| SYKES ENTERPRISES INC Item 1A Risk Factors 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 |
| 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: Dependence on Key Clients We derive a substantial portion of our revenues from a few key clients |
| For the years ended December 31, 2005, 2004 and 2003, total revenues included dlra31dtta4 million, or 6dtta4prca of consolidated revenues, dlra36dtta6 million, or 7dtta8prca of consolidated revenues, and dlra81dtta2 million, or 16dtta9prca 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 |
| 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 |
| We expect to renew this agreement before it expires on April 30, 2006 |
| In addition, total revenue for the years ended December 31, 2005, 2004 and 2003, includes dlra27dtta3 million, or 5dtta5prca of consolidated revenues, dlra33dtta8 million, or 7dtta3prca of consolidated revenues, and dlra58dtta5 million, or 12dtta2prca of consolidated revenues, respectively, from Microsoft Corporation, a major provider of software and related services |
| Our top ten clients accounted for approximately 44prca, 45prca and 59prca, of consolidated revenue for the years ended December 31, 2005, 2004, and 2003, 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 |
| 11 _________________________________________________________________ [39]Table of Contents Risks Associated With International Operations and Expansion We intend to continue to pursue growth opportunities in markets outside the United States |
| At December 31, 2005, our international operations in EMEA and the Asia Pacific Rim were conducted from 24 customer contact management centers located in Sweden, the Netherlands, Finland, Germany, South Africa, Scotland, Ireland, Italy, Hungary, Slovakia, Spain, The Peoples Republic of China and the Philippines |
| Revenues from these operations for the years ended December 31, 2005, 2004, and 2003, were 57prca, 59prca, and 44prca of consolidated revenues, respectively |
| We also conduct business from five 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, and economic instability |
| Additionally, we have been granted tax holidays in the Philippines, El Salvador, India and Costa Rica, which expire at varying dates from 2006 through 2013 |
| In some cases, the tax holidays expire without possibility of renewal |
| In other cases, we expect to renew these tax holidays, but there are no assurances from the respective foreign governments that they will renew them |
| This could potentially result in adverse tax consequences |
| Any one or more of these factors could have an adverse effect on our international operations and, consequently, on our business, financial condition and results of operations |
| As of December 31, 2005, we had cash balances of approximately dlra86dtta3 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 Toward 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 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 12 _________________________________________________________________ [40]Table of Contents 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 service quality, tailored value added service offerings, industry experience, advanced technological capabilities, 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 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 acquisitions funded with SYKES’ stock |
| Our acquisition strategy involves other potential risks |
| These risks include: § The inability to obtain the capital required to finance potential acquisitions on satisfactory terms; § The diversion of our attention to the integration of the businesses to be acquired; § The risk that the acquired businesses will fail to maintain the quality of services that we have historically provided; § The need to implement financial and other systems and add management resources; § The risk that key employees of the acquired business will leave after the acquisition; § Potential liabilities of the acquired business; § Unforeseen difficulties in the acquired operations; 13 _________________________________________________________________ [41]Table of Contents § Adverse short-term effects on our operating results; § Lack of success in assimilating or integrating the operations of acquired businesses within our business; § The dilutive effect of the issuance of additional equity securities; § The impairment of goodwill and other intangible assets involved in any acquisitions; § The businesses we acquire not proving profitable; and § Potentially incurring additional indebtedness |
| Uncertainties Relating to 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 |
| 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 February 24, 2006, John H Sykes, our founder and former Chairman of the Board and Chief Executive Officer, beneficially owned approximately 28dtta3prca of our outstanding common stock |
| Sykes will have substantial influence in the election of our directors and in determining the outcome of other matters requiring shareholder approval |
| 14 _________________________________________________________________ [42]Table of Contents 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 |