UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                          to                                         

Commission File No. 0-28274

Sykes Enterprises, Incorporated

(Exact name of Registrant as specified in its charter)

Florida		56-1383460
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

400 North Ashley Drive, Tampa, FL 33602
(Address of principal executive offices) (Zip Code)

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 at least the past 90 days.

Yes þ No o

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

Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of October 21, 2005, there were 39,336,511 outstanding shares of common stock.

 

 

Sykes Enterprises, Incorporated and Subsidiaries

INDEX

		Page
		No.
Explanatory Statement			3
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2005 and December 31, 2004 (Unaudited)			4
Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2005 and 2004 (Unaudited)			5
Condensed Consolidated Statements of Changes in Shareholders’ Equity Nine months ended September 30, 2004, three months ended December 31, 2004 and nine months ended September 30, 2005 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2005 and 2004 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 6. Exhibits			37
Signature			38
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification
Ex-32.2 Section 906 Certification

Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2005

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 Balance Sheets as of December 31, 2003 and thereafter. 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, the Company has determined to restate its Consolidated Financial Statements for the year ended December 31, 2003 and thereafter. As previously disclosed in the Current Report on Form 8-K dated November 11, 2005, management, supported by the Audit Committee of the Board of Directors, concluded that investors should no longer rely on the Company’s previously issued consolidated financial statements for the years ended December 31, 2003 and December 31, 2004, or the quarters ended March 31, 2005 and June 30, 2005, nor the related management’s report on internal control over financial reporting or any of the respective independent registered public accountants’ reports thereon.

This Quarterly report on Form 10-Q reflects the restated Consolidated Balance Sheet as of December 31, 2004. The Company reclassified $19.0 million of deferred revenue from long-term liabilities to current liabilities. Additionally, the Company reclassified $2.1 million of the related deferred income taxes from long-term assets to current assets. A summary of the effects of the restatement as of December 31, 2004 is presented below (in thousands). See Note 2 to the condensed consolidated financial statements for further details.

		As Previously								As Presented
		Reported				Reclassifications				Now
Cash and cash equivalents		$	93,868							$	93,868
Receivables, net			90,661								90,661
Prepaid expenses and other current assets			9,126			$	2,093				11,219
Assets held for sale			9,742								9,742
Total current assets			203,397				2,093				205,490
Property and equipment, net			82,891								82,891
Goodwill, net			5,224								5,224
Deferred charges and other assets			21,014				(2,093	)			18,921
		$	312,526			$	—			$	312,526
Accounts payable		$	13,693							$	13,693
Accrued employee compensation and benefits			30,316								30,316
Deferred grants related to Assets held for sale			6,740								6,740
Income taxes payable			2,965								2,965
Deferred revenue			—			$	22,952				22,952
Other accrued expenses and current liabilities			13,284				(3,898	)			9,386
Total current liabilities			66,998				19,054				86,052
Deferred grants			13,921								13,921
Deferred revenue			19,054				(19,054	)			—
Other long-term liabilities			2,518								2,518
Total liabilities			102,491				—				102,491
Total shareholders’ equity			210,035				—				210,035
		$	312,526			$	—			$	312,526

The Company plans to amend its Annual Report on Form 10-K for the years ended December 31, 2004 and 2003 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005 as soon as practicable.

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(in thousands, except per share data)

		September 30,				December 31,
		2005				2004
						(Restated)
						(See Note 2)
Assets
Current assets:
Cash and cash equivalents		$	117,803			$	93,868
Receivables, net			86,331				90,661
Prepaid expenses and other current assets			11,881				11,219
Assets held for sale			19				9,742
Total current assets			216,034				205,490
Property and equipment, net			75,360				82,891
Goodwill and intangibles, net			8,111				5,224
Deferred charges and other assets			21,851				18,921
		$	321,356			$	312,526
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	15,662			$	13,693
Accrued employee compensation and benefits			29,700				30,316
Deferred grants related to assets held for sale			13				6,740
Income taxes payable			1,892				2,965
Deferred revenue			25,817				22,952
Other accrued expenses and current liabilities			10,568				9,386
Total current liabilities			83,652				86,052
Deferred grants			18,511				13,921
Deferred revenue			142				—
Other long-term liabilities			2,130				2,518
Total liabilities			104,435				102,491
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; 43,961 and 43,832 shares issued			439				438
Additional paid-in capital			165,257				163,885
Retained earnings			107,139				92,327
Accumulated other comprehensive income (loss)			(3,980	)			4,871
			268,855				261,521
Deferred stock compensation			(448	)			—
Treasury stock at cost; 4,644 shares and 4,644 shares			(51,486	)			(51,486	)
Total shareholders’ equity			216,921				210,035
		$	321,356			$	312,526

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands, except for per share data)		2005				2004				2005				2004
Revenues		$	122,596			$	111,507			$	366,162			$	346,000
Operating expenses:
Direct salaries and related costs			75,247				70,578				228,702				227,834
General and administrative			40,387				41,338				121,646				123,929
Net (gain) on disposal of property and equipment			(47	)			(2,874	)			(1,743	)			(7,009	)
Impairment of long-lived assets			605				—				605				—
Reversal of restructuring and other charges			—				—				(314	)			—
Total operating expenses			116,192				109,042				348,896				344,754
Income from operations			6,404				2,465				17,266				1,246
Other income (expense):
Interest, net			606				117				1,093				1,376
Other			672				(112	)			1,068				1,731
Total other income (expense)			1,278				5				2,161				3,107
Income before provision for income taxes			7,682				2,470				19,427				4,353
Provision for income taxes			812				1,398				4,615				1,963
Net income		$	6,870			$	1,072			$	14,812			$	2,390
Net income per share:
Basic		$	0.17			$	0.03			$	0.38			$	0.06
Diluted		$	0.17			$	0.03			$	0.38			$	0.06
Weighted average shares:
Basic			39,291				39,189				39,242				39,746
Diluted			39,566				39,259				39,425				39,870

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

																		Accumulated
		Common Stock								Additional								Other				Deferred
		Shares								Paid-in				Retained				Comprehensive				Stock				Treasury
		Issued				Amount				Capital				Earnings				Income (Loss)				Compensation				Stock				Total
Balance at January 1, 2004			43,771			$	438			$	163,511			$	81,513			$	(208	)		$	—			$	(44,422	)		$	200,832
Issuance of common stock			51				—				297				—				—				—				—				297
Purchase of treasury stock			—				—				—				—				—				—				(7,064	)			(7,064	)
Comprehensive income (loss)			—				—				—				2,390				(2,683	)			—				—				(293	)
Balance at September 30, 2004			43,822				438				163,808				83,903				(2,891	)			—				(51,486	)			193,772
Issuance of common stock			10				—				45				—				—				—				—				45
Tax benefit of exercise of stock options			—				—				32				—				—				—				—				32
Comprehensive income			—				—				—				8,424				7,762				—				—				16,186
Balance at December 31, 2004			43,832				438				163,885				92,327				4,871				—				(51,486	)			210,035
Issuance of common stock			129				1				518				—				—				—				—				519
Deferred stock compensation for the issuance of restricted common stock units			—				—				854				—				—				(854	)			—				—
Amortization of deferred stock compensation			—				—				—				—				—				406				—				406
Comprehensive income (loss)			—				—				—				14,812				(8,851	)			—				—				5,961
Balance at September 30, 2005			43,961			$	439			$	165,257			$	107,139			$	(3,980	)		$	(448	)		$	(51,486	)		$	216,921

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(in thousands)		2005				2004
Cash flows from operating activities:
Net income		$	14,812			$	2,390
Depreciation and amortization			19,927				23,194
Deferred income tax benefit			(1,013	)			—
Stock compensation expense			406				—
Net (gain) on disposal of property and equipment			(1,743	)			(7,009	)
Termination costs associated with exit activities			186				1,684
Foreign exchange (gain) on liquidation of foreign entities			(369	)			(680	)
Reversal of restructuring and other charges			(314	)			—
Impairment of long-lived assets			605				—
Bad debt expense (recoveries)			(141	)			(206	)
Changes in assets and liabilities:
Receivables			1,225				(4,284	)
Prepaid expenses and other current assets			(117	)			128
Deferred charges and other assets			(3,076	)			(150	)
Accounts payable			2,944				(5,352	)
Income taxes receivable/payable			(846	)			174
Accrued employee compensation and benefits			645				1,224
Other accrued expenses and current liabilities			1,830				385
Deferred revenue			2,726				(940	)
Other long-term liabilities			1				(348	)
Net cash provided by operating activities			37,688				10,210
Cash flows from investing activities:
Capital expenditures			(8,666	)			(21,500	)
Cash paid for acquisition of Kelly, Luttmer & Assoc. Ltd, net of cash acquired			(3,246	)			—
Proceeds from sale of facilities			2,400				9,695
Proceeds from sale of property and equipment			120				87
Other			(350	)			—
Net cash used for investing activities			(9,742	)			(11,718	)
Cash flows from financing activities:
Payments of long-term debt			(77	)			(64	)
Proceeds from issuance of stock			519				297
Purchase of treasury stock			—				(7,064	)
Net cash provided (used) for financing activities			442				(6,831	)
Effects of exchange rates on cash			(4,453	)			(1,309	)
Net increase (decrease) in cash and cash equivalents			23,935				(9,648	)
Cash and cash equivalents – beginning			93,868				92,085
Cash and cash equivalents – ending		$	117,803			$	82,437
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest		$	408			$	215
Income taxes		$	6,308			$	7,522

See accompanying notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Sykes Enterprises, Incorporated and consolidated subsidiaries (“Sykes” or the “Company”) provides outsourced customer contact management solutions and services in the business process outsourcing 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 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In addition, certain reclassifications have been made for consistent presentation. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004 to be filed with the Securities and Exchange Commission (“SEC”) as soon as practicable.

Stock-Based Compensation — The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“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 (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under APB No. 25, compensation expense is generally not recognized when 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.

During the year ended December 31, 2004, under the 2004 Non-employee Director Fee Plan (the “Plan”), an aggregate of 55,614 Common Stock Units (“CSUs”) were awarded to the non-employee directors totaling $0.3 million with a weighted average fair market value of $5.94. Since the Plan was subject to shareholder approval, the CSUs were not considered to be granted in accordance with FASB Interpretation No. 44, “Accounting for Certain transactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25” and therefore no compensation cost was recognized until the shareholders approved the Plan at the 2005 Annual Shareholders’ Meeting on May 24, 2005, the grant date. At that time, the Company recorded unearned compensation at the then current market price totaling $0.5 million with a weighted average fair market value of $8.25 per CSU, to be recognized over the two and three year vesting periods in accordance with APB No. 25.

During the three months ended June 30, 2005, under the Plan an aggregate of 47,832 CSUs were awarded to the non-employee directors totaling $0.4 million with a weighted average fair market value of $8.27 per CSU. Accordingly, the Company recorded unearned compensation at the then current market price totaling $0.4 million to be recognized over the two and three year vesting periods in accordance with APB No. 25. During the three and nine months ended September 30, 2005, the Company recognized compensation cost for CSUs issued in 2004 and 2005 of $0.1 million and $0.4 million, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Stock-Based Compensation (continued)

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 and earnings per share would have been changed to the pro forma amounts as follows (in thousands except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net Income:
Net income as reported		$	6,870			$	1,072			$	14,812			$	2,390
Add: Stock-based compensation included in reported net income, net of tax			93				—				406				—
Add (Deduct):
Stock-based compensation under the fair value method, net of tax			(109	)			—				(913	)			(310	)
Reversal of stock-based compensation due to forfeitures under the fair value method, net of tax			—				187				—				—
Pro forma net income		$	6,854			$	1,259			$	14,305			$	2,080
Net Income Per Share:
Basic, as reported		$	0.17			$	0.03			$	0.38			$	0.06
Basic, pro forma		$	0.17			$	0.03			$	0.36			$	0.05
Diluted, as reported		$	0.17			$	0.03			$	0.38			$	0.06
Diluted, pro forma		$	0.17			$	0.03			$	0.36			$	0.05

The Company has not issued any stock options since January 1, 2004. For options issued before this date, the Company used the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant using various assumptions.

On February 1, 2005, the Compensation Committee of the Board of Directors approved accelerating the vesting of most out-of-the-money, unvested stock options held by current employees, including executive officers and certain employee directors. An option was considered out-of-the-money if the stated option exercise price was greater than the closing price, $7.23, of the Company’s common stock on the day the Compensation Committee approved the acceleration. Additionally, on February 1, 2005, the Compensation Committee approved accelerating the vesting of out-of the-money, unvested stock options held by non-employee directors, subject to shareholder approval.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Stock-Based Compensation (continued)

The following table summarizes the options accelerated on February 1, 2005:

		Aggregate Number of				Weighted Average
		Shares Issuable Under				Exercise Price Per
		Accelerated Options				Share
Certain Directors & Executive Officers:
Jenna R. Nelson			16,500			$	8.640
William N. Rocktoff			29,500			$	9.050
Charles E. Sykes (employee director)			11,000			$	9.090
Total Certain Directors & Executive Officers			57,000			$	8.939
Total Non-officer Employees			68,550			$	9.814
Total			125,550			$	9.416

Additionally, on May 24, 2005, the shareholders approved accelerating the vesting of the out-of-the-money, unvested stock options held by the non-employee directors at the Annual Meeting. Options held by non-employee directors were considered out-of-the-money if the stated option exercise price was greater than the closing price, $8.39, of the Company’s common stock on May 24, 2005. As a result, the Company accelerated the vesting of 8,332 unvested stock options held by Paul L. Whiting at an exercise price of $8.732 on May 24, 2005. There was no additional compensation expense recognized in 2005, or in the amounts in the pro forma stock-based compensation table presented within this note, as a result of accelerating the vesting of the stock options on February 1, 2005 and May 24, 2005.

The decision to accelerate vesting of these options and eliminate future compensation expense was based on a review of the Company’s long-term incentive programs in light of current market conditions and changing accounting rules regarding stock option expensing that the Company must follow beginning January 1, 2006. This accounting rule, entitled “Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment” (“SFAS No. 123R”), requires that compensation cost related to share-based payment transactions, including stock options, be recognized in the financial statements. Excluding holders of foreign stock options that elected to decline the accelerated vesting, it is estimated that the maximum future compensation expense that would have been charged to earnings, absent the acceleration of these options, based on the Company’s implementation date for SFAS No. 123R as of January 1, 2006, was less than $0.1 million.

Property and Equipment — The carrying value of property and equipment, including leased assets, 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 value 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. The Company has closed several customer contact management centers and expects it may close additional centers in the future if customer call volumes decrease in the United States and Europe. As of September 30, 2005, the Company determined that its property and equipment, including closed customer contact management centers, were not impaired. As of September 30, 2005, the Company had assets with a carrying value of less than $0.1 million included in “Assets held for sale” in the accompanying Condensed Consolidated Balance Sheet. The carrying value of these assets is

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Property and Equipment (continued)

offset by the related deferred grants of less than $0.1 million as of September 30, 2005 and included in “Deferred grants related to assets held for sale” in the accompanying Condensed Consolidated Balance Sheet. Upon reclassification of “Property and equipment, net” to “Assets held for sale”, the Company discontinues 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 2005, in connection with the plan of migration of the call volumes of the customer contact management services and related operations from the Company’s Bangalore, India facility, a component of the Americas segment, to other more strategically-aligned facilities as discussed in Note 4, the Company redeployed property and equipment located in India totaling approximately $1.8 million and recorded an asset impairment charge of $0.7 million for certain property and equipment in India as of December 31, 2004. Upon completion of the redeployment of the property and equipment from the India facility, the Company recorded an additional asset impairment charge of $0.1 million in September 2005.

In September 2005, the Company withdrew its plans to sell the Perry, Kentucky facility due to increased demand for customer care management services from new and existing clients in the United States, particularly in the communications market. As a result, the net carrying value of $4.5 million of land, building and equipment related to this site was reclassified from “Assets held for sale” to “Property and Equipment” as of September 30, 2005. The net carrying value of $4.5 million was offset by a related deferred grant in the amount of $1.9 million as of September 30, 2005. The Company also recaptured the related depreciation, net of grant amortization of $0.7 million in September 2005. In connection with the decision to reopen the Perry, Kentucky facility, certain assets held for sale at this facility, which were not redeployed to other locations, were deemed impaired, written down to fair value and subsequently sold resulting in an impairment charge of $0.5 million in September 2005.

In April 2005, the Company leased the land, building and its contents related to its Palatka, Florida facility to an unrelated third party effective May 1, 2005 for a period of 5 years cancelable by the lessee at the end of the third or fourth years at varying penalties not exceeding one year’s rent. This lease is renewable, at the tenant’s option, for five additional periods of two years each.

In June 2005, the Company leased the land, building and its contents related to its Ada, Oklahoma facility to an unrelated third party effective November 1, 2005 for a noncancelable period of 5 years renewable, at the tenant’s option, for three additional periods of three years each.

The Company has also leased properties to unrelated third parties in Manhattan, Kansas and Pikeville, Kentucky. The Manhattan, Kansas lease is for a period of five years and may be canceled by the lessee at the end of the fourth year by paying a penalty equivalent to three month’s rent. The lease is renewable, at the tenant’s option, for five additional periods of two years each. The Pikeville, Kentucky lease is for a period of one year, renewable for five additional periods of two years each.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Property and Equipment (continued)

As of June 30, 2005, the leased properties in Ada, Manhattan, Pikeville and Palatka consist of the following (in thousands):

		Amount
Building and improvements, net of deferred grants of $6.9 million		$	3,574
Equipment, furniture and fixtures			7,491
			11,065
Less accumulated depreciation			(10,161	)
		$	904

Future minimum rental payments, including penalties for failure to renew, to be received on non-cancelable operating leases are contractually due as follows as of September 30, 2005 (in thousands):

		Amount
2005		$	520
2006			1,839
2007			1,097
2008			1,352
2009			519
Thereafter			448
		$	5,775

On April 1, 2005, the Company sold the land and building related to its Greeley, Colorado facility for $2.4 million cash, resulting in a net gain of $1.7 million. The net book value of the facilities of $1.4 million was offset by the related deferred grants of $0.7 million.

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 in the accompanying Condensed Consolidated Statements of Operations.

Foreign Currency and Derivative Instruments — Periodically, the Company enters into foreign currency 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. A foreign currency 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 currency contracts as accounting hedges and does not hold or issue financial instruments for speculative or trading purposes. Foreign currency 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. Realized and unrealized gains or losses related to these contracts for the three and nine months ended September 30, 2005 and 2004 were immaterial.

Recent Accounting Pronouncements — In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, which requires, among other things, that all share-based payments to employees, including

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1

— Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Recent Accounting Pronouncements (continued)

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 fiscal years beginning after June 15, 2005; therefore the Company is required to adopt SFAS No. 123R as of January 1, 2006. 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 Condensed Consolidated Financial Statements for the pro forma net income and net income per share amounts for the three and nine months ended September 30, 2005 and 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. 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 March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payments” (“SAB 107”), which provides guidance on valuation methods available and guidance on other related matters in applying the provisions of SFAS No. 123R. The Company will adopt the provisions of SAB 107 in conjunction with the adoption of SFAS No. 123R as of January 1, 2006.

In June 2004, the Emerging Issues Task Force (“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 No. 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 No. 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 Company adopted EITF No. 02-14 on January 1, 2005. The impact of this adoption did not have a material effect on the financial 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 No. 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 were effective for fiscal years ending after June 15, 2004. In the fourth quarter of 2005, the FASB expects to issue a final FASB Staff Position No. SFAS 115-1 (“SFAS No. 115-1”) “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which will supersede EITF No. 03-1 and provide similar guidance. FASB Staff Position No. SFAS 115-1 is expected to be effective for fiscal years beginning after December 15, 2005. The adoption of the recognition and measurement provisions of these standards 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. SFAS 109-1 (“SFAS No. 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. SFAS No. 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. SFAS 109-2 (“SFAS No. 109-2”), "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 1

— Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Recent Accounting Pronouncements (continued)

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. SFAS No. 109-2 provides accounting and disclosure guidance for the repatriation provision. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $50.0 million. The Company has not yet completed evaluating the impact of the related range of income tax effects of such repatriation provisions. Until such evaluation is complete, a range of income tax effects of such repatriation cannot be reasonably estimated. The Company expects to complete its evaluation during the fourth quarter of 2005.

In March 2005, the FASB issued Interpretation No. 47 (“FIN No. 47”), “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN No. 47 clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of this standard on its financial position, results of operations and cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which requires retrospective application to prior periods’ financial statements for changes in accounting principle and redefines the term “restatement” as the revising of previously issued financial statements to reflect the correction of an error. Under retrospective application, the new accounting principle is applied as of the beginning of the first period presented as if that principle had always been used. The cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In July 2005, the FASB issued an exposure draft of a proposed interpretation of FASB Statement No. 109, “Accounting for Income Taxes” entitled “Accounting for Uncertain Tax Positions”. The proposed interpretation stipulates that the benefit from a tax position only should be recorded when it is probable that the tax position will be sustained upon audit by taxing authorities, based solely on the technical merits of the position. The final issuance of this interpretation will be no earlier than the first quarter of 2006 and the effective date has not been determined. The Company is currently evaluating the impact of this proposed standard on its financial position, results of operations and cash flows.

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 Balance Sheets as of December 31, 2003 and thereafter. 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 financial statements for the year ended December 31, 2004 have been restated to correct the classification of deferred revenue and the related deferred income taxes.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 2 — Restatement — (continued)

A summary of the effects of the restatement as of December 31, 2004 is presented below (in thousands):

		As								As
		Previously								Presented
		Reported				Reclassifications				Now
Cash and cash equivalents		$	93,868							$	93,868
Receivables, net			90,661								90,661
Prepaid expenses and other current assets			9,126			$	2,093				11,219
Assets held for sale			9,742								9,742
Total current assets			203,397				2,093				205,490
Property and equipment, net			82,891								82,891
Goodwill, net			5,224								5,224
Deferred charges and other assets			21,014				(2,093	)			18,921
		$	312,526			$	—			$	312,526
Accounts payable		$	13,693							$	13,693
Accrued employee compensation and benefits			30,316								30,316
Deferred grants related to Assets held for sale			6,740								6,740
Income taxes payable			2,965								2,965
Deferred revenue			—			$	22,952				22,952
Other accrued expenses and current liabilities			13,284				(3,898	)			9,386
Total current liabilities			66,998				19,054				86,052
Deferred grants			13,921								13,921
Deferred revenue			19,054				(19,054	)			—
Other long-term liabilities			2,518								2,518
Total liabilities			102,491				—				102,491
Total shareholders’ equity			210,035				—				210,035
		$	312,526			$	—			$	312,526

Note 3 — Acquisitions and Dispositions

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 $0.2 million. KLA specializes in providing call center services for organizational health, employee assistance, occupational health, and disability management. The Company acquired these operations in an effort to broaden its operations in the healthcare sector. Total cash consideration paid was approximately $3.2 million based on foreign currency rates in effect at the date of the acquisition. Based on a third-party valuation, the purchase price resulted in a purchase price allocation to net assets of $0.2 million, to purchased intangible assets of $2.4 million (primarily customer relationships) and to goodwill of $0.6 million. The purchased intangible assets (other than goodwill) are amortized over a range of two to fifteen years.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 3 — Acquisitions and Dispositions — (continued)

The following table presents the purchased intangible assets at September 30, 2005 (in thousands):

		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Contractual agreements		$	2,435			$		240		$	2,195

Estimated future amortization expense for the five succeeding years is as follows (in thousands):

Year Ending December 31,		Amount
2005 (remaining three months)		$	103
2006		$	412
2007		$	225
2008		$	130
2009		$	119

Pro-forma results of operations, in respect to this acquisition, have not been presented because the effect of this acquisition was not material.

Note 4 — Accumulated Other Comprehensive Income (Loss)

The Company presents data in the Condensed 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 and its components.

The components of accumulated other comprehensive income (loss) include foreign currency translation adjustments as follows (in thousands):

		Accumulated
		Other
		Comprehensive
		Income (Loss)
Balance at January 1, 2004		$	(208	)
Foreign currency translation adjustment			5,713
Less: foreign currency translation gain included in net income (no tax effect)			(634	)
Balance at December 31, 2004			4,871
Foreign currency translation adjustment			(9,085	)
Plus: foreign currency translation loss included in net income (no tax effect)			234
Balance at September 30, 2005		$	(3,980	)

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.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 5 — Termination Costs Associated with Exit Activities

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 would 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 facilities. Before the plan of migration, the Company’s Bangalore facility generated approximately $0.9 million in revenue in the first quarter of 2005. The Company substantially completed 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, in the second quarter of 2005. In connection with this migration, the Company terminated 413 employees and accrued over their remaining service period, an estimated liability for termination costs of $0.2 million based on the fair value as of the termination date, in accordance SFAS No. 146, "Accounting for Costs associated with Exit or Disposal Activities.” These termination costs are included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2005. Cash payments related to these termination costs totaled $0.1 and $0.2 million during the three and nine months ended September 30, 2005, respectively.

On November 3, 2005, the Company committed to a plan (the “Plan”) to reduce its workforce by approximately 200 people in one of its European customer contact management centers in response to the October 2005 contractual expiration of a technology client program, which generated annual revenues of approximately $12.0 million. The Company expects to complete the Plan by the end of the second quarter of 2006. The Company estimates that during the fourth quarter of 2005 and the first half of 2006, it will incur total charges related to the Plan of approximately $1.3 million to $1.6 million. These charges include approximately $1.1 million to $1.2 million for severance and related costs and $0.1 million to $0.2 million for other exit costs. Additionally, upon completion of the Plan, the Company will cease using certain property and equipment estimated at $0.2 million, and will begin immediately to depreciate these assets over the shortened useful life, which approximates eight months. As a result, the Company will record additional depreciation of approximately $0.1 million to $0.2 million during the eight-month period ended June 30, 2006. The severance and other exit costs require the outlay of cash during the fourth quarter of 2005 and the first half of 2006, while the depreciation charges related to property and equipment represent non-cash charges.

Note 6 — 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 by 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 reported, 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 is no longer utilized upon the expiration of the contracts in March 2003.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 6 — Restructuring and Other Charges — (continued)

2002 Charges — (continued)

The following tables summarize the 2002 plan accrued liability for restructuring and other charges and related activity in 2005 and 2004 (in thousands):

		Balance at								Other				Balance at
		July 1,				Cash				Non-Cash				September 30,
Three Months ended September 30, 2005:		2005				Outlays				Changes				2005
Severance and related costs		$	34			$	(34	)		$	—			$	—
Other restructuring costs			26				(26	)			—				—
Total		$	60			$	(60	)		$	—			$	—

		Balance at								Other				Balance at
		July 1,				Cash				Non-Cash				September 30,
Three Months ended September 30, 2004:		2004				Outlays				Changes				2004
Severance and related costs		$	106			$	—			$	—			$	106
Lease termination costs			144				(82	)			—				62
Other restructuring costs			434				(30	)			—				404
Total		$	684			$	(112	)		$	—			$	572

		Balance at								Other				Balance at
		January 1,				Cash				Non-Cash				September 30,
Nine Months ended September 30, 2005:		2005				Outlays				Changes (1)				2005
Severance and related costs		$	106			$	(34	)		$	(72	)		$	—
Other restructuring costs			285				(43	)			(242	)			—
Total		$	391			$	(77	)		$	(314	)		$	—

		Balance at								Other				Balance at
		January 1,				Cash				Non-Cash				September 30,
Nine Months ended September 30, 2004:		2004				Outlays				Changes (2)				2004
Severance and related costs		$	106			$	—			$	—			$	106
Lease termination costs			342				(280	)			—				62
Other restructuring costs			545				(150	)			9				404
Total		$	993			$	(430	)		$	9			$	572

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 6 — Restructuring and Other Charges — (continued)

2000 Charges

The Company recorded restructuring and other charges during the second and fourth quarters of 2000 approximating $30.5 million. The second quarter 2000 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 Company’s former chairman (and largest shareholder) related to the termination of a ten-year operating lease agreement for the 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.

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 2005 and 2004 (in thousands):

		Balance at				Other		Balance at
		July 1,		Cash		Non-Cash		September 30,
Three Months ended September 30, 2005:		2005		Outlays		Changes		2005
Severance and related costs		$—		$—		$—		$—

		Balance at								Other		Balance at
		July 1,				Cash				Non-Cash		September 30,
Three Months ended September 30, 2004:		2004				Outlays				Changes		2004
Severance and related costs		$	343			$	(117	)		$—		$	226

		Balance at								Other		Balance at
		January 1,				Cash				Non-Cash		September 30,
Nine Months Ended September 30, 2005:		2005				Outlays				Changes		2005
Severance and related costs		$	87			$	(87	)		$—		$—

		Balance at								Other		Balance at
		January 1,				Cash				Non-Cash		September 30,
Nine Months ended September 30, 2004:		2004				Outlays				Changes		2004
Severance and related costs		$	588			$	(362	)		$—		$	226

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 7 — Borrowings

On March 15, 2004, the Company entered into a $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 strategic 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 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 are secured by a pledge of 65% of the stock of each of the Company’s active direct foreign subsidiaries. The Credit Facility prohibits the Company from incurring additional indebtedness, subject to certain specific exclusions. There were no outstanding balances with $50.0 million availability on the Credit Facility as of September 30, 2005. On May 25, 2005, the term of the Credit Facility was extended by one year to March 14, 2008.

Note 8 — Income Taxes

The Company’s effective tax rate was 23.8% and 45.1% for the nine months ended September 30, 2005 and 2004, respectively. This decrease in the Company’s effective tax rate was primarily due to the shift in the mix of earnings within tax jurisdictions and the effects of permanent differences, valuation allowances and foreign income tax rate differentials. Also, the Company’s effective tax rate of 23.8% differs from the statutory federal income tax rate of 35.0% primarily due to the effects of requisite valuation allowances, permanent differences, foreign withholding and other taxes, and foreign income tax rate differentials.

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, 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 Company has not yet completed evaluating the impact of the related range of income tax effects of such repatriation provisions. Until such evaluation is complete, a range of income tax effects of such repatriation cannot be reasonably estimated. The Company expects to complete its evaluation during the fourth quarter of 2005.

Earnings associated with the Company’s investments in its foreign subsidiaries are considered to be permanently invested and United States income taxes have not been provided for on those earnings or translation adjustments. 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 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 the tax year ended July 31, 1999 and is currently auditing the tax year ended July 31, 2002. Certain German subsidiaries of the Company are under examination by the German tax authorities for tax years 1997 through 2000. Additionally, certain Canadian subsidiaries are under examination by Canadian tax authorities for the tax years 1993 through 2003 and an Asian subsidiary is being audited by the Asian tax authorities for tax years 2003 and 2004.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 8 — Income Taxes — (continued)

As of September 30, 2005, the Company has a $3.1 million contingent income tax liability consisting of amounts for subsidiaries located in both the Americas and EMEA segments and is accounted for in “Income taxes payable” in the accompanying Condensed Consolidated Balance Sheet. The amount of the contingent liability is based on an estimate of the probable liability in accordance with SFAS 5 “Accounting for Contingencies”, using available evidence, including detailed analyses of the potential income tax issues, income tax assessments and notices of disallowance, consultation with independent outside tax and legal advisors and the Company’s historical experience in settling similar issues without additional income tax liability. Management believes that the $3.1 million contingent income tax liability is the probable amount that will be paid upon settlement of the related tax audits based on current available evidence and issues and does not believe there would be a material impact on liquidity beyond what has been provided for in “Income taxes payable.” However, it is possible that a change in the estimate may occur in the near term due to resolution of the related issues under formal appeal procedures.

Note 9 — 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 and common stock units using the treasury stock method. Options to purchase 0.3 million shares and 1.4 million shares of common stock at various prices for the three and nine month periods ended September 30, 2005, respectively, and 2.6 million shares and 2.5 million shares of common stock for the three and nine months ended September 30, 2004, respectively, were antidilutive and were excluded from the calculation of diluted earnings per share.

The numbers of shares used in the earnings per share computations are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Basic:
Weighted average common shares outstanding			39,291				39,189				39,242				39,746
Diluted:
Dilutive effect of stock options and common stock units			275				70				183				124
Total weighted average diluted shares outstanding			39,566				39,259				39,425				39,870

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. During the nine months ended September 30, 2005, the Company made no purchases under the 2002 repurchase program.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 10 — Segment Reporting and Major Clients

The Company operates within two regions, the “Americas” and “EMEA” which represented 65.5% and 34.5%, respectively, of the Company’s consolidated revenues for the three months ended September 30, 2005 and 63.4% and 36.6%, respectively, of the Company’s consolidated revenues for the nine months ended September 30, 2005. In the comparable 2004 periods, the Americas and EMEA regions represented 61.1% and 38.9%, respectively, of the Company’s consolidated revenues for the three months ended September 30, 2004 and 61.2% and 38.8%, respectively, of the Company’s consolidated revenues for the nine months ended September 30, 2004. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. 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.

Information about the Company’s reportable segments for the three and nine months ended September 30, 2005 compared to the corresponding prior year periods, is as follows (in thousands):

														Consolidated
		Americas				EMEA				Other (1)				Total
Three Months Ended September 30, 2005:
Revenues		$	80,310			$	42,286							$	122,596
Depreciation and amortization			5,388				1,249								6,637
Income (loss) from operations before impairment of long-lived assets		$	13,174			$	2,338			$	(8,503	)		$	7,009
Impairment of long-lived assets											(605	)			(605	)
Income from operations															6,404
Other income											1,278				1,278
Provision for income taxes											(812	)			(812	)
Net income														$	6,870
Three Months Ended September 30, 2004:
Revenues		$	68,165			$	43,342							$	111,507
Depreciation and amortization			5,443				1,944								7,387
Income (loss) from operations		$	8,757			$	2,488			$	(8,780	)		$	2,465
Other income											5				5
Provision for income taxes											(1,398	)			(1,398	)
Net income														$	1,072

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)

Note 10 — Segment Reporting and Major Clients — (continued)

														Consolidated
		Americas				EMEA				Other (1)				Total
Nine Months Ended September 30, 2005:
Revenues		$	231,980			$	134,182							$	366,162
Depreciation and amortization			15,566				4,361								19,927
Income (loss) from operations before reversal of restructuring and other charges and before impairment of long-lived assets		$	35,396			$	5,973			$	(23,812	)		$	17,557
Reversal of restructuring and other charges											314				314
Impairment of long-lived assets											(605	)			(605	)
Income from operations															17,266
Other income											2,161				2,161
Provision for income taxes											(4,615	)			(4,615	)
Net income														$	14,812
Nine Months Ended September 30, 2004:
Revenues		$	211,661			$	134,339							$	346,000
Depreciation and amortization			16,884				6,310								23,194
Income (loss) from operations		$	16,869			$	5,181			$	(20,804	)		$	1,246
Other income											3,107				3,107
Provision for income taxes											(1,963	)			(1,963	)
Net income														$	2,390

During the three and nine months ended September 30, 2005 and September 30, 2004, the Company had no clients that exceeded ten percent of consolidated revenues.

Note 11 — Post-Retirement Defined Contribution Healthcare Plan

On January 1, 2005, the Company established a Post-Retirement Defined Contribution Healthcare Plan (the “Plan”) for eligible employees meeting certain service and age requirements. The Plan is fully funded by the participants and accordingly, the Company does not recognize expense relating to the Plan.

Sykes Enterprises, Incorporated and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations

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

This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the Sykes Enterprises, Incorporated (“Sykes,” “our”, “we” or “us”) Annual Report on Form 10-K/A for the year ended December 31, 2004 to be filed with the Securities and Exchange Commission (“SEC”) as soon as practicable.

Our discussion and analysis may contain 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 Sykes, 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 “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plan,” “seek,” 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 such 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: (i) the timing of significant orders for our products and services, (ii) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (iii) changes in applicable accounting principles or interpretations of such principles, (iv) difficulties or delays in implementing our bundled service offerings, (v) failure to achieve sales, marketing and other objectives, (vi) construction delays or higher than anticipated development costs in connection with new technical and customer contact management centers, (vii) delays in our ability to develop new products and services and market acceptance of new products and services, (viii) rapid technological change, (ix) loss, addition or fluctuation in business levels with significant clients, (x) political, economic and market risks inherent in conducting business abroad, (xi) currency fluctuations, (xii) fluctuations in business conditions and the economy, (xiii) our ability to attract and retain key management personnel, (xiv) our ability to continue the growth of our support service revenues through additional technical and customer contact management centers, (xv) our ability to further penetrate into vertically integrated markets, (xvi) our ability to expand our global presence through internal growth, strategic alliances and selective acquisitions, (xvii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xviii) the ultimate outcome of any lawsuits, (xix) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xx) our dependence on trend toward outsourcing, (xxi) risk of interruption of technical and customer contact management center operations due to such factors as fire and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxii) the existence of substantial competition, (xxiii) the early termination of contracts by clients, and (xxiv) other important factors which are identified in our most recent Annual Report on Form 10-K, including factors identified under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sykes Enterprises, Incorporated and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations

Results of Operations

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Operations and certain of such data expressed as a percentage of revenues (in thousands, except percentage amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues		$	122,596			$	111,507			$	366,162			$	346,000
Percentage of revenues			100.0	%			100.0	%			100.0	%			100.0	%
Direct salaries and related costs		$	75,247			$	70,578			$	228,702			$	227,834
Percentage of revenues			61.4	%			63.3	%			62.5	%			65.8	%
General and administrative expenses		$	40,387			$	41,338			$	121,646			$	123,929
Percentage of revenues			32.9	%			37.1	%			33.2	%			35.8	%
Net (gain) on disposal of property and equipment		$	(47	)		$	(2,874	)		$	(1,743	)		$	(7,009	)
Percentage of revenues			—	%			(2.6	)%			(0.5	)%			(2.0	)%
Impairment of long-lived assets		$	605			$	—			$	605			$	—
Percentage of revenues			0.5	%				%			0.2	%				%
Reversal of restructuring and other charges		$	—			$	—			$	(314	)		$	—
Percentage of revenues			—	%			—	%			(0.1	)%			—	%
Income from operations		$	6,404			$	2,465			$	17,266			$	1,246
Percentage of revenues			5.2	%			2.2	%			4.7	%			0.4	%