FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] QUARTERLY 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 (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 813-274-1000
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 twelve 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 ninety days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $.01 Par Value, 19,351,498 shares as of August 2, 1996
<PAGE>
PART I
Item 1 - Financial Statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1995 1996
ASSETS (Unaudited)
Current assets
Cash $ 1,088,555 $ 683,500
Temporary investments 144,281 25,858,213
Receivables, including unbilled 15,010,853 18,949,015
Refundable income taxes 602,197 607,186
Prepaid expenses and other current
assets 366,275 757,265
---------- ----------
Total current assets 17,212,161 46,855,179
Property and equipment, net 23,220,780 26,253,341
Deferred income taxes 177,000 159,000
Deferred charges and other assets 732,558 857,726
---------- ----------
$41,342,499 $74,125,246
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt $ 1,245,204 $ -
Accounts payable 5,345,980 3,303,788
Accrued employee compensation and benefits 5,659,517 5,971,344
Income taxes payable - 2,250,267
Deferred income taxes 3,366,000 283,080
Other accrued expenses and current
liabilities 1,102,107 558,006
---------- ----------
Total current liabilities 16,718,808 12,366,485
Long-term debt 8,180,916 -
Deferred income taxes - 1,864,510
Deferred grants 6,326,341 7,850,477
Shareholders' equity
Preferred stock, $0.01 par value,
10,000,000 shares authorized; no
shares issued and outstanding - -
Common stock, $1.00 par value, 100,000
shares authorized; 1,000 shares issued
and outstanding 1,000 -
Common stock, $0.01 par value, 50,000,000
shares authorized; 19,104,679 shares
issued and outstanding - 191,047
Additional paid-in capital 350,000 44,917,904
Retained earnings 9,798,316 6,935,546
Accumulated foreign currency translation
adjustments (32,882) (723)
---------- ----------
Total shareholders' equity 10,115,434 52,043,774
---------- ----------
$41,342,499 $74,125,246
========== ==========
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Six and Three Months Ended July 2, 1995 and June 30, 1996
(Unaudited)
<CAPTION>
Six Months Ended Three Months Ended
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Revenues $27,676,757 $45,433,016 $14,084,774 $23,180,805
---------- ---------- ---------- ----------
Operating expenses
Direct salaries and related costs 18,452,446 27,000,158 9,177,261 13,366,403
General and administrative 7,831,974 13,766,316 4,022,811 7,067,293
---------- ---------- ---------- ----------
Total operating expenses 26,284,420 40,766,474 13,200,072 20,433,696
---------- ---------- ---------- ----------
Income from operations 1,392,337 4,666,542 884,702 2,747,109
---------- ---------- ---------- ----------
Other income (expense)
Interest income - 247,827 - 244,247
Interest (expense) (315,560) (499,548) (154,842) (199,537)
Other income 70,049 69,092 (49,778) 64,948
---------- ---------- ---------- ----------
Total other income (expense) (245,511) (182,629) (204,620) 109,658
---------- ---------- ---------- ----------
Income before income taxes 1,146,826 4,483,913 680,082 2,856,767
Provision for income taxes 540,000 1,745,000 320,000 1,106,000
---------- ---------- ---------- ----------
Net income 606,826 2,738,913 360,082 1,750,767
Preferred stock dividends - 47,343 - 23,672
---------- ---------- ---------- ----------
Net income applicable to common
shareholders $ 606,826 $ 2,691,570 $ 360,082 $ 1,727,095
========== ========== ========== ==========
Net income per common and
common equivalent share $ 0.04 $ 0.16 $ 0.02 $ 0.09
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 2, 1995 and June 30, 1996
(Unaudited)
July 2, June 30,
1995 1996
Cash flows from operating activities:
Net income $ 634,671 $ 2,738,913
Depreciation and amortization 754,494 2,225,061
Gain on disposal of property and
equipment (27,846) (6,590)
Changes in assets and liabilities:
Receivables, including unbilled (1,388,111) (3,938,162)
Refundable income taxes 33,810 (4,989)
Deferred tax asset - 18,000
Prepaid expenses and other current
assets (1,971) (390,990)
Deferred charges and other assets 401,243 (279,668)
Accounts payable 616,542 (2,355,729)
Accrued employee compensation and
benefits 550,064 625,368
Income taxes payable 287,528 2,250,267
Deferred income taxes (294,668) (1,218,410)
Other accrued expenses and current
liabilities (179,267) (544,101)
--------- ---------
Net cash provided by (used
for) operating activities 1,386,489 (881,030)
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,851,640) (5,444,651)
Proceeds from sales of property and
equipment 73,568 146,590
--------- ---------
Net cash used for investing
activities (1,778,072) (5,298,061)
--------- ---------
Cash flows from financing activities:
Paydowns under revolving line of credit
agreements (12,302,000) (19,871,569)
Borrowings under revolving line of credit
agreements 13,184,000 19,706,835
Proceeds from grants - 1,725,665
Proceeds from issuance of stock - 39,203,605
Payment of long-term debt (320,263) (9,261,386)
Preferred stock dividends paid - (47,343)
---------- ----------
Net cash provided by financing
activities 561,737 31,455,807
---------- ----------
Adjustment for foreign currency
translation 2,350 32,161
---------- ----------
Net increase in cash and temporary
investments 172,504 25,308,877
Cash and temporary investments at
beginning of period 763,226 1,232,836
---------- ----------
Cash and temporary investments at end
of period $ 935,730 $26,541,713
========== ==========
See accompanying notes to consolidated financial statements
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended July 2, 1995 and June 30, 1996
(Unaudited)
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with 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. Operating results for the six month
period ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the combined financial statements and notes thereto
as of and for the years ended December 31, 1995 included in the Company's
Form S-1 Registration Statement and Prospectus dated April 29, 1996
associated with the Company's initial public offering.
Sykes Enterprises, Incorporated and consolidated subsidiaries (the
"Company") provide comprehensive information technology outsourcing
services including information technology support services, consisting of
technical product support and help desk services, and information
technology development services and solutions, consisting of software
design, development, integration and implementation and documentation,
foreign language translation and localization services. The Company's
services are provided to a wide variety of industries.
At June 30, 1996, the entities comprising the consolidated Company
included:
Sykes Enterprises, Incorporated
Sykes Enterprises Incorporated Holdings B.V.
Sykes Enterprises Incorporated of Canada
Sykes Realty, Inc.
Unless otherwise noted, all information in this Form 10-Q has been
adjusted to retroactively reflect the three-for-two stock split in the
form of a 50% stock dividend to shareholders of record on July 18, 1996,
which was reflected on the Nasdaq National Market on July 29, 1996.
Note 1 - Temporary Investments
Temporary investments consist of investments with original maturities of
three months or less. At June 30, 1996, cash in the amount of
approximately $25,617,000 was held in tax free interest bearing
investments and approximately $136,000 was held in an interest bearing
account and pledged as collateral with respect to office space leased in
Amsterdam, The Netherlands. It is the Company's intention to continue to
maintain the Netherlands's investment throughout the term of the lease.
Note 2 - Long-term Debt
The Company has a credit facility comprised of a $12 million revolving
line of credit and a term note issued in the original amount of $8
million. At December 31, 1995, the Company had borrowings under the
credit facility of $8,165,000.
The Company also had a loan agreement in the amount of $1,300,000.
Outstanding amount under the loan agreement at December 31, 1995 was
approximately $1,261,000.
The Company extinguished the debt under the credit facility and the loan
agreement during the second quarter of 1996 with the proceeds of the
public offering.
Note 3 - Income Taxes
In conjunction with the Company's initial public offering, the Company
changed its method of accounting for income taxes from the cash basis to
the accrual method effective with the beginning of the Company's income
tax year of August 1, 1995. The corresponding adjustment established
approximately $1.2 million of current income taxes payable and
approximately $1.8 million of noncurrent deferred income taxes of
previously classified current deferred income taxes. The approximate $1.8
million balance associated with the change to the accrual method will
become due and payable over a period not to exceed three years.
Prior to the Company's initial public offering, an affiliate of the
Company that had elected to be taxed as an S corporation, terminated its S
corporation election and accordingly became subject to federal and state
income taxes. Upon termination of the S corporation election, deferred
income taxes reflecting the tax effect of temporary differences between
the Company's financial statements and tax bases of certain assets and
liabilities became a net liability of the Company and was reflected on the
consolidated balance sheet with a corresponding non-recurring expense in
the consolidated statement of income during the second quarter. The
amount of such deferred tax liability computed using the asset and
liability method of accounting for deferred income taxes approximated
$41,000 and is reflected in the accompanying financial statements.
Note 4 - Commitments and Contingencies
The Company from time to time is involved in legal actions arising in the
ordinary course of business. With respect to these matters, management
believes that it has adequate legal defenses and/or provided adequate
accruals for related costs such that the ultimate outcome will not have a
material adverse effect on the Company's future financial position.
Note 5 - Stock Options
In March 1996, the Company's 1996 Employee Stock Option Plan was adopted
and provides for the grant of incentive or nonqualified stock options to
purchase up to 700,000 shares of common stock. Certain employees of the
Company were granted options to purchase a total of 394,819 shares of
common stock at the initial public offering price of $12.00 per share,
except for 139,894 shares with an exercise price as follows: (i) 33 1/3%
of such shares at $12.00 per share; (ii) 33 1/3 of such shares at $11.34
per share; and (iii) 33 1/3% of such shares at $10.00 per share.
In March 1996, the Company's 1996 Non-Employee Director Stock Option Plan
was adopted and provides for the grant of nonqualified stock options to
purchase up to 300,000 shares of common stock with an exercise price equal
to the fair market value of the common stock on the date of grant to
members of the Board of Directors who are not employees of the Company.
Each outside director was granted options to purchase 7,500 shares of
common stock. Thereafter, on the date on which a new outside director is
first elected or appointed, he or she shall automatically be granted
options to purchase 7,500 shares of common stock. Each outside director
also shall be granted options to purchase 7,500 shares of common stock
annually on the day following the annual meeting of shareholders.
Note 6 - Initial Public Offering
On May 3, the Company sold in an initial public offering 3,777,889 shares
of its common stock (prior to consideration of adjustment for the three-
for-two stock split) which generated net proceeds of approximately $39.2
million. The Company used a portion of the proceeds to repay amounts
outstanding under the Company's loan agreements discussed in Note 2. The
balance of the net proceeds were invested in temporary investments and
will be used to open additional IT call centers, make additional capital
expenditures for upgraded technology, and for working capital and general
corporate purposes, including possible acquisitions.
Note 7 - Earnings Per Share
Primary earnings per share are based on the weighted average number of
common shares and common share equivalents outstanding during the periods.
Common share equivalents include, when applicable, dilutive stock options
using the treasury stock method.
Fully diluted earnings per share assumes, in addition to the above, (i)
that the redeemable preferred stock was converted at the beginning of each
period or date of issuance, if later, (ii) that earnings were increased
for preferred dividends that would not have been incurred had conversion
taken place, and (iii) the additional dilutive effect of stock options.
In July, 1996 the Board of Directors of the Company declared a three-for-
two stock split of the Company's common stock to be distributed on July
28, 1996 to the Company's shareholders of record at the close of business
on July 18, 1996. All applicable share and per share data have been
adjusted for the stock split. As a result of the split, 6,368,225
additional shares were issued and additional paid-in capital was reduced
by $63,682.
The numbers of shares used in the earnings per share computation are as
follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Primary
Weighted average common
shares outstanding 10,020,000 10,900,131 10,020,000 11,780,262
Stock options 316,089 455,994 316,089 595,900
Stock split
three-for-two 5,168,044 5,678,062 5,168,044 6,188,079
---------- ---------- ---------- ----------
Total primary 15,504,133 17,034,187 15,504,133 18,564,241
---------- ---------- ---------- ----------
Fully Diluted
Conversion of Preferred 298,686 201,912 298,686 105,138
Additional dilution of
stock options - 31,776 - 63,551
Stock split
three-for-two 149,343 116,844 149,343 84,346
---------- ---------- ---------- ----------
Total fully diluted 15,952,162 17,384,719 15,952,162 18,817,276
========== ========== ========== ==========
</TABLE>
Fully diluted per share data is not shown since the effect would be
antidilutive.
Note 8 - Acquisitions and Mergers
Immediately prior to the Company's initial public offering, Sykes Realty,
Inc. merged with a newly formed wholly-owned subsidiary of Sykes
Enterprises, Incorporated. Sykes Realty, Inc. was the surviving entity
pursuant to this merger. The Company issued 1,830,000 shares of common
stock to the sole shareholder of Sykes Realty, Inc. as a result of the
merger involving Sykes Realty, Inc.
On July 16, 1996 the Company acquired Datasvar Support AB of Stockholm,
Sweden in exchange for 246,819 shares of the Company's common stock. The
Company will account for the acquisition utilizing the pooling-of-
interests method of accounting. Datasvar operates two information
technology call centers in Sweden serving the Scandinavian region.
Datasvar employs 90 employees and had 1995 revenues of approximately $5.3
million and after-tax earnings of approximately $1.0 million.
<PAGE>
Item - 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Management considers liquidity to be the Company's ability to generate
adequate cash to meet its short and long-term business needs. The
principal internal source of such cash is the Company's operations while
the primary external source is the issuance of equity securities and
credit borrowings.
On May 3, 1996, the Company received proceeds, net of offering expenses,
in excess of $39 million from the sale of approximately 2.4 million shares
of common stock in its initial public offering (adjusted to approximately
3.6 million to reflect the retroactive effect of the three-for-two stock
split in the form of a 50% stock dividend to shareholders of record on
July 18, 1996). The Company used a portion of these proceeds and
approximately $1.7 million of grants received associated with the opening
of its sixth technical call center, to repay all amounts outstanding under
its bank borrowing agreements and fund approximately $5.4 million of
capital expenditures. The capital expenditures, which were comprised
primarily of computer and telephone equipment and furniture, were
purchased pursuant to the continued growth within the technical support
business and the associated increase in call volume capacity within the
United States and Europe. The Company has also announced the location and
commencement of construction of its seventh and eighth call centers to be
completed during 1996. It is further anticipated that the first of these
additional centers will become operational during the third quarter of
1996, with the second becoming operational January 1, 1997. The Company
will receive incentive grants from each newly selected location consistent
with recent packages previously obtained pursuant to the terms of the
individual agreements. As a result of the continued increase in demand
for the Company's services and the added capacity to be realized from the
new call centers, it is anticipated that capital acquisitions will
approximate $16 million during 1996.
The Company intends to utilize the balance of the proceeds available from
the initial public offering to make additional capital expenditures
associated primarily with its technical support services as identified
above, and for general corporate purposes, including possible
acquisitions. Pending any such use, the Company will continue to invest
such balance in short-term, investment grade securities or money market
instruments.
For the six month period ended June 30, 1996, the Company had negative
cash flow from operating activities of approximately $900,000. However,
for the three month period ended June 30, 1996, operating activities
provided positive cash flow of approximately $3.8 million. These results
were attributable to an increase in the Company's accounts receivable,
primarily having occurred in the first calendar quarter, from a reduction
in collections associated with increased revenues and the establishment of
new clients, and a decrease in accounts payable, also in the first
calendar quarter, from the payment of uncommonly large fourth quarter 1995
purchases.
Subsequent to June 30, 1996, the Company increased its European technical
support presence through the acquisition of Datasvar Support AB ("the
Acquisition"). The purchase price for the Acquisition was approximately
247,000 shares of the Company's common stock (as adjusted for the three-
for-two stock split), and will be accounted for using the pooling-of-
interests method of accounting. The Company anticipates that the
integration of the Acquisition will require additional financial
resources, including the potential for additional capital expenditures
above levels projected for the 1996 year. However, the Company does not
believe the resources required will be significant to the overall
operations of the combined organization.
The Company presently believes that the proceeds from its initial public
offering, combined with available funds under its credit facilities and
cash flows from current and future operations, will be adequate to meet
the capital requirements identified, including any additional resources
required pursuant to the Acquisition.
Results of Operations
For the six and three months ended June 30, 1996, the Company posted
consolidated revenues of $45.4 and $23.2 million, respectively, an
increase of $17.8 and $9.1 million, respectively, from the comparable
periods of the previous year. The 1996 results represent increases of
64% and 65%, respectively, from the 1995 comparable period information.
This growth in revenues for each period was primarily the result of an
$17.8 and $8.8 million, respectively, increase in revenues within
technical support services, and occurred primarily from the investments in
call centers and capital equipment the Company has made and the resultant
increase in call volumes from clients. During February 1996, the Company
opened its sixth call center in addition to the two new call centers
opened in the fourth quarter of 1995. In addition, during the six and
three months of 1996, the Company recognized an additional revenue
increase of $2.5 and $1.2 million, respectively, or 16% and 14%,
respectively, from information services and solutions when compared to the
same periods of 1995. This increase was primarily the result of increased
hours billed to clients and growth in providing foreign language
translation services. These revenue increases were partially offset by a
$2.5 and $0.9 million reduction in revenues from the Company's strategic
decision to phase-out other services provided during the comparable six
and three month period of 1995.
Direct salaries and related costs increased $8.5 and $4.2 million,
respectively, or 46%, for the six and three month periods in 1996 from the
comparable periods in 1995. As a percentage of revenues, however, direct
salaries and related costs decreased to 59% and 58% in the 1996 periods
from 67% and 65% from the respective periods in 1995. The increase in the
amount of direct salaries and related costs were attributable to the
addition of personnel to support revenue growth. The decrease as a
percentage of revenues resulted from economies of scale associated with
spreading costs over a larger revenue base, and the change in the
Company's mix of business such that technical support service revenues
constitute a larger percentage of the Company's consolidated revenues when
compared to comparable 1995 results.
General and administrative expenses increased $5.9 and $3.0 million, or
76%, for the six and three month 1996 periods from their respective
periods in 1995. As a percentage of revenues, general and administrative
expenses increased to 30% for each of the 1996 periods, from 28% and 29%
for the six and three month periods of 1995. The increase in the amount
and percentage of general and administrative expenses are primarily
attributable to the addition of management, sales and administrative
personnel to support the Company's growth, and the increase in
depreciation and equipment expense associated with facility and capital
equipment expenditures incurred primarily in connection with the technical
support call centers.
Interest income increased in the six and three month periods of 1996
solely from the investments made from the net proceeds of the Company's
initial public offering, and which accounts for the reduction in interest
expense in the 1996 three month period. The increase in other income for
the three month period in 1996 resulted primarily from the recognition of
favorable foreign currency translation fluctuations from the comparable
1995 period.
The provision for income taxes as a percentage of income before income
taxes decreased during the six and three month 1996 periods when
contrasted to the comparable 1995 periods due to the realization of tax-
exempt interest income during the 1996 periods, and the recognition of
nondeductible expenses as a lower percentage of larger income before
income tax bases in 1996 as compared to 1995.
<PAGE>
PART - II OTHER INFORMATION
Item 6 - Exhibit and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this Report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K, dated July 31, 1996, was filed by the
Registrant to disclose requirements under Item 2, Acquisition or
Disposition of Assets.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
Date: August 2, 1996 By: /s/Scott J. Bendert
Scott J. Bendert
Vice President-Finance
and Treasurer (Principal
Financial and Accounting
Officer)
<PAGE>
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
(For the Six Months Ended June 30, 1996)
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
27.1 Financial Data Schedule . . . . . . . . 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q FOR
THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 683,500
<SECURITIES> 25,858,213
<RECEIVABLES> 19,144,288
<ALLOWANCES> 195,273
<INVENTORY> 0
<CURRENT-ASSETS> 46,855,179
<PP&E> 34,940,012
<DEPRECIATION> 8,686,671
<TOTAL-ASSETS> 74,125,246
<CURRENT-LIABILITIES> 12,366,485
<BONDS> 0
0
0
<COMMON> 199,463
<OTHER-SE> 51,844,311
<TOTAL-LIABILITY-AND-EQUITY> 74,125,246
<SALES> 0
<TOTAL-REVENUES> 45,433,016
<CGS> 0
<TOTAL-COSTS> 27,000,158
<OTHER-EXPENSES> 13,766,316
<LOSS-PROVISION> 69,092
<INTEREST-EXPENSE> 251,721
<INCOME-PRETAX> 4,483,913
<INCOME-TAX> 1,745,000
<INCOME-CONTINUING> 2,738,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 47,343
<NET-INCOME> 2,691,570
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
