<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
- - ------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
56-1383460
- - ------------------------------------------------------------------------------
(IRS Employer Identification Number)
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. [ ] Yes [X] 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, 12,736,454 shares as of May 3, 1996
Page 1 of 14 Pages
The Exhibit Index Appears on Page 13
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYKES ENTERPRISES, INCORPORATED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, March 31, March 31,
1995 1996 1996
ASSETS (Unaudited) (Unaudited)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,232,836 $ 1,985,620 $ 1,985,620
Receivables, including unbilled 15,010,853 18,879,752 18,879,752
Refundable income taxes 602,197 574,343 574,343
Prepaid expenses and other current assets 366,275 747,745 747,745
----------- ----------- -----------
Total current assets 17,212,161 22,187,460 22,187,460
PROPERTY AND EQUIPMENT, NET 23,220,780 25,708,659 25,708,659
DEFERRED INCOME TAXES 177,000 159,000 126,000
DEFERRED CHARGES AND OTHER ASSETS 732,558 587,083 587,083
----------- ----------- -----------
$41,342,499 $48,642,202 $48,609,202
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current installments of long-term debt $ 1,245,204 $ 1,646,570 $ 1,646,570
Accounts payable 5,345,980 3,978,648 3,978,648
Accrued employee compensation and benefits 5,659,517 4,590,119 4,590,119
Income taxes payable - 1,236,212 1,236,212
Deferred income taxes 3,366,000 283,080 283,080
Other accrued expenses and current liabilities 1,102,107 1,169,339 1,939,339
----------- ----------- -----------
Total current liabilities 16,718,808 12,903,968 13,673,968
LONG-TERM DEBT 8,180,916 14,727,277 14,727,277
DEFERRED INCOME TAXES - 1,823,568 1,823,568
DEFERRED GRANTS 6,326,341 7,953,456 7,953,456
REDEEMABLE PREFERRED STOCK - 5,376,352 -
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; 8,800,000 and 10,318,686 shares
issued and outstanding - 88,000 103,187
Additional paid-in capital 350,000 - 5,373,365
Retained earnings 9,798,316 5,585,340 4,770,140
Accumulated foreign currency translation
adjustments (32,882) 184,241 184,241
----------- ----------- -----------
Total shareholders' equity 10,116,434 5,857,581 10,430,933
----------- ----------- -----------
$41,342,499 $48,642,202 $48,609,202
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
2
<PAGE> 3
SYKES ENTERPRISES, INCORPORATED
COMBINED STATEMENTS OF INCOME
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
April 2, March 31,
1995 1996
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $13,591,983 $22,252,211
----------- -----------
OPERATING EXPENSES
Direct salaries and related costs 9,275,185 13,633,755
General and administrative 3,809,163 6,699,023
------------ -----------
Total operating expenses 13,084,348 20,332,778
------------ -----------
INCOME FROM OPERATIONS 507,635 1,919,433
------------ -----------
OTHER INCOME (EXPENSE)
Interest (160,718) (296,431)
Other 119,827 4,144
------------ -----------
Total other expense (40,891) (292,287)
------------ -----------
INCOME BEFORE INCOME TAXES 466,744 1,627,146
PROVISION FOR INCOME TAXES 194,000 639,000
------------ -----------
NET INCOME 272,744 988,146
PREFERRED STOCK DIVIDENDS - 23,671
------------ -----------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 272,744 $ 964,475
============ ===========
PRO FORMA INCOME DATA
Income before income taxes $ 466,744 $ 1,627,146
Pro forma provision for income
taxes relating to S Corporation 26,000 44,000
Actual provision for income taxes 194,000 639,000
------------ -----------
Total provision and pro forma
provision for income taxes 220,000 683,000
------------ -----------
Pro forma net income 246,744 944,146
Preferred stock dividends - 23,671
------------ -----------
Pro forma net income applicable to common shareholders $ 246,744 $ 920,475
============ ===========
Pro forma net income per share $ 0.03 $ 0.09
============ ===========
Weighted average common and common equivalent shares
outstanding 10,634,775 10,634,775
============ ===========
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE> 4
SYKES ENTERPRISES, INCORPORATED
COMBINED STATEMENTS OF CASH FLOWS
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
April 2, March 31,
1995 1996
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 272,744 $ 988,146
Depreciation and amortization 252,666 971,963
Gain on disposal of property and equipment (59,440) (990)
Change in assets and liabilities:
Receivables, including unbilled (1,362,076) (3,868,900)
Refundable income taxes (33,814) 27,854
Prepaid expenses and other current assets (377,765) (381,470)
Deferred charges and other assets 86,731 92,646
Accounts payable 84,857 (1,680,869)
Accrued employee compensation and benefits 65,522 (843,629)
Income taxes payable - 1,236,212
Deferred income taxes (203,668) (1,241,352)
Other accrued expenses and current liabilities 23,654 67,232
----------- -----------
Net cash used for operating activities (1,250,589) (4,633,157)
----------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES
Capital expenditures (596,759) (3,645,563)
Proceeds from sale of property and equipment 82,076 140,990
----------- -----------
Net cash used for investing activities (514,683) (3,504,573)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Paydowns under revolving line of credit agreements (5,427,341) (7,345,109)
Borrowings under revolving line of credit agreements 7,523,342 14,685,327
Proceeds from grants - 1,725,665
Payment of long-term debt (160,342) (392,492)
----------- -----------
Net cash provided by financing activities 1,935,659 8,673,391
----------- -----------
Adjustment for foreign currency translation 7,095 217,123
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 177,482 752,784
CASH AND CASH EQUIVALENTS - BEGINNING 763,226 1,232,836
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 940,708 $ 1,985,620
=========== ===========
</TABLE>
See accompanying notes to combined financial statements
4
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SYKES ENTERPRISES, INCORPORATED
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
The accompanying unaudited condensed combined 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 as of and for the years ended December 31, 1995, 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 three month period
ended March 31, 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 March 27, 1996 associated with the Company's
initial public offering.
Sykes Enterprises, Incorporated and combined affiliates (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.
At March 31, 1996, the entities comprising the combined Company included:
Sykes Enterprises, Incorporated
Sykes Enterprises Incorporated Holdings B.V., formed in June 1994
Sykes Enterprises Incorporated of Canada, formed in January 1992
Sykes Realty, Inc., formed in August 1994
NOTE 1 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with original maturities of three
months or less. At March 31, 1996, cash in the amount of $140,314 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 this investment throughout the term of the lease.
NOTE 2 - 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
non-current 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.
5
<PAGE> 6
SYKES ENTERPRISES, INCORPORATED
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company has pledged certain assets as collateral on mortgage loans made to
the Company's majority shareholder. Total loans outstanding at March 31, 1996
were approximately $5,145,000. On May 10, 1996, the Company's majority
shareholder repaid all outstanding loans for which certain assets were pledged
thereby releasing all such liens on those assets.
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 4 - REDEEMABLE PREFERRED STOCK
In connection with an agreement entered into in February 1996, the Company's
majority shareholder transferred all the newly issued shares of the Company's
outstanding preferred stock and all of the outstanding non-voting common stock
to a related party. The redeemable preferred stock consists of 3,600 shares of
$.01 par value 7.5% cumulative preferred stock (stated value of $1,000 per
share, and a redemption amount of $5,376,352). The preferred stock accrues
dividends at a rate of 7.5% on the stated value, of which approximately $24,000
was accrued at March 31, 1996. Effective immediately prior to the initial
public offering, the preferred stock and non-voting common stock were
automatically converted into 738,686 shares of common stock. These converted
shares were sold in the initial public offering.
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. Upon completion of the initial public
offering, certain employees of the Company were granted options to purchase
a total of 263,213 shares of common stock at $18.00 per share, except for
93,263 shares with an exercise price as follows: (i) 33 1/3% of such shares at
$18.00 per share; (ii) 33 1/3 of such shares at $17.00 per share; and (iii) 33
1/3% of such shares at $15.00 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 200,000 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 5,000 shares of common stock upon completion of the
offering. 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 5,000 shares of common stock. Each outside director also shall be
granted options to purchase 5,000 shares of common stock annually on the day
following the annual meeting of shareholders.
6
<PAGE> 7
SYKES ENTERPRISES, INCORPORATED
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
NOTE 6 - PRO FORMA DISCLOSURES
On May 3, 1996, the Company completed the sale of 2,417,768 shares of common
stock, $.01 par value in the initial public offering. Immediately prior to the
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 1,220,000 shares of common stock
to the sole shareholder of Sykes Realty, Inc. as a result of the merger
involving Sykes Realty, Inc.
Pro Forma Income Taxes - The Company and its combined affiliates are either
taxed as C corporations or taxed as an S corporation under the provisions of
the Internal Revenue Code. The taxable income of the S corporation is included
in the individual income tax return of the Company's major shareholder for
federal income tax purposes.
The Company utilizes the asset and liability method of accounting for deferred
income taxes for its combined affiliates that are taxed as C corporations.
Under this method, deferred tax assets and liabilities are established based on
the differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Prior to the offering, the Company's affiliate 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
will be reflected on the combined balance sheet with a corresponding
non-recurring expense in the combined statement of income in the quarter in
which the S corporation election is terminated. The amount of such deferred
tax liability computed using the asset and liability method of accounting for
deferred income taxes was approximately $33,000 at December 31, 1995 and March
31, 1996.
Pro Forma Net Income Per Share - In March 1996, the Company was a North
Carolina corporation and amended its articles of incorporation to authorize the
issuance of up to 10,000 shares of $1,000 par value per share preferred stock
and a stock split of 95-to-1 stock split of all outstanding common stock.
Subsequent to the amendment and stock split, the Company changed its state of
incorporation from North Carolina to Florida and changed the authorized number
of shares of common stock from 100,000 to 50,000,000. As part of the change of
the state of incorporation, each share of common stock of the North Carolina
corporation was exchanged for 88 shares of common stock of the Company. All
applicable share and per share amounts in the accompanying financial statements
have been retroactively adjusted to reflect these events.
7
<PAGE> 8
SYKES ENTERPRISES, INCORPORATED
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Months Ended April 2, 1995 and March 31, 1996
(Unaudited)
Weighted average common shares outstanding includes the common share equivalents
assuming an initial public offering price of $18.00 per share for purposes of
applying the treasury stock method for determining common stock equivalents. In
addition, the calculation includes certain preferred stock issued that were
converted to common stock immediately prior to the closing of and sold in the
initial public offering. Such shares were deemed outstanding for all periods
presented.
Pro Forma Shareholders' Equity - The Company's presentation of unaudited pro
forma shareholders' equity at March 31, 1996 reflects the items noted in Pro
Forma Net Income Per Share above, as well as the effect on historical retained
earnings of a distribution to the Company's majority shareholder of $770,000
attributable to previously taxed earnings and the recording of the deferred tax
liability of $33,000 referred to above as if the S corporation election had
terminated immediately prior to that date, but does not give effect to the
proceeds of the initial public offering.
8
<PAGE> 9
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.
During the three month period ended March 31, 1996, the Company funded changes
in working capital and the purchase of approximately $3.6 million of capital
equipment from an approximate $6.9 million increase in debt borrowings and $1.7
million receipt of grants associated with the opening of the Company's sixth
technical call center. 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. As a result of the increased demand for the Company's services, it is
anticipated that 1996 capital acquisitions will approximate $16 million,
including the construction of two additional technical call centers.
On May 3, 1996, the Company received proceeds, net of offering expenses, in
excess of $39 million from the sale of 2,417,768 shares of common stock in an
initial public offering. The Company used approximately $16.8 million of these
proceeds to repay all amounts outstanding under its bank borrowing agreements,
and intends to utilize the balance of the proceeds to make additional capital
expenditures associated with its technical support services, and for general
corporate purposes, including possible acquisitions. Currently, the Company has
no arrangements or understandings with respect to any acquisition, although it
continues to monitor acquisition opportunities. Pending any such use, the
Company plans to invest the proceeds in short-term, investment grade securities
or money market instruments.
The Company 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 its capital
requirements for the foreseeable future.
RESULTS OF OPERATIONS
For the three months ended March 31, 1996, the Company posted revenues of
approximately $22.3 million, an increase of approximately $8.7 million, or 64%,
from the comparable period of the previous year. This growth in revenues was
the result of an approximate $9.1 million 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 three months of 1996, the Company recognized an
additional revenue increase of approximately $1.3 million,
9
<PAGE> 10
or 18%, in information services and solutions when compared to the first
quarter 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 $1.7 million
reduction in revenues from the Company's strategic decision to phase-out other
services provided during the comparable three month period of 1995.
Direct salaries and related costs increased approximately $4.4 million, or 47%,
in the three month period in 1996 from the comparable period in 1995. As a
percentage of revenues, however, direct salaries and related costs decreased to
approximately 61% in the 1996 quarter from approximately 68% from the same
quarter in 1995. The increase in the amount of direct salaries and related
costs was 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.
General and administrative expenses increased approximately $2.9 million,
or 76%, in the 1996 period from the same period in 1995. The increase in the
amount of general and administrative expenses was primarily attributable to
the addition of management, sales and administrative personnel to support
the Company's growth, and the increase in depreciation expense associated with
facility and capital equipment expenditures incurred primarily in connection
with the technical support call centers.
Interest expense in the 1996 period increased from the comparable 1995 period
and was attributable to the significantly higher levels of borrowings
associated with the funding requirements associated with the technical support
expansion. It is anticipated that interest expense, in the foreseeable future,
will be minimal or eliminated subsequent to the receipt and use of proceeds
from the sale of common stock from the initial public offering as described
above. The decrease in other income in 1996 resulted from the recognition of
favorable foreign currency translation fluctuations in 1995.
The provision for income taxes as a percentage of income before income taxes
decreased during the 1996 period when contrasted to the comparable 1995 period
due to the recognition of nondeductible expenses over a larger income before
income tax base in 1996 as compared to 1995.
10
<PAGE> 11
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 (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended March 31, 1996.
11
<PAGE> 12
SYKES ENTERPRISE, INCORPORATED
FORM 10-Q
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: May 13, 1996 By: /s/Scott J. Bendert
------------------------ -------------------
Scott J. Bendert
Vice President-Finance
and Treasurer
(Principal Financial and
Accounting Officer)
12
<PAGE> 13
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
(For the Quarter Ended March 31, 1996)
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
27.1 Financial Data Schedule (for SEC use only). . . . . 14
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,985,620
<SECURITIES> 0
<RECEIVABLES> 18,575,851
<ALLOWANCES> 132,816
<INVENTORY> 0
<CURRENT-ASSETS> 22,187,460
<PP&E> 33,217,983
<DEPRECIATION> 7,509,324
<TOTAL-ASSETS> 48,642,202
<CURRENT-LIABILITIES> 12,903,968
<BONDS> 14,727,277
5,376,352
0
<COMMON> 88,000
<OTHER-SE> 5,769,581
<TOTAL-LIABILITY-AND-EQUITY> 48,642,202
<SALES> 0
<TOTAL-REVENUES> 22,252,211
<CGS> 0
<TOTAL-COSTS> 13,633,755
<OTHER-EXPENSES> 6,699,023
<LOSS-PROVISION> 49,417
<INTEREST-EXPENSE> 296,431
<INCOME-PRETAX> 1,627,146
<INCOME-TAX> 683,000
<INCOME-CONTINUING> 944,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944,146
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
