64.4
33.7
(0.3 )
—
(0.1 )
—
2.3
0.6
2.9
1.0
1.9 %
100.0 %
63.4
34.4
(0.2 )
—
4.6
0.3
(2.5 )
(2.9 )
(5.4 )
(1.3 )
(4.1 )%
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of
Operations (in thousands):
Revenues ............................................................
Direct salaries and related costs .........................
General and administrative ................................
Net gain on disposal of property and
equipment .......................................................
Net gain on insurance settlement ........................
Restructuring and other charges (reversals) .......
Impairment of long-lived assets .........................
Income (loss) from operations ...........................
Other income (expense) (2) .................................
Income (loss) before (provision) benefit for
income taxes ...................................................
Provision (benefit) for income taxes ..................
Net income (loss) ...............................................
2004
$ 466,713
300,600
165,232
Years Ended December 31,
2003
$ 480,359
309,489
161,743
2002
$ 452,737
287,141
155,547
(6,915)
(5,378)
(113)
690
12,597
3,264
(1,595 )
—
(646 )
—
11,368
2,588
15,861
5,047
10,814
$
13,956
4,651
9,305
$
(945)
—
20,814
1,475
(11,295)
(13,151)
(24,446)
(5,815)
$ (18,631)
(2)
Includes litigation settlement of $13.8 million in 2002.
The following table summarizes our revenues, for the periods indicated, by geographic region (in thousands):
Years Ended December 31,
2003
2002
2004
Revenues:
Americas ..........................
EMEA ..............................
Consolidated .................
$ 283,253
183,460
$ 466,713
$ 321,195
159,164
$ 480,359
$
$
299,185
153,552
452,737
23
2004 Compared to 2003
Revenues
During 2004, we recognized consolidated revenues of $466.7 million, a decrease of $13.7 million or 2.9% from
$480.4 million of consolidated revenues for 2003.
On a geographic segmentation, revenues from the Americas region, including the United States, Canada, Latin
America, India and the Asia Pacific Rim, represented 60.7%, or $ 283.3 million for 2004 compared to 66.9%, or
$321.2 million for 2003. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 39.3 %, or $ 183.4 million for 2004 compared to 33.1% or $159.2 million for 2003.
The decrease in Americas’ revenue of $ 37.9 million, or 11.8%, for 2004, compared to 2003, reflected the client-
driven migration of call volumes from the United States to comparable or higher margin offshore operations,
including Latin America and the Asia Pacific Rim, the resulting mix-shift in revenues from the United States to
offshore (each offshore seat generates roughly half the revenue dollar equivalence of a U.S. seat) and the ramp down
of a technology client late in the first quarter of 2003. In addition to the revenue mix-shift, the revenue decline
reflected an overall reduction in U.S. customer call volumes primarily attributable to the decision by certain
communications and technology clients to exit dial-up Internet service customer support programs in early 2004.
This decrease was partially offset by an increase in revenues from our offshore operations, which represented 27.6%
of consolidated revenues for 2004 compared to 16.9% for 2003. We expect this trend of generating more of our
revenues from offshore operations to continue in 2005. We anticipate that as our offshore operations grow and
become a larger percentage of revenues, the total revenue and revenue growth rate may decline since each offshore
seat generates less average revenue per seat than in the United States. While the average offshore revenue per seat is
less, the operating margins generated offshore are generally comparable or higher than those in the United States.
However, our ability to maintain these offshore operating margins longer term is difficult to predict due to potential
increased competition for the available workforce in offshore markets.
The increase in EMEA’s revenue of $24.2 million, or 15.3%, for 2004 was primarily related to the strengthening
Euro, which positively impacted revenues for 2004 by approximately $16.5 million compared to the Euro in 2003.
Excluding this foreign currency benefit, EMEA’s revenues would have increased $7.7 million compared with last
year reflecting an improvement in certain customer call volumes and higher incentive payments related to quality
operating performance. However, the persistent economic sluggishness in our key European markets continues to
present challenges for us. The increase in revenue in 2004, compared to the same period in 2003, also included the
recognition of deferred revenues of $0.8 million related to a former client.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $8.9 million or 2.9% to $300.6 million for 2004, from $309.5 million
in 2003. Excluding the negative foreign currency impact of $11.0 million related to the strengthening Euro in 2004
compared to the Euro in 2003, direct salaries and related costs decreased $19.9 million compared with last year. This
decrease was due to lower direct and indirect salaries and related benefits primarily attributable to an overall
reduction in U.S. customer call volumes. This decrease was offset by 1) higher telephone costs related to
transporting calls offshore, 2) higher staffing and training costs associated with the ramp-up offshore and certain
duplicative costs as we simultaneously ramped-down U.S. customer contact management centers, 3) termination
costs related to the consolidation of two European customer contact management centers and 4) higher claim costs
associated with our automotive program in Canada related to higher fuel costs and the severe Canada winter. The
migration offshore was substantially complete at the end of the third quarter of 2004. As a percentage of revenues,
direct salaries and related costs was 64.4% in both 2004 and 2003.
General and Administrative
General and administrative expenses increased $3.5 million or 2.2% to $165.2 million for 2004, from $161.7
million in 2003. Excluding the negative foreign currency impact of $4.6 million related to the strengthening Euro in
2004 compared to the Euro in 2003, general and administrative expenses decreased $1.1 million compared with last
year. This decrease was principally attributable to a decrease in depreciation expense of $1.0 million related to the
2003 expiration of two technology client contracts, lower insurance costs, technology related costs and bad debts.
This decrease was partially offset by 1) higher compliance costs of $3.3 million related to the Sarbanes-Oxley Act,
2) compensation costs of $1.7 million related to the former chairman’s retirement and 3) lease and utilities costs
24
associated with expansion of offshore facilities. As a percentage of revenues, general and administrative expenses
increased to 35.4% in 2004 from 33.7% in 2003.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $6.9 million for 2004 includes a $2.8 million net gain on
the sale of our Hays, Kansas facility, a $2.7 million net gain on the sale of our Klamath Falls, Oregon facility, a
$0.1 million net gain on the sale of a parcel of land at our Pikeville, Kentucky facility and a $1.5 million net gain on
the sale of our Eveleth, Minnesota facility, offset by a $0.2 million loss on disposal of property and equipment. This
compares to a $1.6 million net gain on disposal of property and equipment, which includes a $1.9 million net gain
on the sale of our Scottsbluff, Nebraska facility (closed in connection with the 2002 restructuring plan) and a
$0.2 million portion of the net gain related to the installment sale of our Eveleth, Minnesota facility offset by a
$0.5 million loss on disposal of property and equipment.
Net Gain on Insurance Settlement
In September 2004, the building and contents of our customer contact management center located in Marianna,
Florida was severely damaged by Hurricane Ivan. Upon settlement with the insurer in December 2004, we
recognized a net gain of $5.4 million after write-off of the property and equipment, which had a net book value of
$3.4 million, net of the related deferred grants of $2.2 million. We also received an insurance recovery for business
interruption during 2004 and recognized $0.1 million and $0.2 million, respectively, as a reduction to “Direct
salaries and related costs” and “General and administrative” costs in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2004. In December 2004, we reached an agreement with the City of
Marianna to donate the underlying land to the city with $0.1 million to assist with the site demolition and clean up of
the property with no further obligation of the Company.
Reversal of Restructuring and Other Charges
In 2004, restructuring and other charges included a $0.1 million reversal of certain charges related to the
remaining lease termination and closure costs for two European customer contact management centers and one
European fulfillment center.
In 2003, restructuring and other charges included a $0.6 million reversal of certain charges related to the final
termination settlements for the closure of two of our European customer contact management centers and one
European fulfillment center, the remaining site closure costs for our Galashiels, Scotland print facility and our
Scottsbluff, Nebraska facility, which were both sold in 2003, offset by additional accruals related to the final
settlement of certain lease termination and site closure costs.
Impairment of Long-Lived Assets
During 2004, we recorded a charge for impairment of long-lived assets of $0.7 million related to certain property
and equipment in Bangalore, India as a result of our plans to migrate the call volumes of the customer contact
management services and related operations in India to other facilities in the Asia Pacific region in 2005.
Other Income and Expense
Other income increased $0.7 million to $3.3 million for 2004, from $2.6 million in 2003. This increase was
primarily attributable to a $0.4 million increase in interest earned on cash and cash equivalents, net of interest
expense including $0.8 million of interest received on a foreign income tax refund, and a $0.6 million increase in
other miscellaneous income offset by a $0.3 million decrease in foreign currency translation gains, net of losses
including $0.7 million related to the liquidation of a foreign entity. Other income excludes the effects of cumulative
translation effects included in Accumulated Other Comprehensive Loss in shareholders’ equity in the accompanying
Consolidated Balance Sheets.
Provision (Benefit) for Income Taxes
The 2004 provision for income taxes of $5.1 million was based upon pre-tax book income of $15.9 million,
compared to the 2003 provision for income taxes of $4.7 million based upon a pre-tax book income of
$14.0 million. The $0.4 million change was primarily attributable to the $1.9 million change in pre-tax book income.
25
The effective tax rate was 31.8% for 2004 and 33.3% for 2003. This decrease in the effective tax rate resulted from a
shift in our mix of earnings within tax jurisdictions and the related effects of permanent differences, state income
taxes and foreign income tax rate differentials (including tax holiday jurisdictions) offset by a requisite valuation
allowance for the year-to-date United States tax loss benefit provided during the second, third and fourth quarters of
2004 (partially reduced by the reversal of certain specific tax contingency reserves).
Net Income (Loss)
As a result of the foregoing, we reported income from operations for 2004 of $12.6 million, an increase of
$1.2 million from 2003. This increase was principally attributable to an $8.9 million decrease in direct salaries and
related costs, a $5.3 million increase in net gain on disposal of property and equipment and a $5.4 million net gain
on insurance settlement offset by a $13.7 million decrease in revenues, a $3.5 million increase in general and
administrative costs, a $0.7 million increase in impairment of long-lived assets and a $0.5 million decrease in
reversals of restructuring and other charges, as previously discussed. The $1.2 million increase in income from
operations and an increase in other income of $0.7 million were offset by a $0.4 million higher tax provision,
resulting in net income of $10.8 million for 2004, an increase of $1.5 million compared to 2003.
2003 Compared to 2002
Revenues
During 2003, we recorded consolidated revenues of $480.4 million, an increase of $27.7 million or 6.1% from
$452.7 million of consolidated revenues for 2002.
On a geographic segmentation basis, revenues from the Americas region, including the United States, Canada,
Latin America, India and the Asia Pacific Rim, represented 66.9%, or $321.2 million for 2003 compared to 66.1%,
or $299.2 million for 2002. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 33.1%, or $159.2 million for 2003 compared to 33.9% or $153.5 million for 2002.
The increase in Americas’ revenue of $22.0 million, or 7.4%, for 2003 was primarily attributable to an increase in
revenues from our offshore operations, including Latin America, India and the Asia Pacific Rim, resulting from the
continued acceleration in demand for a lower cost customer contact management solution as well as further
diversification into new vertical markets. These offshore operations represented 16.9% of consolidated revenues for
2003 compared to 9.7% for 2002. We expect this trend of generating more of our revenues from offshore operations
to continue into 2004. The increase in the Americas’ revenue was partially offset by the overall reduction in
customer call volumes resulting from the economic downturn and the phasing out of two U.S. based original
equipment manufacturer (“OEM”) technology clients. We anticipate that as our offshore operations grow and
become 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 North America and Europe. While the average offshore
revenue per seat is less, the operating margins generated offshore are generally comparable or higher than those in
North America and Europe. However, our ability to maintain these offshore operating margins longer term is
difficult to predict due to potential increased competition for the available workforce in offshore markets.
The increase in EMEA’s revenue of $5.7 million, or 3.7%, for 2003 was primarily related to the strengthening
Euro, which positively impacted revenues for 2003 by approximately $26.2 million compared to the Euro in 2002.
Without this foreign currency benefit, EMEA’s revenues would have declined $20.5 million compared with last year
due to the continued softness in customer call volumes resulting from the weak European economy.
Direct Salaries and Related Costs
Direct salaries and related costs increased $22.4 million or 7.8% to $309.5 million for 2003, from $287.1 million
in 2002. As a percentage of revenues, direct salaries and related costs increased to 64.4% in 2003 from 63.4% for
2002. This increase was primarily attributable to an increase in staffing and training costs associated with the ramp-
up of new business in our offshore operations, lower call volumes in the United States and Europe and lower margin
European centers that were closed in the first quarter of 2003 in connection with our 2002 restructuring plan.
Although the strengthening Euro positively impacted revenues, it increased direct salaries and related costs for 2003
by approximately $17.1 million compared to the Euro in 2002.
26
General and Administrative
General and administrative expenses increased $6.2 million or 4.0% to $161.8 million for 2003, from $155.6
million in 2002. As a percentage of revenues, general and administrative expenses decreased to 33.7% in 2003 from
34.4% in 2002. This decrease was principally attributable to lower depreciation and bad debt expense partially offset
by higher insurance and compliance costs as well as higher lease, travel, training, utilities and maintenance costs
associated with the expansion of offshore facilities and certain duplicative operating costs related to the call volumes
migrating offshore. Similar to the negative effect on direct salaries and related costs, the strengthening Euro also
increased general and administrative expenses for 2003 by approximately $8.7 million compared to the Euro in
2002.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $1.6 million for 2003 included a $1.9 million net gain on
the sale of our Scottsbluff, Nebraska facility (which was closed in connection with the 2002 restructuring plan) and a
$0.2 million portion of the net gain related to the installment sale of our Eveleth, Minnesota facility offset by a
$0.5 million loss on disposal of property and equipment. This compares to a $1.0 million net gain on disposal of
property and equipment for 2002, which included a $1.8 million net gain on the sale of one of our Bismarck, North
Dakota facilities offset by a $0.2 million net loss on the sale of certain assets of the print facility in Galashiels,
Scotland and a $0.6 million loss on disposal of property and equipment.
Restructuring and Other Charges (Reversals)
In 2003, restructuring and other charges included a $0.6 million reversal of certain charges related to the final
termination settlements for the closure of two of our European customer contact management centers and one
European fulfillment center, the remaining site closure costs for our Galashiels, Scotland print facility and our
Scottsbluff, Nebraska facility, which were both sold in 2003, offset by additional accruals related to the final
settlement of certain lease termination and site closure costs.
In 2002, restructuring and other charges included a $20.8 million charge related to 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 contact management centers, capacity reductions within the European fulfillment operations and the
elimination of specialized e-commerce assets primarily in response to the October 2002 notification of the
contractual 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 our infrastructure in-line with the
current business environment.
Impairment of Long-Lived Assets
During 2002, we recorded a charge for impairment of long-lived assets of $1.5 million related to the write-off of
certain intangible assets associated with a customer contact management agreement for which the level of call
volumes fell below anticipated levels.
Other Income and Expense
Other income was $2.6 million for 2003, compared to other expense of $13.2 million for 2002. This change of
$15.8 million was primarily attributable to a $13.8 million charge for the uninsured portion of a class action
settlement in 2002, a $0.8 million increase in interest earned on cash and cash equivalents net of interest expense
and a $1.2 increase in foreign currency translation gains net of losses and other miscellaneous income.
Provision (Benefit) for Income Taxes
The 2003 tax provision of $4.7 million was based upon pre-tax book income of $14.0 million, whereas the 2002
tax benefit of $5.8 million was based upon a pretax book loss of $24.4 million. The $10.5 million change was
primarily attributable to the $38.4 million change in pre-tax book income. The increase in the effective tax rate for
2003 resulted from a shift in our mix of earnings within tax jurisdictions and the related effects of permanent
differences, state income taxes, varying foreign income tax rates (including tax holiday jurisdictions) and requisite
valuation allowances.
27
Net Income (Loss)
As a result of the foregoing, income from operations for 2003 was $11.4 million, an increase of $22.6 million
from 2002. As previously discussed, this increase was principally attributable to a $27.7 million increase in
revenues, a $0.6 million increase in net gain on disposal of property and equipment, a $21.4 million decrease in
restructuring and other charges and a $1.5 million decrease in impairment of long-lived assets offset by a
$22.4 million increase in direct salaries and related costs and a $6.2 million increase in general and administrative
costs. The $22.6 million increase in income from operations and an increase in other income of $15.8 million were
offset by a $10.5 million higher tax provision resulting in net income of $9.3 million for 2003, an increase of $27.9
million compared to 2002.
28
Quarterly Results
The following information presents our unaudited quarterly operating results for 2004 and 2003. The data has
been prepared on a basis consistent with the Consolidated Financial Statements, as restated, included elsewhere in
this Form 10-K/A, and include all adjustments, consisting of normal recurring accruals that we consider necessary
for a fair presentation thereof.
(In thousands, except per share data)
81
94
—
—
—
—
—
107
(47 )
(113 )
9/30/03
9/30/04
(1,394 )
(1,736 )
(2,874 )
(5,378 )
(2,741 )
03/31/04
12/31/03
06/30/03
12/31/04
83,389
41,276
79,119
43,099
72,766
41,303
76,506
39,862
76,508
38,875
70,578
41,338
03/31/03
06/30/04
Revenues...................................... $ 120,713 $ 111,507 $ 113,450 $ 121,043 $ 124,212 $ 119,912 $ 118,949 $ 117,286
77,356
Direct salaries and related costs ...
73,867
General and administrative(1) .......
39,907
41,315
Net (gain) loss on disposal of
property and equipment(2,3) ......
Net gain on insurance
settlement(4) ..............................
Restructuring and other charges
(reversals) (5).............................
Impairment of long-lived
assets(6) .....................................
Income (loss) from operations .....
Other income (expense)(3) ............
Income (loss) before provision
(benefit) for income taxes ........
Provision (benefit) for income
taxes .........................................
Net income (loss) ......................... $
Net income (loss) per basic
share(7)..................................... $
Total weighted average basic
shares ......................................
Net income (loss) per diluted
share(7)..................................... $
Total weighted average diluted
shares ......................................
—
(881 )
1,209
—
(338 )
1,893
690
11,351
157
—
2,465
5
—
3,459
408
—
5,480
490
—
2,487
1,347
2,039
3,931 $
1,398
1,072 $
3,084
8,424 $
1,314
2,553 $
481
1,074 $
1,201
2,633 $
84
244 $
97
188
0.10 $
0.10 $
0.01 $
0.01 $
0.21 $
0.21 $
0.06 $
0.06 $
0.03 $
0.03 $
0.03 $
0.03 $
0.07 $
0.07 $
39,189
39,998
39,882
40,350
40,424
39,259
39,197
40,184
40,307
40,445
40,491
39,304
40,216
40,368
40,371
40,388
11,508
(200 )
3,867
5,970
3,834
2,470
1,555
(446)
0.00
0.00
285
328
—
—
—
—
(58)
343
(1)
(2)
(3)
The quarter ended September 30, 2004 includes a $2.3 million estimated compensation accrual related to
the Chairman’s retirement and the quarter ended December 31, 2004 includes a $0.6 million reversal of
part of this accrual related to life insurance premiums to be paid directly to the insurer over the policy
period rather than to the insured in a lump sum.
The quarters ended December 31, 2003 and September 30, 2003 include a net gain of $0.2 million and
$1.9 million related to the partial recognition of the sale of the Eveleth, Minnesota and Scottsbluff,
Nebraska facilities, respectively. In addition, the quarters ended September 30, 2004, June 30, 2004 and
March 31, 2004 include a net gain of $2.8 million related to the sale of the Hays, Kansas facility, $1.6
million related to the sales of the Eveleth, Minnesota facility and the parcel of land at our Pikeville,
Kentucky facility; and $2.7 million related to the sale of the Klamath Falls, Oregon facility, respectively.
The Net (gain) loss on disposal of property and equipment of $0.1 million and $0.1 million were previously
reported in Other income (expense) in our quarterly reports on Form 10-Q for the quarters ended June 30,
2003 and March 31, 2003, respectively.
(4)
(5)
The quarter ended December 31, 2004 includes a net gain on insurance settlement of $5.4 million.
The quarters ended December 31, 2004, December 31, 2003 and September 30, 2003 include reversals of
restructuring and other charges of $0.1 million, $0.4 million and $0.2 million, respectively.
(6)
The quarter ended December 31, 2004 includes a $0.7 million charge associated with the impairment of
long-lived assets.
(7)
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.
29
Liquidity and Capital Resources
Our primary sources of liquidity are generally cash flows generated by operating activities and from available
borrowings under our revolving credit facilities. We utilize these capital resources to make capital expenditures
associated primarily with our customer contact management services, invest in technology applications and tools to
further develop our service offerings and for working capital and other general corporate purposes, including
repurchase of our common stock in the open market and to fund possible acquisitions. In future periods, we intend
similar uses of these funds.
On August 5, 2002, the Company’s Board of Directors authorized the Company to purchase up to three million
shares of its outstanding common stock. A total of 1.6 million shares have been repurchased under this program
since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private
transactions, and the purchases are based on factors, including but not limited to, the stock price and general market
conditions. For the year ended December 31, 2004, the Company had repurchased approximately 1.1 million
common shares under the 2002 repurchase program at prices ranging between $5.55 and $7.58 per share for a total
cost of $7.1 million.
During the year ended December 31, 2004, we generated $13.7 million in cash from operating activities and
received $0.4 million in cash from issuance of stock, $9.8 million in cash from the sale of facilities, property and
equipment and $6.9 million in cash from an insurance settlement and insurance payment for business interruption.
Further, we used $25.7 million in funds for capital expenditures and $7.1 million to repurchase stock in the open
market resulting in a $1.8 million increase in available cash (including the favorable effects of international currency
exchange rates on cash of $3.8 million).
Net cash flows provided by operating activities for the year ended December 31, 2004 were $13.7 million,
compared to net cash flows provided by operating activities of $34.2 million for the year ended December 31, 2003.
The $20.5 million decrease in net cash flows from operating activities was due to a net decrease in non-cash
reconciling items of $7.0 million such as deferred income taxes, net gain on disposal of property and equipment,
gain on a property insurance settlement and foreign exchange gain, a net change in assets and liabilities of $15.0
million, offset by an increase in net income of $1.5 million. This $15.0 million net change in assets and liabilities
was principally a result of a $5.8 million increase in receivables, a $7.6 million decrease in income taxes payable
and $4.7 million decrease in deferred revenue and other liabilities offset by a $3.1 million increase in other assets.
Capital expenditures, which are generally funded by cash generated from operating activities and borrowings
available under our credit facilities, were $25.7 million for the year ended December 31, 2004, compared to $29.3
million for the year ended December 31, 2003, a decrease of $3.6 million, which was driven primarily by declining
investments in offshore facilities. During the year ended December 31, 2004, approximately 93% of the capital
expenditures were the result of investing in new and existing customer contact management centers, primarily
offshore, and 7% was expended primarily for maintenance and systems infrastructure. In 2005, we anticipate capital
expenditures in the range of $10.0 million to $15.0 million.
One primary source of future cash flows from financing activities is from borrowings under our $50.0 million
revolving credit facility (the “Credit Facility”), which amount is subject to certain borrowing limitations. Pursuant to
the terms of the Credit Facility, the amount of $50.0 million may be increased up to a maximum of $100.0 million
with the prior written consent of the lenders. The $50.0 million Credit Facility includes a $10.0 million swingline
subfacility, a $15.0 million letter of credit subfacility and a $40.0 million multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general corporate purposes
including acquisitions, share repurchases, working capital support, and letters of credit, subject to certain limitations.
The Credit Facility, including the multi-currency subfacility, accrues interest, at our option, at (a) the Base Rate
(defined as the higher of the lender’s prime rate or the Federal Funds rate plus 0.50%) plus an applicable margin up
to 0.50%, or (b) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin up to 2.25%. Borrowings
under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to 0.50% and
borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an applicable margin up to 2.25%.
In addition, a commitment fee of up to 0.50% is charged on the unused portion of the Credit Facility on a quarterly
basis. The borrowings under the Credit Facility, which will terminate on March 14, 2007, are secured by a pledge of
65% of the stock of each of our direct foreign subsidiaries. The Credit Facility prohibits us from incurring additional
indebtedness, subject to certain specific exclusions. There were no borrowings in 2004 and no outstanding balances
30
as of December 31, 2004 with $50.0 million availability under the Credit Facility. At December 31, 2004, we were
in compliance with all loan requirements of the Credit Facility.
At December 31, 2004, we had $93.9 million in cash, of which approximately $79.0 million was held in
international operations and may be subject to additional taxes if repatriated to the United States. On October 22,
2004 the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary
incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent
dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to
a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act.
As such, we are not yet in a position to decide on whether, and to what extent, we might repatriate foreign earnings
that have not yet been remitted to the U.S. Based on our analysis to date, however, it is reasonably possible that we
may repatriate some amount up to $50.0 million. The related range of income tax effects of such repatriation cannot
reasonably be estimated. We expect to be in a position to finalize our assessment by December 31, 2005.
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 requirements (if any),
continued expansion objectives, anticipated levels of capital expenditures for the foreseeable future and stock
repurchases.
Off-Balance Sheet Arrangements and Other
At December 31, 2004, we did not have any material commercial commitments, including guarantees or standby
repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities
often referred to as structured finance or special purpose entities or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes.
From time to time, during the normal course of business, we may make certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions. These include:
(i) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct
and (ii) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, we
have agreements whereby we indemnify certain officers and directors for certain events or occurrences while the
officer or director is, or was, serving at our request in such capacity. The indemnification period covers all pertinent
events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is unlimited; however, we have
director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future
amounts paid. We believe the applicable insurance coverage is generally adequate to cover any estimated potential
liability under these indemnification agreements. The majority of these indemnities, commitments and guarantees do
not provide for any limitation of the maximum potential for future payments we could be obligated to make. We
have not recorded any liability for these indemnities, commitments and other guarantees in the accompanying
Consolidated Balance Sheets.
31
Contractual Obligations
The following table summarizes our contractual cash obligations at December 31, 2004, and the effect these
obligations are expected to have on liquidity and cash flow in future periods (in thousands):
Payments Due By Period
Total
Less Than 1
Year
1 – 3 Years 4 – 5 Years After 5 Years
Operating leases (1) .................................
Accrued restructuring charges (2) ............
Purchase obligations (3) ...........................
Other long-term liabilities (4) ..................
Total contractual cash obligations .....
$
51,546
478
26,819
21
$
14,375
$ 14,271
$
478
14,315
21
—
12,504
—
$
78,864
$
29,189
$ 26,775
$
7,331
—
—
—
7,331
$ 15,569
—
—
—
$ 15,569
(1) Amounts represent the expected cash payments of our operating leases as discussed in Note 18 to the
Consolidated Financial Statements.
(2) Amounts represent the expected cash payments in connection with the 2002 and 2000 restructuring plans as
discussed in Note 16 to the Consolidated Financial Statements.
(3) Purchase obligations include agreements to purchase goods or services that are enforceable and legally
binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase
obligations exclude agreements that are cancelable without penalty.
(4) Other long-term liabilities, which exclude deferred income taxes, represent the expected cash payments due
minority shareholders of certain subsidiaries and others.
Critical Accounting Policies and Estimates
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 different assumptions or conditions.
We believe the following accounting policies are the most critical since these policies require significant
judgment or involve complex estimations that are important to the portrayal of our financial condition and operating
results:
(cid:131) We recognize revenue pursuant to applicable accounting standards, including SEC Staff Accounting Bulletin
(“SAB”) No. 101 (SAB 101), “ Revenue Recognition in Financial Statements,” SAB 104, “Revenue
Recognition” and the Emerging Issues Task force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” SAB 101, as amended, and SAB 104 summarize certain of the SEC staff’s views in applying
generally accepted accounting principles to revenue recognition in financial statements and provides guidance
on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a
specific industry. EITF No. 00-21 provides further guidance on how to account for multiple element contracts.
We recognize revenue from services as the services are performed under a fully executed contractual agreement
and record estimated reductions to revenue for penalties and holdbacks for failure to meet specified minimum
service levels and other performance based contingencies. 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, which relies on estimates of total expected revenue and related costs. Revisions to these
estimates, which could result in adjustments to fixed price contracts and estimated losses, are recorded in the
period when such adjustments or losses are known. Product sales are recognized upon shipment to the customer
and satisfaction of all obligations.
We recognize revenue from licenses of our 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
32
rights are fixed and determinable. If any portion of the license fees or rights is subject to forfeiture, refund or
other contractual contingencies, we postpone revenue recognition until these contingencies have been removed.
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.
Certain contracts to sell our products and services contain multiple elements or non-standard terms and
conditions. As a result, we evaluate each contract and a thorough contract interpretation is sometimes required
to determine the appropriate accounting, including whether the deliverables specified in a multiple element
arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how
the price should be allocated among the deliverable elements and the timing of revenue recognition for each
element. We recognize revenue for delivered elements only when the fair values of undelivered elements are
known, uncertainties regarding client acceptance are resolved, and there are no client-negotiated refund or
return rights affecting the revenue recognized for delivered elements. Changes in the allocation of the sales
price between deliverable elements might impact the timing of revenue recognition, but would not change the
total revenue recognized on the contract.
We recognize revenue associated with the grants of land and the cash grants for the acquisition of property,
buildings and equipment for customer contact management 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 $20.6
million as of December 31, 2004. Of the $20.6 million, $6.7 million is classified as current and the remaining
$13.9 million is classified as non-current. Income from operations included amortization of the deferred grants
of $2.1 million for the year ended December 31, 2004.
(cid:131) We maintain allowances for doubtful accounts of $4.3 million as of December 31, 2004, or 4.8% of receivables,
for estimated losses arising from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in a reduced ability to make payments, additional
allowances may be required which would reduce income from operations.
(cid:131) As of December 31, 2004, we had net deferred tax assets of $16.1 million, which is net of a valuation allowance
of $30.4 million. We maintain a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not
that some portion or all of such deferred tax assets will not be realized. Available evidence which is considered
in determining the amount of valuation allowance required includes, but is not limited to, our estimate of future
taxable income and any applicable tax-planning strategies. As of December 31, 2004, we determined the
valuation allowance of $30.4 million was necessary to reduce foreign deferred tax assets approximately $20.0
million and US deferred tax assets approximately $10.4 million, where it was more likely than not that some
portion or all of such deferred tax assets will not be realized. The recoverability of the remaining net deferred
tax assets of $16.1 million is dependent upon future profitability within each tax jurisdiction. As of
December 31, 2004, based on our estimates of future taxable income and any applicable tax-planning strategies
within these tax jurisdictions, we believe that it is more likely than not that all of these deferred tax assets will
be realized. (See Note 14 in the accompanying Consolidated Financial Statements).
(cid:131) We hold a 6.5% ownership interest in SHPS, Incorporated which is accounted for at cost of approximately
$2.1 million as of December 31, 2004. We will record an impairment charge or loss if we believe the
investment has experienced a decline in value that is other than temporary. 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 investment and, therefore, might require an impairment charge in the future.
(cid:131) We review long-lived assets, which had a carrying value of $88.1 million as of December 31, 2004, including
goodwill and property and equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable and at least annually for impairment testing of
goodwill. An asset is considered to be impaired when the carrying amount exceeds the fair value. Upon
determination that the carrying value of the asset is impaired, we would record an impairment charge or loss to
reduce the asset to its fair value. 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 investment and,
therefore, might require an impairment charge in the future.
(cid:131) Self-insurance related liabilities of $1.7 million as of December 31, 2004 include estimates for, among other
things, projected settlements for known and anticipated claims for worker’s compensation and employee health
33
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 estimates 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 such adjustments or charges are known.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based
Payment” (“SFAS No. 123R”), which requires, among other things, that all share-based payments to employees,
including grants of stock options, be measured at their grant-date fair value and expensed in the consolidated
financial statements. The accounting provisions of SFAS No. 123R are effective for reporting periods beginning
after June 15, 2005; therefore, we are required to adopt SFAS No. 123R in the third quarter of 2005. The pro forma
disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement
recognition. See "Stock-Based Compensation" in Note 1 to the accompanying Consolidated Financial Statements for
the pro forma net income (loss) and net income (loss) per share amounts for 2002 through 2004, as if the fair-value-
based method had been used, similar to the methods required under SFAS No. 123R to measure compensation
expense for employee stock awards. We have not yet determined whether the adoption of SFAS No. 123R will
result in amounts that are materially different from those currently provided under the pro forma disclosures under
SFAS No. 123 in Note 1 to the accompanying Consolidated Financial Statements. The adoption of SFAS No. 123R
is not expected to have a material effect on our financial condition, results of operations, or cash flows.
In June 2004, the EITF reached a consensus on Issue No. 02-14, “Whether an Investor Should Apply the Equity
Method of Accounting to Investments Other Than Common Stock.” EITF 02-14 addresses whether the equity method
of accounting should be applied to investments when an investor does not have an investment in voting common
stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor
should only apply the equity method of accounting when it has investments in either common stock or in-substance
common stock of a corporation, provided that the investor has the ability to exercise significant influence over the
operating and financial policies of the investee. The effective date of EITF 02-14 is the first reporting period
beginning after September 15, 2004. The adoption of EITF No. 02-14 did not have a material impact on our
financial condition, results of operations or cash flows.
In March 2004, the EITF reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary
impairment evaluations for securities accounted for under SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a
basic three-step test to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the
FASB delayed the effective date of the recognition and measurement provisions of EITF No. 03-1. However, the
disclosure provisions remain effective for fiscal years ending after June 15, 2004. The adoption of the recognition
and measurement provisions of EITF No. 03-1 is not expected to have a material impact on our financial condition,
results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” and a revised
interpretation of FIN No. 46 (FIN No. 46-R) in December 2003, in an effort to expand upon existing accounting
guidance that addresses when a company should consolidate the financial results of another entity. FIN No. 46
requires “variable interest entities,” as defined, to be consolidated by a company if that company is subject to a
majority of expected losses of the entity or is entitled to receive a majority of expected residual returns of the entity,
or both. A company that is required to consolidate a variable interest entity is referred to as the entity’s primary
beneficiary. The interpretation also requires certain disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation and disclosure requirements apply immediately to variable interest entities created after
January 31, 2003. We are not the primary beneficiary of any variable interest entity created after January 31, 2003
nor do we have a significant variable interest in a variable interest entity created after January 31, 2003.
For variable interest entities that existed before February 1, 2003, the consolidation requirements of FIN No. 46-
R are effective as of March 31, 2004. The adoption of FIN No. 46-R did not have a material impact on our financial
condition, results of operations or cash flows.
34
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 ("FAS 109-1"), "Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004." The Act introduces a special 9% tax deduction on qualified
production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction
in accordance with SFAS No. 109. The adoption of these new tax provisions is not expected to have a material
impact on our financial condition, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FAS 109-2"), "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of
2004." The Act introduces a limited time 85% dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides
accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, we
do not expect to be able to complete the evaluation of the repatriation provision until after Congress or the Treasury
Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury
Department began to issue the first of a series of clarifying guidance documents related to this provision. The range
of possible amounts that we are considering for repatriation under this provision is between zero and $50.0 million.
The related range of income tax effects of such repatriation cannot reasonably be estimated. We expect to complete
an evaluation of the effects of the repatriation provision by the end of 2005.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency and Interest Rate Risk
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
expectations 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.
Periodically, we use foreign currency forward contracts to hedge intercompany receivables and payables, and
transactions initiated in the United States that are denominated in foreign currency. The principal foreign currency
hedged is the Euro using foreign currency forward contracts ranging in periods from one to three months. Foreign
exchange forward contracts are accounted for on a mark-to-market basis, with realized and unrealized gains or
losses recognized in the current period, as we do not designate our foreign exchange forward contracts as accounting
hedges. Unrealized and realized gains or losses related to foreign exchange forward contracts for the years ended
December 31, 2004, 2003 and 2002 were immaterial.
Our exposure to interest rate risk results from variable debt outstanding under our revolving credit facility. Based
on our level of variable rate debt outstanding during the year ended December 31, 2004, a one-point increase in the
weighted average interest rate, which generally equals the LIBOR rate plus an applicable margin, would not have
had a material impact on our annual interest expense.
At December 31, 2004, we had no debt outstanding at variable interest rates. We have not historically used
derivative instruments to manage exposure to changes in interest rates.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are located beginning on page 50 and page
29 of this report, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
35
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2004, under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a – 15(e)
under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to provide
reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized
and reported within the time periods specified by the SEC’s rules and forms, and is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. The Company’s evaluation of the effectiveness of the design and operation of disclosure
controls and procedures, including the identification of a material weakness in the Company’s internal control over
financial reporting, lead the Company to conclude that as of December 31, 2004, our disclosure controls and procedures
were not effective at the reasonable assurance level.
Management’s Report On Internal Control Over Financial Reporting (as revised)
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In the Company’s 2004 annual report on Form 10-K, filed on March 23, 2005, management of the Company
included Management’s Report on Internal Control Over Financial Reporting, which expressed a conclusion by
management that as of December 31, 2004, the Company’s internal control over financial reporting was effective.
As a result of the restatement of its financial statements, as described further in Note 2 to the consolidated financial
statements, management has concluded that a material weakness in internal control over financial reporting existed
as of December 31, 2004 and, accordingly, has revised its assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004.
A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or
detected. Due to the circumstances described in Note 2 to the consolidated financial statements, management has
concluded that a material weakness existed in the Company’s design of the existing controls as of December 31,
2004 as defined under standards established by the Public Company Accounting Oversight Board. Specifically, the
material weakness related to the Company’s design of controls surrounding the review of non-U.S. non-routine
contracts to ensure that such contracts are recorded in accordance with generally accepted accounting principles in
the United States. In making this assessment, the Company used the criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a
result of this identified material weakness, an error in accounting for the classification of deferred revenue, as more
fully explained in Note 2 to the Consolidated Financial Statements, as of December 31, 2004 occurred and was not
detected by the Company. As a result, we performed additional reviews and analysis to ensure the consolidated financial
statements are prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the
consolidated financial statements included in this report fairly present in all material respects our financial condition,
results of operations and cash flows for the periods presented.
We determined that, because of the material weakness described above, as of December 31, 2004, the Company's
internal control over financial reporting was not effective, solely as a result of the material weakness described above.
Our independent registered public accounting firm has issued its attestation report on our revised assessment of
our internal control over financial reporting.
Changes In Internal Control Over Financial Reporting
There were no significant changes in our internal controls over financial reporting during the quarter ended December
31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting. As previously described, in 2005, the Company identified a material weakness in the Company’s internal
36
control over financial reporting and, as described below, the Company will make changes to its internal control over
financial reporting during the fourth quarter of 2005 that are intended to remediate such weakness, including the
establishment of additional controls to improve the design of internal controls with respect to accounting for non-U.S. non-
routine contracts.
Specifically, the proposed changes will include a more formal process to document and review the terms and conditions
of all significant contracts, including non-U.S. non-routine contracts, to ensure that such contracts are recorded in
accordance with accounting principles generally accepted in the United States. This process will be completed at the
inception of the contract and monitored during the term of the contract to ensure all and any changes to the contract are
accounted for appropriately.
Management believes that this change in the design of internal controls will strengthen our disclosure controls and
procedures, as well as our internal control over financial reporting, and will remediate the material weakness that the
Company identified in its internal control over financial reporting as of December 31, 2004. We have discussed this
material weakness and our remediation program with our Audit Committee.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Sykes Enterprises, Incorporated
Tampa, Florida
We have audited management’s assessment, included in the accompanying Management's Report on Internal
Control over Financial Reporting (as revised), as included in Item 9A, Controls and Procedures, that Sykes
Enterprises, Incorporated and subsidiaries (the “Company”) did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the material weakness identified in management’s
assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our report dated March 22, 2005, we expressed an unqualified opinion on management’s assessment that the
Company maintained effective internal control over financial reporting and an unqualified opinion on the
effectiveness of internal control over financial reporting. As described in the following paragraph, the Company
subsequently identified material misstatements in its 2004 annual and interim financial statements, which caused
such annual and interim financial statements to be restated. Management subsequently revised its assessment due to
the identification of a material weakness, described in the following paragraph, in connection with the financial
statement restatement. Accordingly, our opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004 expressed herein is different from that expressed in our previous report.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in management’s revised assessment:
The Company did not adequately design controls surrounding the review of non-U.S. non-routine contracts to
provide reasonable assurance that such contracts are recorded in accordance with accounting principles generally
accepted in the United States. This material weakness resulted in the restatement of the Company’s previously
issued annual and interim financial statements as described more fully in Note 2 to the consolidated financial
statements. This material weakness was considered in determining the nature, timing, and extent of audit tests
38
applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2004, of the
Company and this report does not affect our report on such restated financial statements.
In our opinion, management’s revised assessment that the Company did not maintain effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not maintained effective internal control over
financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on management’s statements regarding the remediation
of the material weakness included in paragraph three of Management’s Report on Internal Control over Financial
Reporting (as revised).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2004 of the Company and our report dated March 22, 2005 (December 19, 2005 as to the effects of
the restatement described in Note 2 to the financial statements) expresses an unqualified opinion on those financial
statements and financial statement schedule and includes an explanatory paragraph relating to the restatement
described in Note 2 to the financial statements.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 22, 2005 (December 19, 2005 as to the effect of the
material weakness described in Management’s Report on
Internal Control Over Financial reporting (as revised))
39
Item 9B. Other Information
None.
40
Items 10. through 14.
PART III
All information required by Items 10 through 14, with the exception of information on Executive Officers which
appears in this report in Item 1 under the caption “Executive Officers”, is incorporated by reference to Sykes’ Proxy
Statement for the 2005 Annual Meeting of Shareholders.
41
PART IV
Item 15. Exhibits and Financial Statement Schedule
The following documents are filed as part of this report:
(1) Consolidated Financial Statements
The Index to Consolidated Financial Statements is set forth on page 48 of this report.
(2) Financial Statements Schedule
Schedule II — Valuation and Qualifying Accounts is set forth on page 81 of this report.
(3) Exhibits:
Exhibit
Number
Exhibit Description
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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)
Shareholder Agreement dated December 11, 1997, by and among Sykes Enterprises, Incorporated and
HealthPlan Services Corporation. (2)
Stock Purchase Agreement, dated September 1, 1998, between Sykes Enterprises, Incorporated and
HealthPlan Services Corporation. (4)
Merger Agreement, dated as of June 9, 2000, among Sykes Enterprises, Incorporated, SHPS,
Incorporated, Welsh Carson Anderson and Stowe, VIII, LP (“WCAS”) and Slugger Acquisition
Corp. (11)
Share Purchase Agreement, dated as of March 1, 2005, among Sykes Canada Corporation and the
shareholders of Kelly, Luttmer & Associates Ltd and 765448 Alberta Limited. (27)
Articles of Incorporation of Sykes Enterprises, Incorporated, as amended. (5)
Articles of Amendment to Articles of Incorporation of Sykes Enterprises, Incorporated, as amended. (6)
Bylaws of Sykes Enterprises, Incorporated, as amended. (27)
Specimen certificate for the Common Stock of Sykes Enterprises, Incorporated. (1)
1996 Employee Stock Option Plan. (1)*
Amended and Restated 1996 Non-Employee Director Stock Option Plan. (12)*
1996 Non-Employee Directors’ Fee Plan. (1)*
2004 Non-Employee Directors’ Fee Plan. (23)*
Form of Split Dollar Plan Documents. (1)*
Form of Split Dollar Agreement. (1)*
Form of Indemnity Agreement between Sykes Enterprises, Incorporated and directors & executive
officers. (1)
Tax Indemnification Agreement between Sykes Enterprises, Incorporated and John H. Sykes. (1)*
1997 Management Stock Incentive Plan. (3)*
42
Exhibit
Number
10.10
1999 Employees’ Stock Purchase Plan. (7)*
Exhibit Description
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
2000 Stock Option Plan. (8)*
2001 Equity Incentive Plan. (13)*
Deferred Compensation Plan (27)*
2004 Non-Employee Director Stock Option Plan (21)*
Amended and Restated Executive Employment Agreement dated as of October 1, 2001 between Sykes
Enterprises, Incorporated and John H. Sykes. (15)*
Founder’s Retirement and Consulting Agreement dated December 10, 2004 between Sykes Enterprises,
Incorporated and John H. Sykes. (24)*
Stock Option Agreement dated as of January 8, 2002, between Sykes Enterprises, Incorporated and
John H. Sykes. (15)*
Employment Agreement dated as of January 1, 2004, between Sykes Enterprises, Incorporated and
Charles E. Sykes. (20)*
Amendment Number 1 to Exhibit “A” of the Employment Agreement between Sykes Enterprises,
Incorporated and Charles E. Sykes dated January 1, 2004. (23)*
Employment Agreement dated as of August 1, 2004 between Sykes Enterprises, Incorporated and
Charles E. Sykes. (27) *
Stock Option Agreement dated as of March 15, 2002 between Sykes Enterprises, Incorporated and
Charles E. Sykes. (16)*
Stock Option Agreement (Performance Accelerated Option) dated as of March 15, 2002 between Sykes
Enterprises, Incorporated and Charles E. Sykes. (16)*
Employment Agreement dated as of March 6, 2000 between Sykes Enterprises, Incorporated and David
L. Grimes. (9)*
Employment Separation Agreement dated November 10, 2000 between Sykes Enterprises, Incorporated
and David L. Grimes. (10)*
Amended and Restated Employment Agreement dated as of October 1, 2001, between Sykes
Enterprises, Incorporated and W. Michael Kipphut. (15) *
Employment Agreement dated as of March 6, 2004, between Sykes Enterprises, Incorporated and W.
Michael Kipphut. (23)*
Employment Agreement dated as of March 6, 2005, between Sykes Enterprises, Incorporated and W.
Michael Kipphut. (26)*
Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and W.
Michael Kipphut. (15)*
Employment Agreement dated as of March 5, 2004, between Sykes Enterprises, Incorporated and Jenna
R. Nelson. (20)*
Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and
Jenna R. Nelson. (16)*
Employment Agreement dated as of March 5, 2004, between Sykes Enterprises, Incorporated and Gerry
L. Rogers. (20)*
43
Exhibit
Number
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
Exhibit Description
Independent Subcontractor Agreement dated as of July 27, 2004 between Sykes Enterprises,
Incorporated and Gerry L. Rogers. (27)*
First Amendment to Independent Subcontractor Agreement dated as of July 27, 2004 between Sykes
Enterprises, Incorporated and Gerry L. Rogers. (27)*
Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and
Gerry Rogers. (16)*
Employment Agreement dated as of April 1, 2003, between Sykes Enterprises, Incorporated and James
T. Holder. (20)*
Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and
James T. Holder. (15)*
Amended and Restated Employment Agreement dated as of March 6, 2002, between Sykes Enterprises,
Incorporated and Harry A. Jackson, Jr. (15)*
Employment Separation Agreement, Waiver and Release dated as of June 9, 2003 between Sykes
Enterprises, Incorporated and Harry A. Jackson, Jr. (19)*
Stock Option Agreement dated as of March 6, 2002 between Sykes Enterprises, Incorporated and Harry
A. Jackson, Jr. (16)*
Stock Option Agreement dated as of December 23, 2002 between Sykes Enterprises, Incorporated and
Harry A. Jackson, Jr. (18)*
Employment Agreement dated as of April 1, 2003, between Sykes Enterprises, Incorporated and
William N. Rocktoff. (20)*
Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and
William Rocktoff. (16)*
Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and
William Rocktoff. (16)*
Employment Separation Agreement dated as of November 5, 2001, between Sykes Enterprises,
Incorporated and Mitchell Nelson. (15)*
Employment Agreement dated as of September 2, 2003, between Sykes Enterprises, Incorporated and
James C. Hobby. (20)*
Employment Agreement dated as of January 3, 2005 between Sykes Enterprises, Incorporated and
James Hobby, Jr. (25)*
Employment Agreement dated as of October 6, 2003, between Sykes Enterprises, Incorporated and
Daniel L. Hernandez. (20)*
Employment Agreement dated as of June 15, 2004 between Sykes Enterprises, Incorporated and David
L. Pearson. (23)*
Senior Revolving Credit Facility between SunTrust, Wachovia and BNP Paribas and Sykes Enterprises,
Incorporated dated as of April 5, 2002 and Schedule I-1. (16)
Amendment No. 1 to Revolving Credit Agreement without exhibits between Sun Trust, Wachovia and
BNP Paribas and Sykes Enterprises, Incorporated dated as of September 30, 2002. (17)
Amendment No. 2 to Revolving Credit Agreement between SunTrust Bank, Wachovia Bank and BNP
Paribas and Sykes Enterprises, Incorporated dated as of June 30, 2003. (19)
44
Exhibit
Number
10.52
Exhibit Description
Credit Agreement Among Sykes Enterprises, Incorporated and Keybank National Association and BNP
Paribas dated March 15, 2004. (22)
10.53
Amendment No. 1 to Credit Agreement Among Sykes Enterprises, Incorporated and Keybank National
Association and BNP Paribas dated October 18, 2004. (27)
14.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Code of Ethics (21)
List of subsidiaries of Sykes Enterprises, Incorporated. (27)
Consent of Independent Registered Public Accounting Firm.
Power of Attorney relating to subsequent amendments (included on the signature page of this report).
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a).
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a).
Certification of Chief Executive Officer, pursuant to Section 1350.
Certification of Chief Financial Officer, pursuant to Section 1350.
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 2.12 to the Registrant’s Form 10-K filed with the Commission on March 16, 1998,
and incorporated herein by reference.
Filed as Exhibit 10 to the Registrant’s Form 10-Q filed with the Commission on July 28, 1998, 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
September 25, 1998, and incorporated herein by reference.
Filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-3 filed with the
Commission on October 23, 1997, and incorporated herein by reference.
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.
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.
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.
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.
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.
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.
Filed as Exhibit 10.12 to Registrant’s Form 10-Q filed with the Commission on May 7, 2001, and
incorporated herein by reference.
Filed as Exhibit 10.32 to Registrant’s Form 10-Q filed with the Commission on May 7, 2001, and
incorporated herein by reference.
Filed as Exhibit 10.33 to Registrant’s Form 10-Q filed with the Commission on August 14, 2001,
and incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 15, 2002, and
incorporated herein by reference
Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on May 10, 2002, and
incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on November 14, 2002,
and incorporated herein by reference.
45
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 24, 2003, and
incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on August 11, 2003, and
incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 10, 2004, and
incorporated herein by reference.
Filed as an Exhibit to Registrant’s Proxy Statement for the 2004 annual meeting of shareholders
filed with the Commission April 6, 2004.
Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on
March 29, 2004, and incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on August 9, 2004, and
incorporated herein by reference.
Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on
December 16, 2004, and incorporated herein by reference.
Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on
January 7, 2005, and incorporated herein by reference.
Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on
March 8, 2005, and incorporated herein by reference.
Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 23, 2005, and
incorporated herein by reference.
46
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 22nd day of December 2005.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
By:
/s/ W. Michael Kipphut
W. Michael Kipphut,
Senior Vice President and Chief Financial Officer
47
Table of Contents
Report of Independent Registered Public Accounting Firm .............................................................................
Consolidated Balance Sheets (as restated, see Note 2) as of December 31, 2004 and 2003 .............................
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 ...................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended
December 31, 2004, 2003 and 2002.............................................................................................................
Consolidated Statements of Cash Flows (as restated, see Note 2) for the years ended
December 31, 2004, 2003 and 2002 ...........................................................................................................
Notes to Consolidated Financial Statements ....................................................................................................
Page No.
49
50
51
52
53
54
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Sykes Enterprises, Incorporated
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Sykes Enterprises, Incorporated and subsidiaries
(the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes
in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. 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, such consolidated financial statements present fairly, in all material respects, the financial position of
Sykes Enterprises, Incorporated and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 22, (December 19, 2005 as to the effect of
the material weakness described in Management’s Report on Internal Control Over Financial Reporting (as revised))
expresses an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal
control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over
financial reporting.
As discussed in Note 2, the accompanying consolidated financial statements have been restated.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 22, 2005 (December 19, 2005 as to the effects of the restatement discussed in Note 2)
49
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
ASSETS
December 31,
2004
Restated
(Note 2)
2003
Restated
(Note 2)
Current assets:
Cash and cash equivalents ................................................................................ $
Receivables, net ................................................................................................
Prepaid expenses and other current assets ........................................................
Assets held for sale............................................................................................
Total current assets .......................................................................................
Property and equipment, net .............................................................................
Goodwill, net ....................................................................................................
Deferred charges and other assets ....................................................................
$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt ............................................................. $
Accounts payable .............................................................................................
Accrued employee compensation and benefits ................................................
Deferred grants related to assets held for sale ...................................................
Income taxes payable ........................................................................................
Deferred revenue ...............................................................................................
Other accrued expenses and current liabilities .................................................
Total current liabilities ................................................................................
Deferred grants ....................................................................................................
Deferred revenue .................................................................................................
Other long-term liabilities ...................................................................................
93,868
90,661
11,219
9,742
205,490
82,891
5,224
18,921
312,526
—
13,693
30,316
6,740
2,965
22,952
9,386
86,052
13,921
—
2,518
$
$
$
92,085
82,415
13,428
—
187,928
107,194
5,085
17,968
318,175
87
17,706
30,869
—
4,921
23,507
9,718
86,808
27,369
836
2,330
Total liabilities .............................................................................................
102,491
117,343
Commitments and contingencies (Note 18)
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;
43,832 and 43,771 issued ...............................................................................
Additional paid-in capital .................................................................................
Retained earnings .............................................................................................
Accumulated other comprehensive income (loss) ............................................
Treasury stock at cost: 4,644 shares and 3,557 shares .....................................
Total shareholders’ equity ...........................................................................
—
—
438
163,885
92,327
4,871
261,521
(51,486)
438
163,511
81,513
(208 )
245,254
(44,422 )
210,035
312,526
$
200,832
318,175
$
See accompanying notes to Consolidated Financial Statements.
50
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
2004
Revenues .................................................................................. $ 466,713
Years Ended December 31,
2003
$ 480,359
2002
$ 452,737
Operating expenses:
Direct salaries and related costs ............................................
General and administrative ....................................................
Net gain on disposal of property and equipment ...................
Net gain on insurance settlement ...........................................
Restructuring and other charges (reversals) ..........................
Impairment of long-lived assets ............................................
300,600
165,232
(6,915)
(5,378)
(113)
690
309,489
161,743
(1,595 )
—
(646 )
—
287,141
155,547
(945 )
—
20,814
1,475
Total operating expenses ..................................................
454,116
468,991
464,032
Income (loss) from operations ..................................................
12,597
11,368
(11,295 )
Other income (expense):
Litigation settlement ..............................................................
Interest, net ............................................................................
Other .....................................................................................
Total other income (expense) ............................................
—
1,672
1,592
3,264
—
1,266
1,322
(13,800 )
517
132
2,588
(13,151 )
Income (loss) before provision (benefit) for income taxes .......
15,861
13,956
(24,446 )
Provision (benefit) for income taxes:
Current ..................................................................................
Deferred ................................................................................
4,399
648
5,707
(1,056 )
2,790
(8,605 )
Total provision (benefit) for income taxes .......................
5,047
4,651
(5,815 )
Net income (loss) ..................................................................... $
10,814
$
9,305
$
(18,631)
Net income (loss) per share:
Basic ...................................................................................... $
Diluted ................................................................................... $
0.27
0.27
$
$
0.23
$
0.23 $
(0.46)
(0.46 )
Weighted average shares:
Basic ......................................................................................
Diluted ...................................................................................
39,607
39,722
40,300
40,441
40,405
40,405
See accompanying notes to Consolidated Financial Statements.
51
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
.
Shares
Issued
(In thousands)
Balance at December 31, 2001 ........ 43,300
Amount
$ 433
Common Stock
Additional
Paid-in
Capital
$ 160,907
Accumulated
Other
Retained Comprehensive Treasury
Income (Loss)
Earnings
$
$ 90,839
Stock
(20,212) $ (40,755 ) $ 191,212
Total
191
Issuance of common stock ...............
Tax benefit of exercise of
stock options .................................
—
Purchase of treasury stock ...............
—
—
Comprehensive loss .........................
Balance at December 31, 2002 ........ 43,491
280
Issuance of common stock ...............
Tax benefit of exercise of
—
stock options .................................
—
Purchase of treasury stock ...............
Comprehensive income....................
—
Balance at December 31, 2003 ........ 43,771
Issuance of common stock .............
Tax benefit of exercise of
stock options ................................
Purchase of treasury stock ............
Comprehensive income..................
61
—
—
—
2
—
—
—
435
3
—
—
—
438
—
—
—
—
984
—
—
—
986
—
226
—
—
— (18,631 )
72,208
162,117
—
—
9,111
(11,101 )
—
(559 )
—
226
(559 )
(9,520 )
(41,314 )
182,345
1,166
—
—
228
—
—
163,511
342
32
—
—
—
—
9,305
81,513
—
—
—
10,814
—
—
10,893
(208 )
—
—
—
5,079
—
—
(3,108 )
—
(44,422 )
—
—
(7,064 )
—
1,169
228
(3,108 )
20,198
200,832
342
32
(7,064 )
15,893
Balance at December 31, 2004 ...... 43,832
$ 438
$ 163,885
$ 92,327
$
4,871 $ (51,486 ) $ 210,035
See accompanying notes to Consolidated Financial Statements.
52
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2003
Restated
(Note 2)
2002
Restated
(Note 2)
2004
Restated
(Note 2)
$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................................................
Depreciation and amortization ................................................
Impairment of long-lived assets ..............................................
Restructuring and other charges (reversals) ............................
Litigation settlement, including cash paid of $13.4 million ....
Deferred income tax (benefit) provision .................................
Tax benefit from stock options.................................................
Net gain on disposal of property and equipment .....................
Net gain on insurance settlement..............................................
Termination costs associated with exit activities .....................
Bad debt expense......................................................................
Foreign exchange gain on liquidation of foreign entity ...........
Changes in assets and liabilities:
Receivables .........................................................................
Prepaid expenses and other current assets ...........................
Deferred charges and other assets .......................................
Accounts payable ................................................................
Income taxes receivable/payable .........................................
Accrued employee compensation and benefits ...................
Other accrued expenses and current liabilities ....................
Deferred revenue .................................................................
Other long-term liabilities ...................................................
Net cash provided by operating activities ........................
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................................
Acquisition of intangible assets ...............................................
Proceeds from sale of facilities ...............................................
Proceeds from sale of property and equipment .......................
Proceeds from insurance settlement .........................................
Net cash used for 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 .............................................
Purchase of treasury stock .......................................................
Net cash (used for) provided by financing activities .......
10,814
30,237
690
(113)
—
648
32
(6,915)
(5,378)
1,684
267
(680)
(8,699)
357
491
(4,797)
1,446
(1,698)
(1,372)
(2,931)
(348)
13,735
(25,665)
—
9,663
99
6,940
(8,963)
—
—
(86)
—
342
(7,064)
(6,808)
$
9,305 $
30,125
—
(646 )
—
(1,056 )
228
(1,595 )
—
—
441
—
(2,939 )
(875)
(1,374)
1,940
9,057
(5,141 )
(3,113 )
(136 )
3
34,224
(29,273 )
—
2,411
212
—
(26,650 )
(1,600 )
1,600
(45 )
71
1,169
(3,108 )
(1,913 )
(18,631 )
34,338
1,475
20,814
13,800
(8,605 )
226
(945 )
—
—
1,472
—
20,891
2,403
242
(2,134 )
2,122
(2,038 )
(18,052 )
(3,946 )
(121 )
43,311
(20,203 )
(1,901 )
2,000
244
—
(19,860 )
—
—
(42 )
—
986
(559 )
385
Effects of exchange rates on cash .........................................
3,819
6,944
5,642
Net increase in cash and cash equivalents ...............................
CASH AND CASH EQUIVALENTS — BEGINNING ........
CASH AND CASH EQUIVALENTS — ENDING ...............
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ...............................
Cash paid during the year for income taxes .....................
See accompanying notes to Consolidated Financial Statements.
$
$
$
1,783
92,085
93,868
12,605
79,480
$ 92,085
$
29,478
50,002
79,480
430
11,216
$
$
460
9,708
$
$
1,155
10,531
53
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Sykes Enterprises, Incorporated and consolidated subsidiaries (“Sykes” or the “Company”) provides outsourced
customer contact management solutions and services in the business process outsourcing (“BPO”) arena to
companies, primarily within the communications, technology/consumer, financial services, healthcare, and
transportation and leisure industries. Sykes provides flexible, high quality outsourced customer contact management
services with an emphasis on inbound technical support and customer service. Utilizing Sykes’ integrated
onshore/offshore global delivery model, Sykes provides its services through multiple communications channels
encompassing phone, e-mail, Web and chat. Sykes complements its outsourced customer contact management
services with various enterprise support services in the United States that encompass services for a company’s
internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe,
Sykes also provides fulfillment services including multilingual sales order processing via the Internet and phone,
inventory control, product delivery and product returns handling. 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 companies 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.
Note 1. Summary of Accounting Policies
Principles of Consolidation — The consolidated financial statements include the accounts of Sykes and its
wholly-owned subsidiaries and controlled majority-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated financial statements in conformity with accounting
principles 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 — Revenue is recognized pursuant to applicable accounting standards, including
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101), “Revenue
Recognition in Financial Statements”, SAB 104, “Revenue Recognition”, and the Emerging Issues Task Force
(“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables”. SAB 101, as amended, and SAB 104
summarize certain of the SEC staff’s views in applying generally accepted accounting principles to revenue
recognition in financial statements and provides guidance on revenue recognition issues in the absence of
authoritative literature addressing a specific arrangement or a specific industry. EITF No. 00-21 provides further
guidance on how to account for multiple element contracts.
The Company primarily recognizes its revenue from services as those services are performed under a fully
executed contractual agreement and records estimated reductions to revenue for penalties and holdbacks for failure
to meet specified minimum service levels and other performance based contingencies. 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 contracts 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 customer 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 Transactions” (“SOP 98-9”), SAB 101, SAB 104 and EITF No. 00-21.
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 determinable. If any portion of the license fees or rights is subject to forfeiture, refund or
other contractual contingencies, the Company postpones revenue recognition until these contingencies have been
removed. Sykes generally accounts for consulting services separate from software license fees for those multi-
element arrangements where consulting services are a separate element and are not essential to the customer’s
54
functionality requirements and there is vendor-specific objective evidence of fair value for these services. 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.
Revenue from contracts with multiple-deliverables to include hardware, software, consulting and other services,
or related contracts with the same client, are allocated to separate units of accounting based on their relative fair
value, if the deliverables in the contract(s) meet the criteria for such treatment. Fair value is the price of a deliverable
when it is regularly sold on a standalone basis, which generally consists of vendor-specific objective evidence of fair
value. If there is no evidence of the fair value for a delivered product or service, revenue is allocated first to the fair
value of the undelivered product or service and then the residual revenue is allocated to the delivered product or
service. If there is no evidence of the fair value for an undelivered product or service, the contract(s) is accounted for
as a single unit of accounting, resulting in delay of revenue recognition for the delivered product or service until the
undelivered product or service portion of the contract is complete. Revenue recognition is limited to the amount that
is not contingent upon delivery of any future product or service or meeting other specified performance conditions.
Cash and Cash Equivalents — Cash and cash equivalents consist of cash and highly liquid short-term
investments. Cash in the amount of $86.7 million and $82.6 million at December 31, 2004 and 2003, respectively,
was held in taxable interest bearing investments, which have an average maturity of less than 60 days. Cash and cash
equivalents of $79.0 million and $67.5 million at December 31, 2004 and 2003, 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 accumulated
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 $32.3 million, $33.0 million and
$36.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. (See Note 1, Deferred Grants,
for amortization, which is shown net of depreciation.) Property and equipment includes $0.1 million, $3.5 million
and $0.7 million of additions included in accounts payable at December 31, 2004, 2003 and 2002, respectively.
Accordingly, non-cash transactions have been excluded from the accompanying Consolidated Statements of Cash
Flows for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company capitalizes certain costs incurred to internally develop software upon the establishment 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 $0.7 million and
$0.6 million at December 31, 2004 and 2003, respectively.
The carrying value of property and equipment to be held and used is evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. An asset is considered to be impaired when
the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual
disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the
amount by which the carrying amount of the asset exceeds its estimated fair value, which is generally determined
based on appraisals or sales prices of comparable assets. Occasionally, the Company redeploys property and
equipment from under-utilized centers to other locations to improve capacity utilization if it is determined that the
related undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the carrying
amount of these assets.
Currently, the Company has closed several customer contact management centers, which are held for sale, and
expects it may close additional centers in the future as a result of the client migration of call volumes from the U.S.
to the Company’s offshore operations, including Latin America and the Asia Pacific Rim, and the overall reduction
in customer call volumes in the United States and Europe. As of December 31, 2004, the Company determined that
its property and equipment, including those at the previously referenced customer contact management centers, were
not impaired, except for certain property and equipment located in India as discussed below. Certain assets of the
closed centers in the U.S., with a carrying value of $9.7 million as of December 31, 2004, are included in “Assets
Held for Sale” in the accompanying Consolidated Balance Sheet. The carrying value of these assets is offset by the
related deferred grants of $6.7 million as of December 31, 2004 and included in “Deferred grants related to assets
held for sale” in the accompanying Consolidated Balance Sheet. Upon reclassification as held for sale, the Company
55
discontinued depreciating these assets and amortizing the related deferred grants. Property and equipment is
classified as held for sale in the period in which management commits to a plan to sell the asset, the asset is
available for immediate sale in its present condition, an active program to locate a buyer and other actions required
to complete the plan to sell the asset have been initiated, the asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value, it is probable that the asset will be sold in a reasonable period of time,
and it is unlikely that significant changes to the plan to sell the asset will be made or that the plan will be withdrawn.
In connection with the plan to migrate the call volumes of the customer contact management services and related
operations in Bangalore, India, the Company has determined that certain of its property and equipment in India was
impaired as of December 31, 2004. Accordingly, the Company recorded a pre-tax impairment charge as of
December 31, 2004 of $0.7 million, to adjust the respective asset carrying amounts to their estimated fair market
values.
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, 2004 and 2003, the carrying value of this investment was $2.1 million
and is included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets. (See Note
9.) Fair value is not estimated if there are no identified events or changes in circumstances that may have a
significant adverse effect on the fair value of the investment and it is not practicable to estimate the fair value of the
investment without incurring excessive costs. We will record an impairment charge or loss if we believe the
investment has experienced a decline in value that is other than temporary. 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 investment and, therefore, might require an impairment charge in the future.
Goodwill — On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”
According to this statement, goodwill and other intangible assets with indefinite lives are no longer subject to
amortization, but instead must be reviewed at least annually, and more frequently in the presence of certain
circumstances, 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 (the “reporting unit”). 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 reporting unit is less than its carrying value. Based on the results of the Company’s
initial transition impairment review as of January 1, 2002 and annual impairment reviews in the third quarter of each
year in accordance with SFAS No. 142, the Company determined that there has been no impairment of goodwill.
The Company expects to receive future benefits from previously acquired goodwill over an indefinite 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
reduced 2004 and 2003 net income by approximately $0.4 million, or $0.01 per diluted share, and increased the
2002 net loss by approximately $0.4 million, or $0.01 per diluted share. Prior to January 1, 2002, the Company
amortized goodwill over an estimated useful life of 10 to 20 years using the straight-line method. Accumulated
amortization of goodwill was $3.2 million as of December 31, 2001.
Intangible Assets — Intangible assets, primarily existing technologies and covenants not to compete, are
amortized using the straight-line method over their estimated period of benefit, generally ranging from two to five
years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or
changes in circumstances that warrant revised estimates of useful lives or that indicate that an impairment exists.
Amortization expense related to these intangible assets was $0.5 million for the year ended December 31, 2002. As
of December 31, 2004, 2003 and 2002, the intangible assets were fully amortized and had a carrying value of zero.
Income Taxes — The Company accounts for income taxes under SFAS No. 109, “Accounting for Income
Taxes.” Deferred income tax assets and liabilities are provided to reflect tax consequences of differences between
the tax bases of assets and liabilities and their reported amounts in the accompanying Consolidated Financial
Statements.
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 $1.7 million at
December 31, 2004 and 2003.
56
Deferred Grants — Recognition of income associated with grants of land and the acquisition of property, buildings
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 reduction 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 $2.1 million, $2.9 million and
$3.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Deferred grants of $6.7 million related to “Assets Held for Sale” is classified as current in the accompanying
Consolidated Balance Sheet as of December 31, 2004.
Deferred Revenue — The Company invoices certain contracts in advance. The deferred revenue is earned over
the service periods of the respective contracts, which range from six months to seven years. Deferred revenue also
includes estimated penalties and holdbacks for failure to meet specified minimum service levels in certain contracts
and other performance based contingencies. Deferred revenue included in current liabilities in the accompanying
Consolidated Balance Sheets represents the amounts for services to be performed during the next ensuing twelve-
month period and the amounts for services provided under contracts that contain short-term cancellation and refund
provisions.
Stock-Based Compensation — The Company has adopted the disclosure only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation.” 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 compensation expense is recognized
for stock option grants.
If the Company had elected to recognize compensation expense for the issuance of options to employees of the
Company based on the fair value method of accounting 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,
2003
2002
2004
Net Income (Loss):
Net income (loss) as reported ..............................................
Pro forma compensation expense, net of tax ......................
Pro forma net income (loss) ................................................
Net Income (Loss) Per Share:
Basic, as reported ................................................................
Basic, pro forma .................................................................
Diluted, as reported .............................................................
Diluted, pro forma ..............................................................
$ 10,814
(404)
$ 10,410
$
$
$
$
0.27
0.26
0.27
0.26
$
$
$
$
$
$
9,305
(1,887 )
7,418
$ (18,631 )
(11,163 )
$ (29,794 )
0.23
0.18
0.23
0.18
$
$
$
$
(0.46 )
(0.74 )
(0.46 )
(0.74 )
The pro forma amounts were determined using the Black-Scholes valuation model with the following key
assumptions: (i) a discount rate of 2.0% for 2003 and discount rates ranging from 3.0% to 3.82% for 2002 (no
options were issued in 2004); (ii) a volatility factor of 83.91% for 2003 and 85.1% for 2002 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 three years in 2003 and five years in 2002 (three years for
the Employee Stock Purchase Plan). In addition, the pro forma amount for 2004, 2003 and 2002 includes
approximately $0.1 million, $0.1 million and $0.2 million, respectively, related to purchase discounts offered under
the Employee Stock Purchase Plan.
57
In accordance with APB No. 25, as discussed in Note 20, Stock Options and Common Stock Units, the Company
applies variable plan accounting for grants of common stock units issued under the 2004 Non-Employee Director
Fee Plan and recognizes compensation cost over the vesting period.
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 amounts reported in the balance sheet for
cash, accounts receivable and accounts payable approximates their fair values.
• 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.
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 average exchange rate during the period. The net effect of
translation gains and losses is not included in determining net income, but is included in accumulated other
comprehensive income (loss), which is reflected as a separate component of shareholders’ equity until the sale or
until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign
currency transactional gains and losses are included in determining net income. Such gains and losses are included
in other income (expense) in the accompanying Consolidated Statements of Operations.
Foreign Currency and Derivative Instruments — Periodically, the Company enters into foreign currency
forward exchange contracts with financial institutions to protect against currency exchange risks associated with
existing assets and liabilities denominated in a foreign currency. These contracts require the Company to exchange
currencies in the future at rates agreed upon at the contract’s inception. The forward exchange contracts entered into
by the Company have been primarily related to the Euro. A foreign currency forward exchange contract acts as an
economic hedge as the gains and losses on these contracts typically offset or partially offset gains and losses on the
assets, liabilities, and transactions being hedged. The Company does not designate its foreign exchange forward
contracts as accounting hedges and does not hold or issue financial instruments for speculative or trading purposes.
Foreign exchange forward contracts are accounted for on a mark-to-market basis, with unrealized gains or losses
recognized as a component of income in the current period.
Unrealized and realized gains or losses related to foreign exchange forward contracts for the three years ended
December 31, 2004 were immaterial.
Recent Accounting Pronouncements — In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which requires, among other
things, that all share-based payments to employees, including grants of stock options, be measured at their grant-date
fair value and expensed in the consolidated financial statements. The accounting provisions of SFAS No. 123R are
effective for reporting periods beginning after June 15, 2005; therefore, the Company is required to adopt SFAS No.
123R in the third quarter of 2005. The pro forma disclosures previously permitted under SFAS No. 123 will no
longer be an alternative to financial statement recognition. See "Stock-Based Compensation" in Note 1 to the
Consolidated Financial Statements for the pro forma net income (loss) and net income (loss) per share amounts for
2002 through 2004, as if the fair-value-based method had been used, similar to the methods required under
SFAS No. 123R to measure compensation expense for employee stock awards. Management has not yet determined
whether the adoption of SFAS No. 123R will result in amounts that are materially different from those currently
provided under the pro forma disclosures under SFAS No. 123 in Note 1 to the Consolidated Financial Statements.
The adoption of SFAS No. 123R is not expected to have a material effect on the financial condition, results of
operations, or cash flows of the Company.
In June 2004, the EITF reached a consensus on Issue No. 02-14, "Whether an Investor Should Apply the Equity
Method of Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether the equity method
of accounting should be applied to investments when an investor does not have an investment in voting common
stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor
should only apply the equity method of accounting when it has investments in either common stock or in-substance
common stock of a corporation, provided that the investor has the ability to exercise significant influence over the
operating and financial policies of the investee. The effective date of EITF 02-14 is the first reporting period
beginning after September 15, 2004. The adoption of EITF No. 02-14 did not have a material impact on the financial
58
condition, results of operations or cash flows of the Company.
In March 2004, the EITF reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." EITF 03-1 provides guidance on other-than-temporary
impairment evaluations for securities accounted for under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations," and non-marketable equity securities accounted for under the cost method. The EITF developed a
basic three-step test to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the
FASB delayed the effective date of the recognition and measurement provisions of EITF No. 03-1. However, the
disclosure provisions remain effective for fiscal years ending after June 15, 2004. The adoption of the recognition
and measurement provisions of EITF No. 03-1 is not expected to have a material impact on the financial condition,
results of operations or cash flows of the Company.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” and a revised
interpretation of FIN No. 46 (FIN No. 46-R) in December 2003, in an effort to expand upon existing accounting
guidance that addresses when a company should consolidate the financial results of another entity. FIN No. 46
requires “variable interest entities,” as defined, to be consolidated by a company if that company is subject to a
majority of expected losses of the entity or is entitled to receive a majority of expected residual returns of the entity,
or both. A company that is required to consolidate a variable interest entity is referred to as the entity’s primary
beneficiary. The interpretation also requires certain disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation and disclosure requirements apply immediately to variable interest entities created after
January 31, 2003. The Company is not the primary beneficiary of any variable interest entity created after
January 31, 2003 nor does the Company have a significant variable interest in a variable interest entity created after
January 31, 2003.
For variable interest entities that existed before February 1, 2003, the consolidation requirements of FIN No. 46-
R are effective as of March 31, 2004. The adoption of FIN No. 46-R did not have a material impact on the financial
condition, results of operations or cash flows of the Company.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 ("FAS 109-1"), "Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004." The Act introduces a special 9% tax deduction on qualified
production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction
in accordance with SFAS No. 109. The adoption of these new tax provisions is not expected to have a material
impact on the financial condition, results of operations or cash flows of the Company.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FAS 109-2"), "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of
2004." The Act introduces a limited time 85% dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides
accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately,
management does not expect to be able to complete the evaluation of the repatriation provision until after Congress
or the Treasury Department provides additional clarifying language on key elements of the provision. In
January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related
to this provision. The range of possible amounts that we are considering for repatriation under this provision is
between zero and $50.0 million. The related range of income tax effects of such repatriation cannot reasonably be
estimated. Management expects to complete an evaluation of the effects of the repatriation provision by the end of
2005.
Reclassifications — Certain amounts from prior years have been reclassified to conform to the current year’s
presentation.
Note 2 -- Restatement
On November 11, 2005, the Company determined that certain deferred revenues should be classified as current
liabilities rather than long-term liabilities in the Company’s Consolidated Financial Statements. The deferred
revenues relate to various contracts in the Company’s Canadian roadside assistance program for which the Company
59
is prepaid for roadside assistance services that are generally carried out over a twelve-month or longer period.
Accordingly, previously issued financial statements as presented herein have been restated to correct the
classification of deferred revenue and the related deferred income taxes. Net Cash provided by Operating Activities
for the years ended December 31, 2004, 2003 and 2002 were not impacted by the corrections of deferred revenue
and the related deferred income taxes. However, cash flows in the amounts of $0.5 million and $0.4 million have
been reclassified within operating cash flows from “Prepaid expenses and other current assets” to “Deferred charges
and other assets” for the years ended December 31, 2004 and 2002, respectively, and from “Deferred charges and
other assets” to “Prepaid expenses and other current assets” for the year ended December 31, 2003 in the amount of
$0.6 million.
A summary of the effects of the restatement on the Financial Statements as of December 31, 2004 and 2003 is
presented below (in thousands):
December 31, 2004
December 31, 2003
Cash and cash equivalents
Receivables, net
Prepaid expenses and other
current assets
Assets held for sale
Total current assets
Property and equipment, net
Goodwill, net
Deferred charges and other
assets
As
Previously Adjustments
Reported
93,868
$
90,661
As
Restated
$
93,868 $
90,661
As
Previously
Reported
Adjustments
92,085
82,415
9,126 $
9,742
203,397
2,093
2,093
11,219
9,742
205,490
11,813 $
--
186,313
1,615
1,615
82,891
5,224
82,891
5,224
107,194
5,085
As
Restated
92,085
82,415
13,428
--
187,928
107,194
5,085
21,014
(2,093 )
18,921
19,583
(1,615 )
17,968
$ 312,526 $
-- $ 312,526 $
318,175 $
-- $ 318,175
--
13,693
30,316
6,740
2,965
$
Current installments of
Long-term debt
Accounts payable
Accrued employee
compensation and benefits
Deferred grants related to
Assets held for sale
Income taxes payable
Deferred revenue
Other accrued expenses and
current liabilities
Total current liabilities
Deferred grants
Deferred revenue
Other long-term liabilities
Total liabilities
Total shareholders’ equity
$
-- $
13,693
87
17,706
$
87
17,706
30,316
30,869
6,740
2,965
22,952
--
4,921
-- $
23,507
-- $
22,952
13,284
66,998
13,921
19,054
2,518
102,491
210,035
(3,898 )
19,054
(19,054 )
--
--
9,386
86,052
13,921
--
2,518
102,491
210,035
14,226
67,809
27,369
19,835
2,330
117,343
200,832
(4,508 )
18,999
(18,999 )
--
--
30,869
--
4,921
23,507
9,718
86,808
27,369
836
2,330
117,343
200,832
$ 312,526 $
-- $ 312,526 $ 318,175 $
-- $ 318,175
Note 3. Acquisitions and Dispositions
In April 2002, the Company acquired the rights to a multi-year customer service and technical support agreement
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 intangible assets of $1.8 million related to the underlying customer 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 evaluated 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.
60
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 net 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. 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, resulting in a net loss of $0.2 million.
The balance due under the note was paid in varying monthly installments over a two-year period. The net gain on
the sale of the Bismarck facility of $1.8 million less the net loss on the sale of the print facilities in Galashiels of
$0.2 million is included in “Net gain on disposal of property and equipment” in the accompanying 2002
Consolidated Statement of Operations.
On September 30, 2003, the Company sold the land and building related to its Scottsbluff, Nebraska facility,
which was closed in connection with the 2002 restructuring plan, for $2.0 million cash, resulting in a net gain of
$1.9 million. The net book value of the facilities of $1.9 million was offset by the related deferred grants of
$1.8 million. The net gain on the sale of the Scottsbluff facility of $1.9 million is included in “Net gain on disposal
of property and equipment” in the accompanying 2003 Consolidated Statement of Operations.
On December 31, 2003, the Company sold the land and building related to its Eveleth, Minnesota facility for
$2.3 million, for which the Company received $0.3 million cash and a $2.0 million note receivable, resulting in a net
gain of $1.7 million recognized over the term of the note using the installment sales method of accounting. The net
book value of the facilities of $3.5 million was offset by the related deferred grants of $2.9 million. The Company
recognized $0.2 million of the $1.7 million net gain on the sale of the Eveleth facility in 2003, which is included in
“Net gain on disposal of property and equipment” in the accompanying 2003 Consolidated Statement of Operations.
The remaining $1.5 million net gain was recognized in 2004 when the note receivable balance was paid in full and is
included in “Net gain on disposal of property and equipment” in the accompanying 2004 Consolidated Statement of
Operations.
On January 15, 2004, the Company sold the land, building and its contents related to its Klamath Falls, Oregon
facility for $4.0 million in cash, resulting in a net gain of $2.7 million in the first quarter of 2004. The net book value
of the facilities of $2.3 million was offset by the related deferred grants of $1.0 million. On March 31, 2004, the
Company sold a parcel of land at its Pikeville, Kentucky facility for $0.2 million in cash, resulting in a net gain of
$0.1 million in the first quarter of 2004. On July 9, 2004, the Company sold the land, building and its contents
related to its Hays, Kansas facility for $3.0 million cash, resulting in a net gain of $2.8 million in the third quarter of
2004. The net book value of the facilities of $1.5 million was offset by the related deferred grants of $1.3 million.
Accordingly, the net gains on the sale of these facilities of $7.1 million related to the Eveleth, Klamath Falls,
Pikeville and Hays facilities are included in “Net gain on disposal of property and equipment” in the accompanying
2004 Consolidated Statement of Operations.
In April 2004, related to the Company’s efforts to realign the EMEA cost structure with current business levels,
the Company proposed a liquidation plan to close its operations in Turkey. Accordingly, the Company transferred
one remaining contract to other Sykes’ subsidiaries and shutdown the operations. In May 2004, the Company
substantially completed the liquidation of its net investment in Turkey. As a result, the net effect of the translation
gains and losses of $0.7 million was recognized as a gain on liquidation of a foreign entity and included in “Other
income” in the accompanying 2004 Consolidated Statement of Operations. Due to the immaterial amounts, the
financial data related to the Company’s net investment in Turkey has not been classified as discontinued operations.
The Company reported net income or net loss from Turkey’s operations, excluding the $0.7 million previously
mentioned foreign translation gain, of $0.3 million net loss for 2004, breakeven for 2003 and net income of $0.1
million for 2002. Turkey’s net assets included in the accompanying Consolidated Balance Sheets as of December
31, 2004 and December 31, 2003, were $0.2 million and $0.8 million, respectively.
Subsequent to year end, on March 1, 2005, the Company purchased the shares of Kelly, Luttmer & Associates
Limited (“KLA”) located in Calgary, Alberta, Canada which included net assets of approximately $0.1 million.
KLA is a customer contact management center specializing in organizational health, employee assistance,
occupational health, and disability management services. The Company acquired these operations in an effort to
broaden its operations in the healthcare sector. Total cash consideration paid was approximately $3.0 million. Pro-
forma results of operations, in respect to this acquisition have not been presented because the effect of this
acquisition was not material.
61
Note 4. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company’s credit concentrations 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 21.
Note 5. Receivables
Receivables consist of the following (in thousands):
Trade accounts receivable ................................................ $ 89,950
3,255
Income taxes receivable ...................................................
1,749
Other ................................................................................
94,954
2004
2003
$ 77,190
6,396
3,071
86,657
December 31,
Less allowance for doubtful accounts ..............................
4,293
$ 90,661
4,242
$ 82,415
Note 6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
December 31,
2004
Deferred tax asset (Note 14).............................................. $
Prepaid maintenance .........................................................
Inventory, at cost...............................................................
Prepaid rent .......................................................................
Prepaid insurance ..............................................................
Prepaid telephone ..............................................................
Prepaid other .....................................................................
4,419
2,080
1,334
1,086
560
499
1,241
$ 11,219
2003
5,927
2,775
1,089
1,273
588
132
1,644
13,428
$
$
Note 7. Assets Held for Sale
Assets held for sale at four customer contact management centers in the United States consist of the following (in
thousands):
Land ................................................................................ $
Buildings and leasehold improvements ..........................
Equipment, furniture and fixtures ...................................
Capitalized software development costs .........................
Less accumulated depreciation .......................................
$
December 31,
2004
2003
1,352
9,124
7,931
114
18,521
8,779
9,742
$
$
—
—
—
—
—
—
—
The carrying value of these assets is offset by the related deferred grants of $6.7 million as of December 31, 2004
and included in “Deferred grants related to assets held for sale” in the accompanying Consolidated Balance Sheet.
62
Note 8. Property and Equipment
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,
2004
2,578
48,872
173,281
9,442
464
1,749
236,386
153,495
82,891
2003
$
6,244
59,901
179,331
8,322
365
737
254,900
147,706
$ 107,194
On June 8, 2004, the Company leased the land, building and its contents related to its Manhattan, Kansas
facility to an unrelated third party effective August 1, 2004 for a period of 5 years, cancelable by the lessee at the
end of each year for varying penalties not exceeding one year’s rent. As of December 31, 2004, the leased property
consists of the following (in thousands):
Building and improvements, net of deferred grants of $2.4 million ........
Equipment, furniture and fixtures ............................................................
Less accumulated depreciation ................................................................
Amount
$ 78
3,893
3,971
(3,791)
$ 180
As of December 31, 2004, future minimum rental payments, including penalties for failure to renew, to be
received on non-cancelable operating leases are contractually due in the amount of $0.8 million in 2005.
In January 2005, the Company leased the Pikeville, Kentucky facility to a third party. As a result, the net
carrying value of $2.6 million of Land, Building and Equipment related to this site was reclassified from “Assets
Held for Sale” to “Property and Equipment” as of December 31, 2004. The carrying value of $2.6 million is offset
by a related deferred grant in the amount of $1.8 million as of December 31, 2004.
In September 2004, the building and contents of the customer contact management center located in Marianna,
Florida was severely damaged by Hurricane Ivan. After settlement with the insurer in December 2004, the Company
recognized a net gain of $5.4 million after write-off of the property and equipment, which had a net book value of
$3.4 million, net of the related deferred grants of $2.2 million. The Company also received an insurance recovery for
business interruption during 2004 and recognized $0.1 million and $0.2 million, respectively, as a reduction to
“Direct salaries and related costs” and “General and administrative” costs in the accompanying Consolidated
Statement of Operations for the year ended December 31, 2004. In December 2004, the Company reached an
agreement with the City of Marianna to donate the underlying land to the city with $0.1 million in cash to assist with
the site demolition and clean up of the property with no further obligation of the Company.
Note 9. Deferred Charges and Other Assets
Deferred charges and other assets consist of the following (in thousands):
Non-current deferred tax asset (see Note 14) ................. $ 14,225
2,089
Investment in SHPS, Incorporated, at cost .....................
2,607
Other ...............................................................................
$ 18,921
2004
2003
$ 13,334
2,089
2,545
$ 17,968
December 31,
63
Note 10. Accrued Employee Compensation and Benefits
Accrued employee compensation and benefits consist of the following (in thousands):
Accrued compensation ..................................................... $ 14,582
6,754
Accrued vacation .............................................................
Accrued employment taxes ..............................................
5,498
Other ................................................................................
3,482
$ 30,316
2004
2003
$ 12,768
7,676
5,874
4,551
$ 30,869
December 31,
Note 11. Other Accrued Expenses and Current Liabilities
Other accrued expenses and current liabilities consist of the following (in thousands):
Accrued legal and professional fees ................................. $
Accrued roadside assistance claim costs ..........................
Accrued telephone charges ..............................................
Accrued rent .....................................................................
Accrued restructuring charges (see Note 16) ...................
Accrued property taxes ....................................................
Other ................................................................................
$
December 31,
2004
2003
2,981
1,417
1,088
610
285
209
2,796
9,386
$
$
2,307
1,182
1,179
501
887
552
3,110
9,718
Note 12. Long-Term Debt
Long-term debt consists of the following (in thousands):
Notes payable and capital leases, principal and interest payable in
monthly installments through December 2004, interest at varying
rates up to 19.0%, collateralized by certain equipment ............
Total debt ..................................................................................
Less current portion ..................................................................
Long-term debt .........................................................................
$ — $ 87
—
87
—
87
$ — $ —
December 31,
2004
2003
As of December 31, 2003, the Company elected to cancel its then existing revolving credit facility. As a result,
the Company charged off the remaining deferred loan costs of $0.2 million, which is included as a component of
other income (expense) in the accompanying in 2003 Consolidated Statement of Operations.
On March 15, 2004, the Company entered into a new $50.0 million revolving credit facility with a group of
lenders (the “Credit Facility”), which amount is subject to certain borrowing limitations. Pursuant to the terms of the
Credit Facility, the amount of $50.0 million may be increased up to a maximum of $100.0 million with the prior
written consent of the lenders. The $50.0 million Credit Facility includes a $10.0 million swingline subfacility, a
$15.0 million letter of credit subfacility and a $40.0 million multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general corporate purposes
including acquisitions, share repurchases, working capital support, and letters of credit, subject to certain limitations.
The Credit Facility, including the multi-currency subfacility, accrues interest, at the Company’s option, at (a) the
Base Rate (defined as the higher of the lender’s prime rate or the Federal Funds rate plus 0.50%) plus an applicable
margin up to 0.50%, or (b) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin up to 2.25%.
Borrowings under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to 0.50%
and borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an applicable margin up to
64
2.25%. In addition, a commitment fee of up to 0.50% is charged on the unused portion of the Credit Facility on a
quarterly basis. The borrowings under the Credit Facility, which will terminate on March 14, 2007, are secured by a
pledge of 65% of the stock of each of the Company’s direct foreign subsidiaries. The Credit Facility prohibits the
Company from incurring additional indebtedness, subject to certain specific exclusions. There were no borrowings
in 2004 and no outstanding balances as of December 31, 2004 with $50.0 million availability under the Credit
Facility.
Note 13. Accumulated Other Comprehensive Income (Loss )
The Company presents data in the Consolidated Statements of Changes in Shareholders’ Equity in accordance
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 income
(loss) include foreign currency translation adjustments as follows (in thousands):
Balance at January 1, 2002 .......................................................
Foreign currency translation adjustment ..................................
Balance at December 31, 2002 .................................................
Foreign currency translation adjustment ..................................
Balance at December 31, 2003 .................................................
Foreign currency translation adjustment ............................
Less: foreign currency translation gain included in net
income (no tax effect).........................................................
Balance at December 31, 2004 ...............................................
Accumulated
Other
Comprehensive
Income (Loss)
(20,212 )
$
9,111
(11,101 )
10,893
(208)
5,713
(634)
4,871
$
Earnings associated with the Company’s investments in its international 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.
Note 14. Income Taxes
The income (loss) before provision (benefit) for income taxes includes the following components (in thousands):
United States ....................................................
Foreign .............................................................
Total income (loss) before provision
(benefit) for income taxes ...........................
$
2004
(14,585)
30,446
Years Ended December 31,
2003
$ (14,013 )
27,969
$
2002
(35,662 )
11,216
$
15,861
$ 13,956
$ (24,446 )
65
Significant components of the income tax provision (benefit) are as follows (in thousands):
2004
Years Ended December 31,
2003
2002
Current:
Federal .............................................................................. $
State ..................................................................................
Foreign .............................................................................
Total current provision (benefit) for income taxes .......
Deferred:
Federal ..............................................................................
State ..................................................................................
Foreign .............................................................................
Total deferred provision (benefit) for income taxes .....
(1,777)
(295)
6,471
4,399
1,093
280
(725)
648
$
(1,279 )
(212 )
7,198
5,707
(1,532 )
(692 )
1,168
(1,056 )
$
(4,628 )
(569 )
7,987
2,790
(5,126 )
(452 )
(3,027 )
(8,605 )
Total provision (benefit) for income taxes .................. $
5,047
$
4,651
$
(5,815 )
The temporary differences that give rise to significant portions of the deferred income tax provision (benefit) are
as follows (in thousands):
Accrued expenses............................................................... $
Net operating loss and tax credit carryforwards.................
Depreciation and amortization ...........................................
Deferred revenue................................................................
Deferred statutory income ..................................................
Valuation allowance...........................................................
Other...................................................................................
Total deferred provision (benefit) for income taxes ...... $
2004
3,110
(8,337)
5,302
(832)
237
(191)
1,359
648
$
$
Years Ended December 31,
2003
(2,163)
(8,765)
(1,775)
1,942
966
10,668
(1,929)
(1,056)
$
$
2002
(1,609)
(16,164)
974
2,978
202
4,612
402
(8,605)
The reconciliation of income tax provision (benefit) computed at the U.S. federal statutory tax rate to the
Company’s effective income tax provision (benefit) is as follows (in thousands):
2004
Years Ended December 31,
2003
Tax at U.S. statutory rate ........................................................ $
State income taxes, net of federal tax benefit .........................
Tax holidays ...........................................................................
Change in valuation allowance, net of related adjustments ....
Foreign rate differential ..........................................................
Permanent differences ............................................................
Income tax credits ...................................................................
Foreign withholding and other taxes ......................................
Other .......................................................................................
Total provision (benefit) for income taxes ......................... $
5,551
(350)
(1,918)
1,189
(1,654)
1,789
—
879
(439)
5,047
$
$
4,885
(438 )
(2,763 )
5,595
(2,529 )
143
(391 )
520
(371 )
4,651
$
$
2002
(8,556 )
(980 )
(1,393 )
4,615
(181 )
680
—
—
—
(5,815 )
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income taxes. A provision for income taxes
has not been made for the undistributed earnings of foreign subsidiaries of approximately $179.0 million at
December 31, 2004, that are permanently reinvested in foreign business operations. Determination of any
unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are
essentially permanent in nature is not practicable.
The Company has been granted tax holidays in the Philippines, El Salvador, India and Costa Rica. These holidays
have various expiration dates from 2005 through 2013. Upon expiration, the Company intends to seek renewals of
these tax holidays.
66
The temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2004 and 2003, respectively, are presented below (in thousands):
December 31,
2004
2003
(Restated)
Deferred tax assets:
Accrued expenses ................................................................
Net operating loss and tax credit carryforwards ..................
Depreciation and amortization .............................................
Deferred revenue .................................................................
Valuation allowance ............................................................
Other ....................................................................................
$
Deferred tax liabilities:
Accrued liabilities ................................................................
Depreciation and amortization .............................................
Deferred statutory income ....................................................
Other ....................................................................................
Net deferred tax assets ....................................................
$
Classified as follows:
Current assets (Prepaid expenses and other) (Note 6) .......... $
Non-current assets (Deferred charges and other) (Note 9) ..
Current liabilities (Other accrued expenses) ........................
Non-current liabilities (Other long-term liabilities) .............
Net deferred tax assets ....................................................
$
3,223
44,029
10,198
2,393
(30,391)
—
29,452
(2,073)
(8,774)
(2,500)
—
(13,347)
16,105
4,419
14,225
(42)
(2,497)
16,105
$
$
$
$
5,705
35,692
19,471
1,561
(30,582 )
1,620
33,467
(1,445 )
(12,745 )
(2,263 )
(98)
(16,551 )
16,916
5,927
13,334
(18)
(2,327 )
16,916
SFAS No. 109, “Accounting for Income Taxes”, requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the available evidence, both positive and negative, for each respective tax
jurisdiction, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At
December 31, 2004, management has determined that a valuation allowance of approximately $30.4 million is
necessary to reduce U.S. deferred tax assets by $10.4 million and foreign deferred tax assets by $20.0 million.
Approximately $75.0 million of the income tax loss carryforward at December 31, 2004 relates to foreign entities
with various expiration dates. For U.S. purposes, a net operating loss carryforward of approximately $52.0 million
and $3.9 million of tax credits are available for carryforward expiring through the year ending December 31, 2024.
Of this U.S. $52.0 million carryforward, only $10.1 million can be offset against the future earnings of an acquired
subsidiary.
The Company is currently under examination in the U.S. by several states for sales and use taxes and franchise
taxes for periods covering 1999 through 2003. The U.S. Internal Revenue Service has completed audits of the
Company’s U.S. tax returns through July 31, 1999 and recently began an audit for tax year ending July 31, 2002.
Certain German subsidiaries of the Company are under examination by the German tax authorities for periods
covering 1997 through 2000. Additionally, certain Canadian subsidiaries are under examination by Canadian tax
authorities for the periods covering 1993 through 2003. 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. The Company has a contingent income tax liability of $2.9
million as of December 31, 2004.
On October 22, 2004 the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act
creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an
85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction
is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions
in the Act. As such, management is not yet in a position to decide on whether, and to what extent, it might repatriate
foreign earnings that have not yet been remitted to the U.S. Based on the analysis to date, however, it is reasonably
possible that the Company may repatriate some amount up to $50.0 million. The related range of income tax effects
67
of such repatriation cannot reasonably be estimated. Management expects to be in a position to finalize its
assessment by December 31, 2005.
Note 15. Termination Costs Associated With Exit Activities
During the first quarter of 2004, the Company determined to reduce costs by consolidating and closing two
European customer contact management centers in Germany. The plan was substantially completed by the end of
the second quarter of 2004. In connection with these closures, the Company terminated 240 employees and accrued
over their remaining service period, an estimated liability for termination costs of $1.7 million based on the fair
value as of the termination date, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities”. Termination costs of $1.7 million are included in “Direct salaries and related costs” in the
accompanying 2004 Consolidated Statement of Operations. Cash payments totaled $1.7 million during the year
ended December 31, 2004.
On January 19, 2005, the Company announced to its workforce that, as part of its continued efforts to optimize
assets and improve operating performance, it plans to migrate the call volumes of the customer contact management
services and related operations from its Bangalore, India facility, a component of the Company’s Americas segment,
to other more strategically-aligned offshore facilities in the Asia Pacific region. The Company’s Bangalore facility
generated approximately $1.0 million in revenue in the fourth quarter of 2004 and $5.7 million in the year of 2004.
The Company anticipates that approximately 50% of the annualized fourth quarter revenue will be captured and
migrated to its offshore facilities within the Asia Pacific region. The Company expects to complete the plan of
migration, including the redeployment of site infrastructure and the recruiting, training and ramping-up of agents
associated with the migration of Bangalore call volumes to other offshore facilities, by the early part of the second
quarter of 2005. The Company’s decision to migrate the Bangalore operations was based on inadequate rates of
return at the Bangalore facility, the marginal competitive advantage of Bangalore operations and Bangalore-based
customer contact management transactions being better suited for other offshore facilities.
As a result of this plan of migration, the Company estimates that during the first quarter of 2005 it will incur
charges of approximately $0.3 million as a result of severance and related costs and $0.3 million related to other exit
costs. In connection with this migration, the Company expects to redeploy property and equipment located in India
totaling approximately $1.9 million to other more strategically-aligned offshore facilities in the Asia Pacific region.
As a result, the Company recorded an asset impairment charge of $0.7 million for certain property and equipment in
India as of December 31, 2004. The total charges related to the plan of migration are anticipated to be approximately
$1.3 million. The severance and other exit costs require the outlay of cash during 2005, while the charges related to
property and equipment represent non-cash charges.
Note 16. Restructuring and Other Charges
2002 Charges
In October 2002, the Company approved a restructuring plan to close and consolidate two U.S. and three
European customer contact management 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
contractual 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 termination and severance
costs. In connection with the 2002 restructuring, the Company reduced the number of employees by 470 during
2002 and 330 during 2003. The plan was substantially completed by the end 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 $1.3
million in the first quarter of 2003 primarily related to a specialized technology platform, which was no longer
utilized upon the expiration of the contracts in March 2003.
68
The following tables summarize the 2002 plan accrued liability for restructuring and other charges and related
activity in 2004, 2003 and 2002 (in thousands):
Balance at
January 1,
2004
Severance and related costs .......... $
Lease termination costs.................
Other restructuring costs ...............
$
106
342
545
993
Cash
Outlays
—
$
(301 )
(188 )
(489 )
$
Balance at
January 1,
2003
Severance and related costs ......... $
Lease termination costs ...............
Other restructuring costs..............
$
4,696
1,827
1,852
8,375
Balance at
January 1,
2002
Cash
Outlays
$
(3,816 )
(1,585 )
(1,512 )
(6,913 )
$
2002
Charges
5,012
1,827
Severance and related costs ............... $ — $
Lease termination costs .....................
Write-down of property, equipment
and capitalized costs......................
Other restructuring costs ...................
—
—
—
12,017
1,958
$ — $ 20,814
Other
Non-Cash
Changes(2)
$ —
(41)
(72)
$ (113)
Other
Non-Cash
Changes
$ (774 ) (3)
100 (4)
205 (5)
$ (469)
Balance at
December 31,
2004 (1)
106
$
—
285
391
$
Balance at
December 31,
2003 (1)
106
$
342
545
993
$
Cash
Outlays
(316)
$
—
—
(106)
(422)
$
Other
Non-Cash
Changes
—
$
—
(12,017)
—
$ (12,017)
Balance at
December 31,
2002
$ 4,696
1,827
—
1,852
$ 8,375
(1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance
Sheets, except $0.1 million of severance and related costs which is included in “Accrued employee
compensation and benefits.”
(2) During 2004, the Company reversed $0.1 million related to the remaining lease termination and closing costs
for two of its European customer contact management centers and one European fulfillment center.
(3) During 2003, the Company reversed $0.8 million of the severance accrual related to the final termination
settlement for the closure of two of its European customer contact management centers and one European
fulfillment center.
(4) During 2003, the Company recorded $0.1 million in additional lease termination costs primarily related to
the final settlement of the lease for one of its European customer contact management centers.
(5)During 2003, the Company recorded $0.3 million in additional site closure costs related to one of its
European customer contact management centers offset by $0.1 million for the reversal of the remaining site
closure costs for its Galashiels, Scotland print facility and its Scottsbluff, Nebraska facility, which were both
sold in 2003.
2001 Charges
In December 2001, in response to the economic slowdown 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 contact management 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 connection
69
with the fourth quarter 2001 restructuring, the Company reduced the number of employees by 230 during 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 nonperforming assets, including software and equipment no longer used by the Company.
The following tables summarize the 2001 plan accrued liability for restructuring and other charges and related
activity in 2003, 2002 and 2001 (in thousands):
Balance at
January 1,
Severance and related costs ................. $
Lease termination costs........................
Other restructuring costs......................
$
2003
153
161
32
346
Cash
Outlays
$
$
(153 )
(121 )
(15 )
(289 )
Other
Non-Cash
Changes(1)
—
(40 )
(17 )
(57)
$
$
Balance at
December 31,
2003
$ —
—
—
$ —
Balance at
January 1,
2002
Severance and related costs................. $
Lease termination costs .......................
Write-down of property, equipment
and capitalized costs.........................
Other restructuring costs .....................
$
1,423
1,355
3,220
292
6,290
Cash
Outlays
$
(1,270)
(1,397)
—
(260)
(2,927)
$
Other
Non-Cash
Changes
$
—
203 (2)
Balance at
December 31,
2002
153
161
$
(3,220 )
—
$ (3,017)
$
—
32
346
Balance at
January 1,
2001
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 ......................................
—
1,480
$ — $ 16,080
2001
Charges
1,456
1,426
8,826
2,600
292
14,600
Cash
Outlays
$
(33)
(71)
—
—
—
(104)
—
(104)
$
Other
Non-Cash
Changes
—
$
—
Balance at
December 31,
2001
$ 1,423
1,355
(5,606)
(2,600)
—
(8,206)
3,220
—
292
6,290
(1,480)
$ (9,686)
—
$ 6,290
(1) During 2003, the Company reversed accruals related to the final settlement of lease termination and other
costs.
(2)During 2002, the Company recorded $0.2 million in additional lease termination costs related to one of the
European customer contact management centers.
2000 Charges
The Company recorded restructuring and other charges during the second and fourth quarters of 2000
approximating $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
consolidation of six technical staffing offices. Included in the second quarter 2000 restructuring and other charges
was a $3.5 million lease termination payment to the founder and former Chairman of the Company related to the
termination of a ten-year operating lease agreement for use of his private jet. 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.
70
The Company also announced, after a comprehensive review of operations, its decision to exit certain non-core,
lower margin businesses to reduce costs, improve operating efficiencies and focus on its core competencies of
technical support, customer service and consulting solutions. 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
operations, the consolidation of its Tampa, Florida technical support center and the exit of its worldwide localization
operations. Included in the fourth quarter 2000 restructuring and other charges is a $2.4 million severance payment
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 plan accrued liability for restructuring and other charges and related
activity in 2004, 2003, 2002, 2001 and 2000 (in thousands):
Severance and related costs ..........................
Lease termination costs ................................
Total .........................................................
Balance at
January 1,
2004
588
—
588
$
$
Cash
Outlays
$ (501)
—
$ (501)
Other
Non-Cash
Changes
$ —
—
$ —
Balance at
December 31,
2004 (1)
87
$
—
87
$
Severance and related costs ..........................
Lease termination costs ................................
Total .........................................................
Balance at
January 1,
2003
$ 1,053
120
$ 1,173
Cash
Outlays
$ (465 )
—
$ (465 )
Other
Non-Cash
Changes
$ —
(120 ) (2)
$ (120 )
Balance at
December 31,
2003 (1)
$ 588
—
$ 588
Severance and related costs ..........................
Lease termination costs ................................
Total .........................................................
Balance at
January 1,
2002
$ 1,485
143
$ 1,628
Cash
Outlays
$ (646 )
(23 )
$ (669 )
Other
Non-Cash
Changes
$ 214 (3)
—
$ 214
Balance at
December 31,
2002
$ 1,053
120
$ 1,173
Cash
Outlays
$
(1,288)
(1,145 )
(718 )
Other
Balance at
Non-Cash December 31,
Changes
$ (289)(4)
—
—
2001
$ 1,485
143
—
$ 1,628
$
(3,151 )
$ (289 )
Severance and related costs ........................
Lease termination costs ..............................
Other restructuring costs ............................
Total .......................................................
Balance at
January 1,
2001
$ 3,062
1,288
718
$ 5,068
71
Balance at
January 1,
2000
2000
Charges
Severance and related costs................. $ — $
Lease termination costs.......................
Write-down of property, equipment....
Write-down of intangible assets..........
Other restructuring costs .....................
3,974
5,404
14,191
6,086
813
$ — $ 30,468
—
—
—
—
Cash
Outlays
$
(912)
(4,116)
—
—
(95)
$ (5,123)
Other
Non-Cash
Changes
Balance at
December 31,
2000
$
—
—
(14,191)
(6,086)
—
$ (20,277)
$
$
3,062
1,288
—
—
718
5,068
(1) Included in “Accrued employee compensation and benefits” in the accompanying Consolidated Balance
Sheets.
(2) During 2003, the Company reversed accruals related to the final settlement of lease termination costs.
(3) 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.
(4) During 2001, the Company reduced the original severance accrual by $0.3 million for severance payments
due to the Company’s former president.
Note 17. Earnings Per Share
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
years ended December 31, 2004, 2003 and 2002, options to purchase shares of common stock of 2.4 million, 2.9
million and 3.2 million, respectively, at various prices were antidilutive and were excluded from the calculation of
diluted earnings per share.
The numbers of shares used in the earnings per share computation are as follows (in thousands):
Basic:
Weighted average common shares outstanding .....
Diluted:
Dilutive effect of stock options ..............................
2004
39,607
115
Total weighted average diluted shares outstanding ....
39,722
Years Ended December 31,
2003
40,300
141
40,441
2002
40,405
—
40,405
On August 5, 2002, the Company’s Board of Directors authorized the Company to purchase up to three million
shares of its outstanding common stock. A total of 1.6 million shares have been repurchased under this program
since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private
transactions, and the purchases are based on factors such as, including but not limited to, the stock price and general
market conditions. For the year ended December 31, 2004, the Company repurchased 1.1 million common shares
under the 2002 repurchase program at prices ranging between $5.55 to $7.58 per share for a total cost of
$7.1 million.
Note 18. Commitments and Contingencies
The Company leases certain equipment and buildings under operating leases having original terms ranging from
one to twenty-two years, some with options to cancel at varying points during the lease. The building leases contain
up to two five-year renewal options. Rental expense under operating leases for the years ended December 31, 2004,
2003 and 2002 was approximately $18.4 million, $13.4 million, and $13.7 million, respectively.
72
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, 2004 (in thousands):
Year
2005 ........................................................................ $
2006 ........................................................................
2007 ........................................................................
2008 ........................................................................
2009 ........................................................................
Thereafter ................................................................
Total minimum payments required .................... $
Total
Amount
14,375
9,230
5,041
3,664
3,667
15,569
51,546
A lease agreement, relating to the Company’s customer contact management center in Ireland, contains a
cancellation clause which requires the Company, in the event of cancellation, to restore the facility to its original
state at an estimated cost of $1.1 million as of December 31, 2004 and pay a cancellation fee of $0.5 million, which
approximates two annual rental payments under the lease agreement. In addition, under certain circumstances
(including cancellation of the lease and cessation of the center’s operations in the facility), the Company is
contingently liable until June 16, 2005 to repay any proceeds received in association with the facility’s grant
agreement. As of December 31, 2004, the grant proceeds subject to repayment approximated $1.1 million. As of
December 31, 2004, the Company had no plans to cancel this lease agreement.
The Company enters into agreements with third-party vendors in the ordinary course of business whereby the
Company commits to purchase goods and services used in its normal operations. These agreements, which are not
cancelable, generally range from one to five year periods and contain fixed or minimum annual commitments.
Certain of these agreements allow for renegotiation of the minimum annual commitments based on certain
conditions.
The following is a schedule of future minimum purchases remaining under the agreements as of December 31,
2004 (in thousands):
Total
Year
Amount
2005 ........................................................................ $ 14,315
12,504
2006 ........................................................................
Total minimum payments required .................... $ 26,819
From time to time, during the normal course of business, the Company may make certain indemnities,
commitments and guarantees under which it may be required to make payments in relation to certain transactions.
These include: (i) indemnities to vendors and service providers pertaining to claims based on negligence or willful
misconduct of the Company and (ii) indemnities involving the accuracy of representations and warranties of the
Company in certain contracts. In addition, the Company has agreements whereby it will indemnify certain officers
and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s
request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s
or director’s lifetime. The maximum potential amount of future payments the Company could be required to make
under these indemnification agreements is unlimited; however, the Company has director and officer insurance
coverage that limits its exposure and enables it to recover a portion of any future amounts paid. The Company
believes the applicable insurance coverage is generally adequate to cover any estimated potential liability under
these indemnification agreements. The majority of these indemnities, commitments and guarantees do not provide
for any limitation of the maximum potential for future payments the Company could be obligated to make. The
Company has not recorded any liability for these indemnities, commitments and other guarantees in the
accompanying Consolidated Balance Sheets.
The Company is monitoring certain state laws regarding taxes associated with its business operations. Although
the Company has not been notified of a claim by a governmental agency, it is believed to be reasonably possible a
73
liability may have been incurred before December 31, 2004. However, management estimates this amount to be
immaterial based on the available facts and circumstances.
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.
Note 19. Employee Benefit Plan
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 $0.5 million, $0.8 million (including $0.2
million to reimburse the 401(k) plan for commissions previously paid to a member of the Company’s Board of
Directors as discussed in Note 22), and $0.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Note 20. Stock Options and Common Stock Units
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. All options granted to
employees under the Company’s stock option plans expire if not exercised by the tenth anniversary of their grant
date.
Until May 2004, the Company maintained a stock option plan that provided for the automatic grant of non-
qualified stock options to members of the Board of Directors who were not employees of the Company. Under the
plan, each new non-employee director was granted an option to purchase 25,000 shares of common stock upon his
or her election to the Board. Each continuing non-employee director was granted an option to purchase an additional
10,000 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 one to three
years. All options granted to non-employee directors expire if not exercised by the tenth anniversary of their grant
date. No options were granted at or after the May 2004 Annual Meeting of Shareholders.
At December 31, 2004, there were 7.0 million shares of common stock reserved for issuance under all of the
Company’s stock option plans. For all plans, options of 2.5 million, 2.4 million, and 2.3 million were exercisable at
December 31, 2004, 2003 and 2002 with a weighted average exercise price of $10.35, $11.50 and $11.39,
respectively. There were 4.7 million, 4.5 million and 4.4 million shares available for grant under the plans at
December 31, 2004, 2003, and 2002, respectively.
The following table summarizes stock option activity for each of the three years ended December 31:
Outstanding at January 1, 2002 .................................
Granted ..................................................................
Exercised ...............................................................
Expired or terminated ............................................
Outstanding at December 31, 2002 ...........................
Granted ..................................................................
Exercised ...............................................................
Expired or terminated ............................................
Outstanding at December 31, 2003 ...........................
Granted ..................................................................
Exercised ...............................................................
Expired or terminated ............................................
Outstanding at December 31, 2004 ........................
74
Shares
(In thousands)
2,740
2,052
(124 )
(1,168 )
3,500
163
(195 )
(307 )
3,161
—
(36 )
(348 )
2,777
Weighted
Average
Exercise
Price
$ 14.35
8.76
$
$
4.15
$ 17.57
$ 10.39
5.80
$
$
4.23
$ 10.40
$ 10.54
—
$
4.56
$
14.53
$
10.12
$
The following table further summarizes significant ranges of outstanding and exercisable options at December 31,
2004:
Range of
Exercise Prices
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 ...................
Total .................................
Number
Outstanding at
Dec. 31, 2004
Weighted
Average
Remaining
(In thousands) Life (Years)
71
449
226
1,600
199
232
2,777
8.0
6.7
6.8
7.0
5.3
3.2
6.6
Weighted
Number
(In thousands)
Weighted
Average Exercisable at Average
Exercise Dec. 31, 2004 Exercise
Price
$ 3.17
$ 4.88
$ 8.41
$ 9.26
$ 16.37
$ 24.22
$ 10.35
Price
$ 3.17
$ 4.94
$ 8.40
$ 9.31
$ 16.37
$ 24.22
$ 10.12
35
419
126
1,485
199
232
2,496
Employee Stock Purchase Plan — The Company’s Employee Stock Purchase Plan (the “ESPP”), which
qualifies under Section 423 of the Internal Revenue Code of 1986, allowed eligible employees to purchase the
Company’s common stock through payroll deductions at 87.5% of the market price on the last day of the offering
period, subject to certain maximum limitations. Effective June 30, 2003, the Company’s Board of Directors decided
to terminate the ESPP due to limited employee participation and costs associated with administrating it.
Accordingly, the remaining 0.8 million shares of the Company’s common stock previously reserved are no longer
available for future issuance under the ESPP as of June 30, 2003, the termination date.
The weighted average fair value share price of the purchase rights granted under the ESPP during the years ended
December 31, 2003 (before the termination date) and 2002 were $3.80 and $5.35, respectively. For the years ended
December 31, 2003 and 2002, 0.03 million and 0.07 million, respectively, of such shares were purchased by eligible
employees.
Non-Employee Director Fee Plan — In May 2004, the Board of Directors approved a new Non-Employee
Director Fee Plan (the “Plan”), subject to shareholder approval at the 2005 Annual Shareholders’ Meeting. The
Board of Directors determined that this Plan would replace and supercede the 1996 Non-Employee Director Fee
Plan and would be used in lieu of the 2004 Nonemployee Director Stock Option Plan (the “Stock Option Plan”). No
options have been awarded under the Stock Option Plan, and none will be awarded if the new Plan is approved by
the shareholders at the 2005 annual meeting. The Plan provides that all new non-employee Directors joining the
Board receive an initial grant of common stock units (“CSUs”) on the date the new Director is appointed or elected,
the number of which will be determined by dividing a dollar amount to be determined from time to time by the
Board (initially set at $30,000) by an amount equal to 110% of the average closing prices of the Company’s
common stock for the five trading days prior to the date the new Director is appointed or elected. The initial grant
of CSUs will vest in three equal installments, one-third on the date of each of the following three annual
shareholders’ meetings.
A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common
stock. On the date each CSU vests, the Director will become entitled to receive a share of the Company’s common
stock and the CSU will be canceled. For federal income tax purposes, the Director will not be deemed to have
received income with respect to the CSUs until the CSUs vest.
Additionally, the Plan provides that each non-employee Director who was serving as a Director immediately
prior to each annual shareholders’ meeting will receive, on the day after the annual meeting, an annual retainer for
service as a non-employee Director, the amount of which shall be determined from time to time by the Board. The
Board increased the amount of the annual retainer from $25,000 under the 1996 Fee Plan to $50,000 under the Plan.
Under the Plan, the annual retainer will be paid 75% in CSUs and 25% in cash. Previously, the annual retainer was
payable one-half in cash and one-half in CSUs. The number of CSUs to be granted under the Plan will be
determined by dividing the amount of the annual retainer by an amount equal to 105% of the average of the closing
75
prices for the Company’s common stock on the five trading days preceding the award date (the day after the annual
meeting). The annual grant of CSUs will vest in two equal installments, one-half on the date of each of the
following two annual shareholders’ meetings.
All CSUs will automatically vest upon the termination of a Director’s service as a Director, whether by reason of
death, retirement, resignation, removal or failure to be reelected at the end of his or her term. Until a CSU vests, the
Director has none of the rights of a shareholder with respect to the CSU or the common stock underlying the CSU.
CSUs are not transferable.
The Company applies variable plan accounting, in accordance with APB No. 25, for grants of CSUs issued under
the Plan and recognizes compensation cost over the vesting period. During the year ended December 31, 2004, the
Board awarded an aggregate of 55.6 thousand CSUs to the non-employee directors totaling $0.3 million with a
weighted average fair value of $5.94. Since the new Plan is subject to shareholder approval, the CSUs are not
considered to be granted and therefore no compensation cost will be recognized until the shareholders approve the
Plan at the 2005 Annual Shareholders’ Meeting. At that time, the Company will recognize compensation cost for the
CSUs over the vesting periods at the then current market price.
Note 21. Segments and Geographic Information
The Company operates within two regions, the “Americas” and “EMEA” which represented 60.7% and 39.3%,
respectively, of consolidated revenues for 2004. The Americas and EMEA regions represented 66.9% and 33.1%,
respectively, of consolidated revenues for 2003, and 66.1% and 33.9%, respectively, of consolidated revenues for
2002. Each region represents a reportable segment comprised of aggregated regional operating segments, which
portray similar economic characteristics. The Company aligns its business into two segments to effectively manage
the business and support the customer care needs of every client and to respond to the demands of the Company’s
global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America,
India and the Asia Pacific Rim, and provides outsourced customer contact management solutions (with an emphasis
on technical support and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle
East and Africa, and provides outsourced customer contact management solutions (with an emphasis on technical
support and customer service) and fulfillment services. The sites within Latin America, 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. based companies that are using the Company’s services in these locations to support their customer
contact management needs.
76
Information about the Company’s reportable segments for the years ended December 31, 2004, 2003 and 2002 is
as follows:
For the Year Ended December 31, 2004:
Americas
EMEA
Other (1)
Consolidated
Total
Revenues .......................................................... $
Depreciation and amortization .........................
283,253
22,042
$ 183,460
8,195
$
466,713
30,237
Income (loss) from operations before
reversal of restructuring and other charges
and before impairment of long-lived assets ... $
Reversal of restructuring and other charges .....
Impairment of long-lived assets ........................
Income from operations ...................................
Other income ....................................................
Provision for income taxes ...............................
Net income .......................................................
For the Year Ended December 31, 2003:
30,960
$ 10,478
$ $ (28,264)
$
113
(690)
3,264
(5,047)
$
13,174
113
(690)
12,597
3,264
(5,047)
10,814
Revenues .......................................................... $ 321,195
21,184
Depreciation and amortization .........................
$ 159,164
8,941
$
480,359
30,125
Income (loss) from operations before
reversal of restructuring and other charges .... $
Reversal of restructuring and other charges ......
Income from operations ...................................
Other income ....................................................
Provision for income taxes ...............................
Net income .......................................................
For the Year Ended December 31, 2002:
31,607
$
2,497
$ (23,382 ) $
646
2,588
(4,651 )
$
10,722
646
11,368
2,588
(4,651 )
9,305
Revenues .......................................................... $ 299,185
23,145
Depreciation and amortization .........................
$ 153,552
11,193
$
452,737
34,338
Income (loss) from operations before
restructuring and other charges and before
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 .............................................................
29,627
$
2,401
$ (21,034 ) $
(20,814 )
(1,475 )
(13,151 )
5,815
$
10,994
(20,814 )
(1,475 )
(11,295 )
(13,151 )
5,815
(18,631 )
(1) Other items (including corporate costs, restructuring and impairment costs, other income and expense, and income
taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the table above for the
three years in the period ended December 31, 2004. The accounting policies of the reportable segments are the same as
those described in Note 1, Summary of Accounting Policies, to the accompanying consolidated financial statements.
Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the
performance of its geographic segments based on revenue and income (loss) from operations, and does not include
segment assets or other income and expense items for management reporting purposes.
77
The Americas’ revenues included $36.6 million and $81.2 million, or 7.8% and 16.9% of consolidated revenues
for the years ended December 31, 2004 and 2003, respectively, from a leading systems integrator that represents a
major provider of communication services to whom the Company provides various outsourced customer contact
management services. Effective May 1, 2003, the Company entered into a subcontractor services agreement (the
“Agreement”) with the systems integrator following the execution of a primary services agreement between the
major provider of communication services and the systems integrator. The revenues for comparable periods as it
relates to this relationship were $71.6 million, or 15.8% of consolidated revenues for the year ended December 31,
2002. Under the terms of this three-year Agreement, which contains penalty provisions for failure to meet minimum
service levels and is cancelable with 6 months written notice, the Company will continue to provide the products and
services necessary to support and assist the systems integrator in the management and performance of its primary
services agreement.
In addition, revenues included $33.8 million, or 7.3% of consolidated revenues, $58.5 million, or 12.2% of
consolidated revenues, and $54.6 million, or 12.1% of consolidated revenues, for the years ended December 31,
2004, 2003 and 2002, respectively, from a leading software and services provider. This includes $33.8 million,
$58.0 million and $52.3 million in revenue from the Americas for the years ended December 31, 2004, 2003 and
2002, respectively, and $0.5 million and $2.3 million in revenue from EMEA for the years ended December 31,
2003 and 2002, respectively.
78
Information about the Company’s operations by geographic location is as follows (in thousands):
2004
Years Ended December 31,
2003
2002
Revenues (1) :
United States ............................................... $
Canada .........................................................
Costa Rica ...................................................
Philippines ...................................................
Other ............................................................
Total Americas ........................................
Germany ......................................................
United Kingdom ..........................................
Sweden ........................................................
Spain.............................................................
The Netherlands ..........................................
Hungary .......................................................
Other ............................................................
Total EMEA ............................................
Total ....................................................
$
Long-lived assets (2) :
United States ............................................... $
Canada .........................................................
Costa Rica ...................................................
Philippines ...................................................
Other ............................................................
Total Americas ........................................
Germany ......................................................
United Kingdom ..........................................
Sweden ........................................................
Spain.............................................................
The Netherlands ..........................................
Hungary .......................................................
Other ............................................................
Total EMEA .............................................
Total ........................................................
$
85,556
69,045
36,595
79,060
12,997
283,253
59,941
52,073
24,704
11,912
9,406
10,722
14,702
183,460
466,713
29,572
10,286
4,816
18,102
5,734
68,510
5,043
7,137
639
1,775
353
2,741
1,917
19,605
88,115
$
$
$
$
173,984
66,147
28,017
45,550
7,497
321,195
59,706
40,500
23,814
4,579
10,683
7,469
12,413
159,164
480,359
56,172
10,340
6,813
13,181
4,776
91,282
6,119
7,767
1,112
1,471
602
2,310
1,616
20,997
112,279
$
$
$
$
197,914
57,297
19,992
21,534
2,448
299,185
57,191
48,976
24,682
427
9,089
4,340
8,847
153,552
452,737
71,667
8,831
3,966
4,857
1,716
91,037
6,604
9,537
1,428
1,339
1,671
1,039
1,797
23,415
114,452
(1) Revenues are attributed to countries based on location of customer, except for Costa Rica, Philippines,
China and India which is primarily based on customers located in the U.S.
(2) Long-lived assets include property and equipment, net and goodwill, net.
Revenues for the Company’s products and services are as follows (in thousands):
Technical support and customer service and fulfillment ...........
Technical staffing and consultative professional services .........
Total ......................................................................................
79
2004
Years Ended December 31,
2003
$ 465,678
14,681
$ 480,359
2002
$ 428,081
24,656
$ 452,737
$ 455,468
11,245
$ 466,713
Note 22. Related Party Transactions
The Company paid John H. Sykes, the founder and former Chairman of the Company, $0.6 million for the use of
his private jet in each of the years 2004, 2003 and 2002 which is based on two times fuel costs and other actual costs
incurred for each trip.
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 for the year ended December 31, 2002 and insurance commissions for the
placement of the Company’s various corporate insurance programs of approximately $0.1 million for the year ended
December 31, 2002. This arrangement was terminated in 2002. During 2003, the Company determined that the
payment of broker commissions was a prohibited transaction under Federal regulations. As a result, during 2003, the
Company reimbursed the 401(k) plan $0.2 million for previously paid broker commissions and paid a penalty to the
U.S. government of $0.1 million.
Note 23. Retirement of Founder and Chairman
On August 2, 2004, John H. Sykes publicly announced his resignation and retirement as Chairman and Chief
Executive Officer of the Company. Mr. Sykes was employed by the Company pursuant to the Amended and
Restated Executive Employment Agreement (the “Employment Agreement”) dated as of October 1, 2001. The
Employment Agreement had an initial term of five years, expiring on October 1, 2006, and included automatic one-
year extensions unless there was appropriate notice of termination.
As a result of Mr. Sykes’ resignation prior to the end of the initial term of the Employment Agreement, the
Company and Mr. Sykes terminated the Employment Agreement and entered into a retirement and consulting
agreement (the “Retirement and Consulting Agreement”) dated December 10, 2004. Under the terms of the
Retirement and Consulting Agreement, Mr. Sykes employment with the Company was terminated effective as of
December 31, 2004, and the Company paid all compensation and benefits due under the Employment Agreement
through December 31, 2004. In addition, the Company paid Mr. Sykes $1.7 million in base severance pay and
unused vacation benefits, including a lump sum of $0.3 million related to the relinquishment of any rights to an
office and a secretary and the right to continue to be covered as an employee under the Company’s group health
insurance policy. The $1.7 million payment to Mr. Sykes is included in “General and administrative” costs in the
accompanying Consolidated Statement of Operations for the year ended December 31, 2004.
Additionally, the Company will pay Hyde Park Equity, LLC, a limited liability company owned by Mr. Sykes,
fees of $150,000, that will be paid in seven equal quarterly installments of $21,428, for consulting services to be
provided by Mr. Sykes through Hyde Park Equity during the period from December 31, 2004, through October 1,
2006. In the event of Mr. Sykes’ death prior to October 1, 2006, the Company shall pay only a pro rata amount for
the quarter in which the services are no longer provided, and nothing further shall be owed for consulting services.
For such amount, Hyde Park Equity will cause Mr. Sykes to provide up to 37.5 days of consulting services per year
at the request of the Board of Directors or its Chairman. Such services will include advice dealing with significant
business issues and an orderly management transition. Additional days of service will be billed at the rate of $2,000
per day. The Company will also reimburse Hyde Park Equity for out of pocket business expenses incurred in
connection with providing services to the Company.
80
Schedule II — Valuation and Qualifying Accounts
Years ended December 31, 2004, 2003 and 2002
Allowance for doubtful accounts:
Balance at
Beginning
of Period
Additions
Charged to
Costs and
Expenses
Deductions
Year ended December 31, 2004 ......................... $ 4,242
5,102
Year ended December 31, 2003 ............................
4,183
Year ended December 31, 2002 ............................
$
267
441
1,472
$
216 (1)
1,301 (1)
553 (1)
Valuation allowance for net deferred tax assets:
Balance at
End of
Period
$ 4,293
4,242
5,102
Year ended December 31, 2004 ........................ $ 30,582
19,914
Year ended December 31, 2003 ...........................
15,302
Year ended December 31, 2002 ...........................
$
— $
10,668
4,612
191
—
—
$ 30,391
30,582
19,914
(1) Net write-offs and recoveries.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-23681, 333-76629, 333-88359, and
333-73260 on Forms S-8 of our report on the consolidated financial statements and financial statement schedule of
Sykes Enterprises, Incorporated and subsidiaries dated March 22, 2005, December 19, 2005, as to effects of the
restatement discussed in Note 2 (which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the restatement discussed in Note 2), and of our report on internal control over financial
reporting dated March 22, 2005, December 19, 2005 as to the effects of the material weakness described in
management’s report (which report expresses an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting because of a material weakness), appearing in Form 10-K/A of Sykes Enterprises,
Incorporated and subsidiaries for the year ended December 31, 2004.
/s/ Deloitte & Touche LLP
Tampa, Florida
December 19, 2005
EXHIBIT 31.1
CERTIFICATION
I, Charles E. Sykes, certify that:
1. I have reviewed this annual report on Form 10-K/A of Sykes Enterprises, Incorporated;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the company as of, and
for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred
during the company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the company’s auditors and the audit committee of the company’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the company’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the company’s internal control over financial reporting.
Date: December 22, 2005
/s/ Charles E. Sykes
_____________________________________________
Charles E. Sykes, President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, W. Michael Kipphut, certify that:
1. I have reviewed this annual report on Form 10-K/A of Sykes Enterprises, Incorporated;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the company as of, and
for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred
during the company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the company’s auditors and the audit committee of the company’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the company’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the company’s internal control over financial reporting.
Date: December 22, 2005
/s/ W. Michael Kipphut
_________________________________________________________
W. Michael Kipphut, Senior Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Annual Report of Sykes Enterprises, Incorporated (the "Company") on Form 10-K/A for the
year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Charles E. Sykes, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: December 22, 2005 By: /s/ Charles E. Sykes
_______________________________
Charles E. Sykes
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Annual Report of Sykes Enterprises, Incorporated (the "Company") on Form 10-K/A for the
year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, W. Michael Kipphut, Senior Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: December 22, 2005 By: /s/ W. Michael Kipphut
________________________________________
W. Michael Kipphut
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.