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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-28274
SYKES ENTERPRISES, INCORPORATED
(Exact name of registrant as specified in its charter)
Florida 56-1383460
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 N. Tampa Street, Suite 3900, Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
(813) 274-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Voting Common Stock $.0l Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of March 11, 1998, there were outstanding 39,109,262 shares of
Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the registrant based on the last sale price reported on the
Nasdaq National Market as of March 11, 1998 was $387,161,318.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents Form 10-K Reference
Portions of the 1997 Sykes Enterprises,
Incorporated Annual Report Part II Items 5-8
Portions of the Proxy Statement
dated March 30, 1998 Part III Items 10-13
Exhibit Index is on Page 27.
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Sykes Enterprises, Incorporated
Form 10-K Annual Report
TABLE OF CONTENTS
Page No.
Cautionary Statements of Forward Looking Information
PART I
Item 1 Business......................................................
Item 2 Properties....................................................
Item 3 Legal Proceedings.............................................
Item 4 Submission of Matters to a Vote of Security Holders...........
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters..................................
Item 6 Selected Financial Data.......................................
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations................
Item 8 Financial Statements and Supplementary Data...................
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................
PART III
Item 10 Directors and Executive Officers of the Registrant............
Item 11 Executive Compensation........................................
Item 12 Security Ownership of Certain Beneficial
Owners and Management........................................
Item 13 Certain Relationships and Related Transactions................
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................
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Certain matters discussed or incorporated by reference in this report are
forward-looking statements within the meaning of the federal securities laws.
Although the company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that its expectations will be achieved. Factors that could cause
actual results to differ materially from the Company's current expectations
include the loss of a significant customer; the inability of the Company to
mange its growth; risks associated with the Company's international operations,
general economic conditions, and other risks discussed elsewhere in this report.
PART I
Item 1 Business
Sykes Enterprises, Incorporated ("Sykes" or the "Company") provides a wide
array of information technology ("IT") outsourcing services, including
information technology support services, information technology development
services and solutions, and software fulfillment. The Company's services are
provided at various stages during the life cycle of computer hardware and
software products. Through its state-of-the-art IT call centers, the Company
provides information technology support services (i) to leading computer
hardware and software companies by providing technical product support services
to end users of their products and (ii) to major companies by providing help
desk services to their employees. The Company also provides fulfillment services
to computer hardware and software companies including design, replication,
material integration, packaging and distribution. In addition, through its staff
of technical professionals, the Company provides information technology
development services and solutions to large corporations, on a contract or
temporary staffing basis, including software design, development, integration
and implementation; systems support and maintenance; and documentation, foreign
language translation and software localization. The integration of these
services provides Sykes customers the opportunity to outsource a broad range of
their information technology services needs to the Company.
In 1993, in an effort to capitalize on the trend toward outsourcing
information technology services, the Company focused its strategic direction
exclusively on the information technology services marketplace and broadened its
array of services. Pursuant to this strategy, the Company began providing
information technology support services by opening IT call centers. Revenues
from information technology support services have grown rapidly through the
opening of two domestic IT call centers in 1994, two in 1995, three in 1996, and
one in 1997. The domestic IT call centers are stand-alone facilities, each
modeled after the same prototype. The Company's strategy of locating its
domestic IT call centers in smaller communities, typically near a college or
university, has enabled the Company to benefit from a relatively low cost
structure and a technically proficient, stable work force. In addition to its
domestic IT call centers, internationally the Company has opened one call center
in 1994, and two during 1997. Additional international IT call centers were
obtained as part of acquisitions, of which one was acquired during 1996 and
eight were acquired during 1997. The Company estimates that the IT call centers
will have the capacity to process in excess of 140,000 calls per day in the
aggregate, up from 7,000 calls per day in January 1994, from users of hardware
and software products seeking technical assistance.
The Company believes that outsourcing by information technology companies and
companies with information technology needs will continue to grow as increasing
competition encourages businesses to focus on their core competencies rather
than non-revenue producing activities. Rapid technological changes, significant
capital requirements for state-of-the-art technology, and the need to integrate
and update complex information technology systems spanning multiple generations
of
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hardware and software components make it increasingly difficult for businesses
to cost-effectively maintain quality information technology services in-house.
To capitalize on this trend toward outsourcing, the Company has developed a
strategy which includes the following key elements: (i) expand information
technology support services revenues through additional IT call centers; (ii)
market the Company's expanded customer care services to existing and new
customers to position Sykes to become a preferred vendor of outsourced services;
(iii) establish a competitive advantage through the Company's proprietary,
sophisticated technological capabilities; and (iv) expand its international
customer base through strategic alliances and selective acquisitions.
Sykes was founded in 1977 in North Carolina and moved its headquarters
to Florida in 1993. In March 1996, Sykes changed its state of incorporation from
North Carolina to Florida.
Industry Background
In today's rapidly changing technological environment, consumers and
businesses require a variety of information technology services in order to
effectively use and manage their complex information technology systems,
including technical support, software development and information systems
integration and management. Many companies' computer systems incorporate a
variety of hardware and software components which may span a number of
technology generations. For example, a company may use client/server systems or
mainframe or midrange hardware platforms running a variety of operating systems,
software applications and relational databases. Information technology services
have become much more important in this environment as information technology
departments strive to integrate a company's information processing capabilities
into a single system while providing the flexibility to change with
technological innovations.
These technological changes are making it increasingly difficult and
expensive for companies to maintain in-house the necessary personnel to handle
all of their information technology needs. Hardware and software companies, as
well as businesses utilizing their products, are increasingly turning to third
party vendors to perform specialized functions and services. Outsourcing of (i)
product support functions by leading hardware and software companies, (ii)
employee help desk functions by major companies, and (iii) other information
technology services such as software design and systems integration and
management, is growing rapidly because of the following factors:
- Increasing need for companies to focus on core competencies
rather than non-revenue producing activities;
- Rapid technological changes requiring personnel with
specialized technical expertise;
- Growing capital requirements for sophisticated technology
necessary to provide timely product support and help desk
functions;
- Increasing need to integrate and continually update complex
systems incorporating a variety of hardware and software
components spanning a number of technology generations;
- Extensive and ongoing staff training and associated costs
required to maintain responsive, up-to-date in-house technical
support and information technology services; and
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- Cost savings from converting fixed employee costs to flexible,
variable costs.
In the face of rapid technological change, large corporations also find
it increasingly difficult and expensive to service all of their own information
technology needs through in-house personnel. Gartner Group, an information
technology advisory firm, predicts that more than 40% of companies with internal
help desks will outsource a portion of this function by 1998, compared with 15%
in 1995.
As the outsourcing of technical product support, help desk and other
information technology services has gained acceptance, many companies also are
seeking to consolidate the number of vendors which provide them with these
services. Accordingly, providers of information technology outsourcing services
must offer a wide array of services to maintain a preferred vendor relationship
with their customers. Sykes believes its broad range of services will allow it
to capitalize on this trend.
Strategy
The Company's objective is to continue its growth and to become a
leading provider of a wide variety of information technology outsourcing
services by being responsive to and providing skilled personnel for its clients'
long-term outsourcing needs. The Company's principal strategies for achieving
this objective are as follows:
Expand Through Systematic Addition of IT Call Centers. The Company has
grown utilizing a strategy of both internal growth and external acquisitions.
This plan has resulted in an increase from three IT call centers in 1994 to
twenty IT call centers as of December 31, 1997. The Company has built six
domestic IT call centers between October 1995 and September 1997 and
acquisitions have included the IT call center acquired through the Datasvar
acquisition, the IT call center acquired through the Telcare acquisition, the
three IT call centers acquired through the TAS acquisitions, and the four IT
call centers acquired through the McQueen acquisition. In addition, the Company
has expanded its international operations through the IT call centers added in
Sunninghill, South Africa and Les Ulis, France during 1997. The Company's IT
call centers currently have the capacity to handle up to approximately 36
million calls per year. Sykes has systematized the establishment and ongoing
operation of its domestic IT call centers by: (i) locating the centers in
smaller communities, near a college or university, with a relatively low cost
structure and a technically proficient, stable work force; (ii) constructing the
IT call centers modeled after the same prototype; (iii) utilizing standardized
procedures to hire and train technicians; and (iv) maintaining consistently
responsive, high quality services through call monitoring and tracking
technology and other quality assurance procedures. The Company's systematic
approach and procedures are part of its strategy of providing responsive, high
quality support at a lower cost than the Company's competitors.
Position Sykes as a Preferred Vendor. The Company intends to
cross-market its expanded array of information technology services to existing
customers and to continue to provide consistently high quality services to new
and existing customers in order to position the Company as a preferred vendor of
outsourced services. Sykes believes that its ability to work in partnership with
its customers during the life cycle of their information technology products and
systems, from software design and systems implementation, through technical
documentation and foreign language translation, to product fulfillment including
packaging and distribution, to end user technical product support, gives it a
competitive advantage to become the provider of choice to its customers. Sykes
has expanded the services it
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provides, such as help desk, diagnostic support services and fulfillment,
through its existing relationships with Fortune 500 companies, particularly
those customers using the Company's services to satisfy all or part of their
information technology development services and solutions needs.
Capitalize on Sophisticated Technology. The Company seeks to establish
a competitive advantage by continuing to capitalize on its sophisticated and
specialized technological capabilities, including PBX switches, automatic call
distributors, call tracking software and computer-telephone integration. These
capabilities allow its IT call centers to serve as the transparent extension of
the Company's customers, receive telephone calls and data directly from its
customers' systems, and report detailed information concerning the status and
results of the Company's services on a daily basis. The Company's sophisticated
technology and systems, which the Company is able to upgrade periodically
because of their open architecture, enable the Company to provide high response
rates at a low cost per transaction.
The Company's strategy is to continue to develop or acquire other
technologies that complement its technical product support functions. For
example, the Company intends to integrate the capabilities of it's sophisticated
diagnostic proprietary software with Sykes IT call centers to further enhance
the efficiency and quality of the Company's information technology support
services, and believes that enhancements to this software will enable it to
access and offer information technology support services directly to the home
and small business markets.
Growth Through Strategic Alliances. The Company intends to expand its
customer base, geographic presence and the information technology services Sykes
provides by forming strategic alliances with other information technology
service providers, particularly those who do not provide labor intensive
technical support. For example, information technology services providers such
as systems integrators increasingly are seeking partners to whom they can
outsource the help desk requirements of their customers. The Company continues
to actively seek help desk contracts with such providers.
Growth Through Selective Acquisitions. The Company intends to continue
to acquire complementary businesses to increase market share, expand its
services, enter key industry sectors and expand its geographic presence. Through
December 31, 1997 the Company has completed eight such strategic acquisitions
since its initial public offering in April 1996. The Company believes it can
expand the scope and quality of its information technology support services by
acquiring companies with IT call centers in international markets which provide
quality technical support for leading computer hardware and software companies,
as well as companies which enhance its ability to provide such services. The
Company further believes that significant opportunities exist to acquire
organizations which provide information technology services within the Company's
strategic focus of emerging technology industries, such as banking and
telecommunications industries in which the Company primarily does not currently
compete. The information technology services industry is highly fragmented. Many
of these local firms may be attractive acquisition candidates because they would
enable Sykes to expand existing service offerings or open new geographic
offices.
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Services
The Company provides a wide array of information technology outsourcing
services, including information technology support services and information
technology development services and solutions. The following is a description of
Sykes' outsourcing services:
Technical Product Support. Sykes provides technical product support
services by telephone (24 hours a day, 7 days a week) to end users of the
products of hardware and software companies through its nine stand-alone IT call
centers in the United States and eleven international call centers located in
Europe, South Africa and the Philippines. Consumers of hardware or software
products of Sykes' customers dial a technical support number listed in their
product manuals and are automatically connected to an IT call center technician
who is specially trained in the applicable product and acts as a transparent
extension of the hardware or software company in diagnosing problems and
answering technical questions. The IT call centers also provide technical
product support by electronic mail and electronic bulletin boards. The IT call
centers in Europe provide support in 11 languages to 20 European countries.
As a result of a strategic alliance with SystemSoft Corp., the Company
provides a modular bundled call center support management software product,
(ETSC-Electronic Technical Support Center) that integrates communication and
remote control technology with hardware and software diagnostic tools to provide
end users a total support solution. This technology capability allows a user,
with ETSC loaded on their computer, to connect to a technical support technician
located in a Sykes call center at the mouse click of an icon. Once connected the
end user can receive support from traditional voice response means or the
technician, with the user's authorization, can remotely fix the computer system
directly from the call center.
The Company also develops and markets the proprietary hardware
diagnostic software for use by manufacturers, professional service personnel and
end users. Proprietary diagnostic products are developed and marketed for use
with a variety of operating systems which include software used by personal
computer manufacturers for quality assurance and pre-installed or bundled
software used by professional service personnel and end users for verifying
component functionality, troubleshooting, resolving hardware and software
conflicts and hardware repairs.
Help Desk Services. The Company provides help desk services to major
companies, at their facilities or through the IT call centers, that have
outsourced technical support for their internal information technology systems.
Employees of Sykes' customers telephone the help desk number provided to them by
their employer for technical assistance. Trained technicians dedicated to a
specific customer answer questions and diagnose and resolve technical problems
ranging from a simplistic error message to a wide area network failure.
Software fulfillment. The Company provides fulfillment services to
computer hardware and software companies. These services include design,
replication, printing documentation, material integration, packaging and
distribution. The products are distributed to various levels of the distribution
chain as directed by the customer.
Software Design, Development, Integration and Implementation. Sykes'
professional personnel provide software application design services geared
toward the development of a functional and technical blueprint for a client's
desired
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software application. These professionals identify applicable business
processes supported by an application and its related functions, determine end
user requirements and prepare a comprehensive plan for developing and
implementing the application. They also develop custom software necessary to
operate a desired application, integrate the application into the customer's
existing information processing architecture, test the functionality of the
application and assist the customer in training its personnel to use the
application.
Software Localization and Documentation Development. Sykes also
specializes in the development of product information for high-tech companies
worldwide. Through its software localization, translation, technical
documentation, and on-line information development services, Sykes provides
turnkey solutions to help customers deliver their products to worldwide markets.
Localization services include cultural adaptation, language translation,
interface modification and international testing in over 24 languages. Technical
documentation and on-line development services are provided in many leading
formats (DOC, RTF, HTML, SGML) and a variety of platforms (Windows, Mac, Unix).
Systems Specialization and Maintenance. Sykes' professional personnel
provide a variety of services designed to support and maintain client/server
systems and mainframe and midrange platforms. These services include systems
administration, maintenance and management support, applications enhancement and
training services.
Retail Solutions. The Company provides design, programming, licensing
and support of software solutions for the retail industry. These retail
solutions, FS Pro (future store professional) Marketplace and FS Pro Chainstore
400 provide retail users advanced back office and point-of-sale technology
including electronic ordering and receiving, cash management, sales analysis,
inventory and price management, and complete hand-held RF-based functionality.
Operations
IT Call Centers. The Company's strategy in the United States is to
locate its IT call centers in smaller communities with similar demographic
characteristics, typically near a college or university. The Company believes
these characteristics tend to provide a well-educated, technically proficient
employee pool from which to attract qualified candidates. These locations also
tend to have lower labor and infrastructure costs than large metropolitan areas.
New IT call centers are established to accommodate anticipated growth
in the Company's business or in response to a specific customer need. The
Company believes that additional IT call centers will be established in the
United States and Europe and potentially in Asia.
A typical domestic IT call center is approximately 42,000 square feet,
has 425 work stations and can handle 12,000 calls per day. The IT call centers
employ current technology in PBX switches, call tracking software,
telephone-computer integration, interactive voice response and relational
database management systems that are integrated into centrally managed local
area networks and wide area networks. The Company's sophisticated equipment and
technology enable it to serve as the transparent extension of its customers at a
low cost per transaction and provide its customers with immediate access to the
status and results of the Company's services. Due to its modular, open system
architecture, the Company's computer system allows timely system updates and
modifications. The Company utilizes sophisticated call tracking software and
systems to provide efficient scheduling of personnel to accommodate fluctuations
in call volume.
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Automated call distributors and digital switches identify each call by
the number dialed and automatically route the call to a technician with the
applicable knowledge and training. The technical product support calls are
routed directly from the end user to the IT call center or are overflow calls
routed from the client's place of business.
IT call center systems capture and download to permanent databases a
variety of information concerning each call for reporting on a daily basis to
customers, including number and duration of calls (which are important for
billing purposes), response time and results of the call. Summary data and
complete databases are made available to the customer to enable it to monitor
the level of service provided by the Company, as well as to determine whether
end users of its products are encountering recurring problems that require
modification. The databases also provide Sykes customers with considerable
marketing information concerning end users, such as whether the user is a home
or business user and regional differences in purchasing patterns or usage. The
Company maintains tape backups and offsite storage to assure the integrity of
its reporting systems and databases.
The IT call centers are protected by a fire extinguishing system and
backup generators and short-term battery backup in the event of a power outage,
reduced voltage or power surge. Rerouting of telephone calls to one of the other
IT call centers is also available in the event of a telecommunications failure,
natural disaster or other emergency. Security measures are imposed to prevent
unauthorized access. Software and related data files are backed up daily and
stored off site at multiple locations. The Company carries business interruption
insurance covering interruptions that might occur as a result of damage to its
business. In addition, the Company believes that it has adequate arrangements
with its equipment vendors pursuant to which damaged equipment can be replaced
promptly.
Fulfillment Centers. Sykes has expanded its fulfillment services during
1997 through an acquisition. Sykes has two fulfillment centers located in the
United States and six fulfillment centers located in Europe. Through these
centers, the Company offers a broad range of brands in each of the product
categories it covers. By stocking a broad mix of products, Sykes meets the needs
of customers who prefer to deal with a single source for many of their product
needs. Sykes is continually evaluating new products, the demand for current
products, and its overall product mix.
Offices. Sykes' professional personnel are assigned to one of the
Company's fourteen offices, which are located in metropolitan areas throughout
the United States and Europe in order to be closer to their major customers.
Each office is responsible for staffing the professional personnel needs of
customers within its geographic region and customers referred from other offices
based on specialized needs. These offices give Sykes the ability to (i) offer a
broad range of professional services on a local basis, and (ii) respond to
changing market demands in each geographical area served. The number of
professionals assigned to each office ranges from 3 to 150.
Each office is staffed with one or more account executives whose goal
is to become the client's partner in evaluating and meeting the client's
information technology needs. The account executive's primary responsibilities
include: client development; understanding and identifying clients' information
technology service needs; working closely with recruiters to staff assignments
appropriately; setting billing rates for each assignment; and monitoring ongoing
assignments. Each account executive is responsible for between four and ten
active corporate accounts, some of which may involve several projects with
multiple operating units of a particular company. The account executive
cultivates and maintains relationships with the client's chief information
officer and numerous department and project managers within the client's
organization.
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The account executive has responsibility for staffing an assignment on
a timely basis. Upon receiving a new assignment, the account executive prepares
a proposal with assignment specifications and distributes the proposal to a
recruiter who is familiar with the professionals who have the expertise required
for the assignment. The account executive reviews the recruiter's recommended
candidates, submits the resumes of qualified employees and other available
candidates to the client and schedules client interviews of the candidates.
Typically, an assignment is staffed within five working days. For certain
clients with whom the Company has long-term relationships, account executives
are given sole responsibility for staffing assignments with little or no client
involvement in the decision.
Quality Assurance
The Company carefully trains, monitors and supervises its employees to
enhance efficiency and quality of its services. The training of new technicians
at the IT call centers is conducted in-house through certified trainers or by
professionals supplied by the Company's customers. The Company actively recruits
highly skilled professionals to staff specific assignment needs of its
information technology development services and solutions customers. Generally,
employees also receive ongoing training throughout the year to respond to
changes in technology.
An IT call center manager supervises project leaders, team leaders and
technicians dedicated to individual customer accounts. Each team leader at the
IT call centers monitors approximately ten technicians. A project leader
supervises a particular customer's account by monitoring calls and reviewing
quality standards. Using the Company's proprietary, sophisticated call tracking
software, the project leader monitors the number of calls each technician
handles, the duration of each call, time between calls, response time, number of
queries resolved after the first call and other statistics important in
measuring and enhancing productivity and service levels. Remote and on-site call
monitoring systems and on-line performance tracking are used to enhance high
quality services. Customers have daily access to a variety of measures of
service performance tracked by the Company's technology and can monitor calls
directly through the Company's remote call monitoring systems.
The Company emphasizes a team approach in order to provide high
quality, customized solutions to meet its clients' information technology
development services and solutions needs. The central role in this team approach
is provided by the Company's account executives and recruiters who work together
to achieve a successful relationship between the client and the Company's
professionals. The team shares information on active and prospective clients,
reviews the availability of professionals and discusses general market
conditions. Such forums enable the teams to remain informed and knowledgeable on
the latest technologies and to identify business development opportunities as
they emerge.
The Company is committed to providing its customers with the highest
quality services. To that end, the Company's IT call center in Sterling,
Colorado has received ISO 9002 certification, an international standard for
quality assurance and consistency in operating procedures. The Company's other
locations are ISO 9002 compliant, but not certified. The Company anticipates
that ISO 9002 certification may become a factor to organizations outsourcing
their technical product support or help desk functions. Consequently, the
Company has modeled each IT call center after ISO 9002 procedures to achieve
consistency and quality. In addition, the Company received the 1995, 1996 and
1997 STAR Award in the highest call volume category. This award has been
presented annually since 1988 by the Software Support Professionals Association
(SSPA) to the software support company that achieves superior customer
satisfaction and call metrics.
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Sales and Marketing
The Company's marketing objective is to develop long-term relationships
with existing and potential clients to become the preferred vendor of their
information technology outsourcing services. Sykes believes that its significant
client base provides excellent opportunities for further marketing of its broad
range of capabilities. The Company markets its information technology services
through a variety of methods, including client referrals, personal sales calls,
advertising in industry publications, attending trade shows, direct mailings to
targeted customers, telemarketing and cross selling additional services to
existing clients. The Company currently employs 77 people in its direct sales
force.
As part of its marketing efforts, the Company invites potential and
existing customers to visit the IT call centers, where the Company demonstrates
its sophisticated telecommunications and call tracking technology, quality
procedures and the knowledge of its technicians. The Company also demonstrates
its ability to quickly accommodate a new customer or a significant increase in
business from an existing customer by emphasizing its systematic approach to
establishing and managing IT call centers.
The Company also emphasizes account development to strengthen its
relationships with its customers. Sales representatives and account executives
are assigned to a limited number of accounts in order to develop a complete
understanding of each customer's particular needs, to form strong customer
relationships and encourage cross selling of other services offered by the
Company. Account executives also receive incentives for cross selling the
Company's services.
The Company's fulfillment services sales force is composed of field
sales representatives who manage relationships with the accounts. In addition,
the Company has inside customer sales representatives who receive product orders
and answer customer inquiries. The Company will process the order and ship the
product from the appropriate fulfillment center. Fulfillment services are
generally billed to the client based on a per unit basis.
Technical product support services provided through IT call centers
generally are billed to the client based on a fee per call, rate per minute or
time and material basis. As a result of the significant infrastructure costs
required for each IT call center, the Company requires a minimum billing amount
to facilitate planning and capital needs. Help desk services usually are billed
at a flat rate per employee per month, with the per employee charge varying
depending on the customer's total number of employees and the complexity of its
information systems.
Information technology development services and solutions engagements
generally are billed on a time and material basis. Sykes is expanding its
efforts to obtain contracts with customers lasting six months or longer to
increase recurring revenues, maximize utilization of professional personnel and
enhance long-term relationships. The Company also is attempting to obtain
contracts to provide for the management of a customer's entire information
technology project, rather than providing professionals to staff a
client-managed project, with a view to enhancing profit margins through the
provision of value-added management services.
Retail solutions are marketed by both in-house direct sales staff and
through a remarketing agreement with IBM reached late in 1997. With IBM, the
Company has effectively increased its marketing program by approximately 150
sales people. The solutions are sold on a per license or location basis and
often include computer hardware equipment.
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Customers
The Company has customers in the United States, Canada, Europe and
South Africa. The Company's customers include Fortune 500 corporations and
leading hardware and software companies. The Company believes its nationally
recognized customer base presents opportunities for further cross-marketing of
its services.
Adobe Systems Incorporated, which became a customer as a result of the
McQueen acquisition during 1997, accounted for 13%, 13% and 11% of the Company's
consolidated revenues for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company's loss of (or the failure to retain a significant
amount of business with) its key customer could have a material adverse effect
on the Company. The Company's largest ten customers accounted for approximately
44% of the consolidated revenues in 1997. Generally, the Company's contracts are
cancelable by each customer at any time or on short-term notice, and customers
may unilaterally reduce their use of the Company's services under such contracts
without penalty. Sykes provided services to approximately 500 customers during
1997.
Competition
The industry in which the Company competes is extremely competitive and
highly fragmented. While many companies provide information technology services,
management believes no one company is dominant. There are numerous and varied
providers of such services, including firms specializing in call center
operations, fulfillment, temporary staffing and personnel placement companies,
language translation companies, general management consulting firms, major
accounting firms, divisions of large hardware and software companies and niche
providers of information technology services, many of whom compete in only
certain markets. The Company's competitors include many companies who may
possess substantially greater resources, greater name recognition and a more
established customer base than the Company. In addition, the services offered by
the Company historically have been provided by in-house personnel. The Company's
also competes with other developers of software diagnostic tools, back office
and point-of-sale applications, many of which have significantly greater
financial, technical, marketing and other resources than the Company.
The Company believes that the most significant competitive factors in
the sale of its services include quality and reliability of services,
flexibility in tailoring services to customer needs, price, experience,
reputation and comprehensive and integrated services. As a result of intense
competition, information technology development services and solutions
engagements frequently are subject to pricing pressure. Customers also require
vendors to be able to provide services in multiple locations. Competition for
contracts for many of Sykes' services takes the form of competitive bidding in
response to requests for proposals.
Many of Sykes' large customers purchase information technology services
primarily from a limited number of preferred vendors. Sykes has experienced and
continues to anticipate pricing pressure from these customers in order to remain
a preferred vendor. These companies also require vendors to be able to provide
services in multiple locations.
12
<PAGE> 13
Intellectual Property
The Company relies upon a combination of contract provisions and trade
secret laws to protect the proprietary technology it uses at its IT call
centers. Sykes relies on a combination of copyright, trademark and trade secret
laws to protect it's proprietary software. The Company attempts to further
protect its trade secrets and other proprietary information through agreements
with employees and consultants. The Company does not hold any patents and does
not have any patent applications pending. There can be no assurance that the
steps taken by the Company to protect its proprietary technology will be
adequate to deter misappropriation of its proprietary rights or third party
development of similar proprietary software. Sykes(R) is a registered
servicemark of the Company. Sykes holds a number of registered trademarks,
including DIAGSOFT(R), QAPLUS/WIN(R), ETSC(R), FS PRO(R) and FS PRO
MARKETPLACE(R).
Employees
As of March 1, 1998, the Company had 6,538 full-time employees,
consisting of 77 in sales and marketing, 4,282 customer support technicians at
the IT call centers, 1,130 technical professionals, 499 in fulfillment services
and 550 in management, administration and finance.
The technical and service nature of the Company's business makes its
employees an important corporate asset. While the market for qualified personnel
is extremely competitive, the Company believes its relationship with its
employees is good. The Company's employees with the exception of 157 employees
in Scotland, are not represented by any labor union.
The Company believes that it gains a competitive advantage by locating
its IT call centers in smaller communities in which they become an integral part
of the local economy and labor force. The Company believes that personnel
located in such communities can be employed at a lower overall cost than
employees located in a metropolitan setting. Sykes IT call centers are located
in communities near a college or university to provide a well-educated,
technically proficient work force. Applicants are interviewed for technical
skills as well as interpersonal skills.
The Company recruits its professional personnel through a continually
updated recruiting network. This network includes a seasoned team of technical
recruiters, a Company-wide candidate database, internet/newspaper advertising,
candidate referral programs and job fairs. However, demand for qualified
professionals conversant with certain technologies may outstrip supply as new
skills are needed to keep pace with the requirements of customer engagements.
Competition for such personnel is intense and employee turnover in this industry
is high.
13
<PAGE> 14
Executive Officers of the Registrant
The following table provides the names and ages of the Company's executive
officers, and the positions and offices with the Company currently held by each
of them:
<TABLE>
<CAPTION>
Name Age Principal Position
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
John H. Sykes 61 President and Chief Executive Officer
Gordon H. Loetz 47 Executive Vice President and Chief Operating Officer
Scott J. Bendert 41 Senior Vice President-Finance, Treasurer, and Chief Financial
Officer
Keith L. Gibson 38 Senior Vice President-Worldwide Sales and Marketing
John D. Bray 49 Senior Vice President-Human Resources and Administration
John L. Crites 53 Vice President and General Counsel
</TABLE>
John H. Sykes has been President and Chief Executive Officer of the
Company since its inception in 1977. Previously, Mr. Sykes was Senior Vice
President of CDI Corporation, a publicly-held technical services firm.
Gordon H. Loetz joined the company as Executive Vice President and
Chief Operating Officer during November 1997. Mr. Loetz has held a seat on the
Company's Board of Directors since 1993, also having previously served on the
Audit Committee. Prior to serving as Executive Vice President and Chief
Operating Officer, Mr. Loetz served as President of Comprehensive Financial
Services Insurance Agency, Inc., a financial investment advisory company.
Scott J. Bendert joined the Company in 1993 as Chief Financial Officer
and was named Senior Vice President-Finance during October 1997. In 1994, Mr.
Bendert was named Treasurer, and in 1995 was appointed Vice President-Finance.
From 1984 to 1993, Mr. Bendert held various management positions with
Reflectone, Inc., a publicly-held producer of complex computer simulator
trainers and devices, most recently as Corporate Controller.
Keith L. Gibson joined the Company as Senior Vice President-Worldwide
Sales and Marketing during October 1997. From 1991 until 1997, Mr. Gibson was a
partner of KPMG Peat Marwick LLP ("KPMG") where he acted as the Chief Knowledge
Officer ("CKO"). Prior to his role as CKO, Mr. Gibson was Partner in Charge of
Outsourcing Assessments. Prior to joining KPMG, Mr. Gibson spent 13 years at IBM
in various marketing positions, working his way through many aspects of IBM's
marketing area.
John D. Bray joined the Company in 1996 as Vice President-Human
Resources and was named Senior Vice President-Human Resources and Administration
during October 1997. From 1989 to 1995, Mr. Bray was Director of Human Resources
and Risk Management for Lil' Champ Food Stores, Inc.
John L. Crites, Jr. joined the Company as Vice President and General
Counsel during April 1996. Prior thereto and since 1991, Mr. Crites served as
Executive Director of the Vivian L. Smith Foundation for Restorative Neurology
at Baylor College of Medicine in Houston, Texas.
14
<PAGE> 15
Item 2 Properties
The Company's principal executive offices are located in Tampa,
Florida. This facility currently serves as the headquarters for senior
management, the financial and administrative departments and the Tampa office.
The following table sets forth additional information concerning the Company's
facilities:
<TABLE>
<CAPTION>
Properties General Usage Square Feet Lease Expiration
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES LOCATIONS
Tampa, Florida Corporate headquarters 18,000 December 2002
Tampa, Florida Development office 5,000 September 1998
Tampa, Florida Office 18,000 July 1999
Bismarck, North Dakota IT call centers 84,000 Company owned
Greeley, Colorado IT call center 42,000 Company owned
Hays, Kansas IT call center 42,000 Company owned
Klamath Falls, Oregon IT call center 42,000 Company owned
Minot, North Dakota IT call center 42,000 Company owned
Ponca City, Oklahoma IT call center 42,000 Company owned
Sterling, Colorado IT call center 34,000 Company owned
Fremont, California IT call center and fulfillment center 111,500 November 1999
Nashville, Tennessee Fulfillment center 121,400 December 1998
Atlanta, Georgia Office 2,000 May 2000
Boise, Idaho Office 2,400 January 1999
Boston, Massachusetts Office 26,000 September 2000
Boulder, Colorado Office 13,000 March 1998
Cary, North Carolina Office 9,500 December 1999
Charlotte, North Carolina Office 2,200 June 2000
Charlotte, North Carolina Office 37,800 October 2003
Dallas, Texas Office 5,500 June 1998
Lexington, Kentucky Office 1,600 June 2000
Orlando, Florida Office 2,000 August 1998
Poughkeepsie, New York Office 1,000 January 1998
St. Louis, Missouri Office 5,500 September 1998
INTERNATIONAL LOCATIONS
Amsterdam, The Netherlands IT call center 27,700 April 1999
Amsterdam, The Netherlands IT call center 12,400 December 1999
Edinburgh, Scotland IT call center 35,900 September 2019
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Properties General Usage Square Feet Lease Expiration
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Les Ulis, France IT call center 36,200 February 2007
Bochum, Germany IT call center 30,000 December 2000
Stuttgart, Germany IT call center 9,200 December 2006
Wilhelmshaven, Germany IT call center 36,800 March 2003
Manila, The Philippines IT call center 13,200 June 2000
Sunninghill, South Africa IT call center 4,000 September 2000
Sveg, Sweden IT call center 13,200 June 1998
Shannon, Ireland IT call center and fulfillment center 66,000 April 2013
Hoofddorp, The Netherlands Fulfillment center 12,000 August 1998
Sevran, France Fulfillment center 19,400 August 2002
Galashiels, Scotland Fulfillment center 92,800 Company owned
Kista, Sweden Fulfillment center 6,500 December 2000
Stockholm, Sweden Sales office 2,700 December 1999
Brussels, Belgium Office and fulfillment center 26,900 February 2001
</TABLE>
The Company owns each of its domestic IT call centers as identified and
anticipates that additional IT call centers will be required due to growth and
expansion.
Item 3 Legal Proceedings
From time to time, the Company is involved in litigation incidental to
its business. In the opinion of management, no litigation to which the Company
currently is a party is likely to have a materially adverse effect on the
Company's results of operations or financial condition, if decided adversely to
the Company.
Item 4 Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security-holders during the fourth
quarter of the year covered by this report.
PART II
Item 5 Market for the Registrant's Common Equity
and Related Shareholder Matters
The information called for by this item is contained in page 15 of the
Company's Annual Report and is incorporated herein by reference.
16
<PAGE> 17
Item 6 Selected Financial Data
The information called for by this item is contained in page 14 of the
Company's Annual Report and is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information called for by this Item is contained in pages 16 through
21 of the Company's Annual Report and is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
The information called for by this Item is contained in pages 24 through
44 of the Company's Annual Report and is incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
All information required by Items 10 through 13 with the exception of
information on Executive Officers which appears in the report under the caption
"Executive Officers of the Registrant" is incorporated by reference to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
Reports of Independent Certified Public Accountants.
The following information is contained in pages 24 through 44 of the
Company's Annual Report, and is incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 1996 and 1997.
Consolidated Statements of Income for the years ended December 31,
1995, 1996 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedule
17
<PAGE> 18
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
The following documents are filed as exhibits to this report:
Exhibit
Number Exhibit Description
2.1 Articles of Merger between Sykes Enterprises, Incorporated, a
North Carolina corporation, and Sykes Enterprises, Incorporated,
a Florida Corporation, dated March 1, 1996. (1)
2.2 Articles of Merger between Sykes Enterprises, Incorporated and
Sykes Realty, Inc. (1)
2.3 Stock Purchase Agreement dated July 1, 1996 among Sykes
Enterprises, Incorporated and Johan Holm, Arne Weinz and Norhold
Invest AB. (2)
2.4 Stock Purchase Agreement dated August 30, 1996 among Sykes
Enterprises, Incorporated and Gordon H. Kraft. (3)
2.5 Merger Agreement dated as of January 10, 1997 among Sykes
Enterprises, Incorporated, Info Systems of North Carolina, Inc.
and ISNC Acquisition Co. (4)
2.6 Stock Purchase Agreement date March 28, 19997 among Sykes
Enterprises, Incorporated, Sykes Holdings of Belgium, B.V.B.A.,
Cycle B.V.B.A. and Michael McMahon. (5)
2.7 Joint Marketing and Distribution Agreement dated April 30, 1997
by and between Sykes Enterprises, Incorporated and SystemSoft
Corporation. (10)
2.8 Common Stock Purchase Agreement dated May 6, 1997 by and between
Sykes Enterprises, Incorporated and SystemSoft Corporation. (10)
2.9 Acquisition Agreement, dated May 30, 1997, by and among the
holders of all of the capital interests of Telcare Gesellschaft
fur Telekommunikations-Mehrwertdienste mbH, Sykes Enterprises
GmbH, and Sykes Enterprises, Incorporated. (7)
2.10 Acquisition Agreement, dated September 19, 1997, by and among the
holders of all of the capital interests of TAS Telemarketing
Gesellschaft fur Kommunikation und Dialog mbH, Sykes Enterprises,
GmbH, and Sykes Enterprises, Incorporated. (8)
2.11 Acquisition Agreement, dated September 25, 1997, by and among the
holders of all of the capital interests of TAS Hedi Fabinyi GmbH,
Sykes Enterprises, GmbH, and Sykes Enterprises, Incorporated. (8)
18
<PAGE> 19
2.12 Shareholder Agreement dated December 18, 1997, by and among Sykes
Enterprises, Incorporated and HealthPlan Services Corporation
(filed herewith).
2.13 Acquisition Agreement, dated December 31, 1997, by and among the
holders of all of the capital interests of McQueen International
Limited and Sykes Enterprises, Incorporated. (11)
3.1 Articles of Incorporation of Sykes Enterprises, Incorporated, as
amended. (12)
3.2 Bylaws of Sykes Enterprises, Incorporated, as amended. (12)
4.1 Specimen certificate for the Common Stock of Sykes Enterprises,
Incorporated. (1)
10.1 Loan Agreement between NationsBank, N.A. and Sykes Enterprises,
Incorporated dated as of December 31, 1996. (6)
10.2 Employment Agreement dated as of January 1, 1996 between John H.
Sykes and Sykes Enterprises, Incorporated. (1)
10.3 Form of Employment Agreement between executive officers and Sykes
Enterprises, Incorporated. (1)
10.4 Stock Option Agreement between Sykes Enterprises, Incorporated
and David E. Garner dated as of December 31, 1995. (1)
10.5 1996 Employee Stock Option Plan. (1)
10.6 1996 Non-Employee Director Stock Option Plan. (1)
10.7 1996 Non-Employee Directors' Fee Plan. (1)
10.8 Form of Split Dollar Plan Documents. (1)
10.9 Form of Split Dollar Agreement. (1)
10.10 Form of Indemnity Agreement between directors and executive
officers and Sykes Enterprises, Incorporated. (1)
10.11 Aircraft Lease Agreement between JHS Leasing of Tampa, Inc. as
lessor and Sykes Enterprises, Incorporated as lessee, dated
December 1, 1995. (1)
10.12 Single Tenant Property Lease Agreement between Sykes Investments
as landlord and Sykes Enterprises, Incorporated as tenant dated
October 31, 1989, for building in Charlotte, North Carolina. (1)
10.13 Tax Indemnification Agreement between Sykes Enterprises,
Incorporated and John H. Sykes. (1)
19
<PAGE> 20
10.14 Consultant Agreement between Sykes Enterprises, Incorporated and
E.J. Milani Consulting Corp. dated April 1, 1996. (1)
13.1 1997 Sykes Enterprises, Incorporated Annual Report (incorporates
sections only in electronic filing).
21.1 List of subsidiaries of Sykes Enterprises, Incorporated.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Grant Thornton.
24.1 Power of Attorney relating to subsequent amendments (included on
the signature page of this report).
27.1 Financial Data Schedule (for SEC use only)(filed herewith)
99.1 McQueen International Limited Consolidated Financial Statements
for Years Ended February 28, 1997 and 1996 (filed herewith).
99.2 McQueen International Limited Pro Forma Financial Statements for
the Ten Months Ended December 31, 1997 (filed herewith).
- ---------------
(1) Filed as the same numbered Exhibit to Registrant's Registration
Statement on Form S-1 (Registration No. 333-2324) and incorporated
herein by reference.
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 31, 1996
and incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Form 8-K dated September 16,
1996 and incorporated herein by reference.
(4) Included as Appendix A to the Proxy Statement/Prospectus contained in
the Registrant's Registration Statement on Form S-4 (Registration No.
333-20465) and incorporated herein by this reference.
(5) Filed as an Exhibit to the Registrant's Form 10-K dated March 30, 1997
and incorporated herein by reference.
(6) Filed as Exhibit 2.5 to the Registrant's Registration Statement on
Registration No. 333-20465.
(7) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated June 16, 1997 and incorporated herein by reference.
(8) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated September 26, 1997 and incorporated herein by reference.
(9) Filed as the same numbered Exhibit to Registrant's Registration
Statement on Form S-3 (Registration No. 333-38513) and incorporated
herein by reference.
(10) Filed as an Exhibit to the Registrant's Form 10-Q dated June 29, 1997
and incorporated herein by reference.
(11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated January 15, 1998 and incorporated herein by reference.
(12) Filed as an Exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-38513) and incorporated herein by reference.
(13) Filed as an Exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-46569) and incorporated herein by reference.
20
<PAGE> 21
(b) Reports on Form 8-K
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Tampa,
and State of Florida, on this 16th day of March, 1998.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
By: /s/ Scott J. Bendert
---------------------------------------
Scott J. Bendert,
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated. Each person whose signature appears below constitutes and
appoints Scott Bendert and John Crites and each of them individually, his true
and lawful attorney-in-fact and agent, with full power of substitution and
revocation, for him and in his name, place and stead, in any and all capacities,
to sign any and all amendments to this report and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/John H. Sykes Chairman of the Board, President, Chief March 16, 1998
- --------------------- Executive Officer and Director (Principal
John H. Sykes Executive Officer)
/s/Scott J. Bendert Senior Vice President-Finance, Chief Financial March 16, 1998
- --------------------- Officer and Treasurer (Principal Financial and
Scott J. Bendert Accounting Officer)
/s/Gordon H. Loetz Executive Vice President, Chief Operating March 16, 1998
- --------------------- Officer and Director
Gordon H. Loetz
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
/s/Furman P. Bodenheimer, Jr. March 16, 1998
- -----------------------------
Furman P. Bodenheimer, Jr. Director
/s/John D. Gannett, Jr. March 16, 1998
- -----------------------------
John D. Gannett, Jr. Director
/s/H. Parks Helms March 16, 1998
- -----------------------------
H. Parks Helms Director
/s/Ernest J. Milani March 16, 1998
- -----------------------------
Ernest J. Milani Director
/s/Adelaide A. Sink March 16, 1998
- -----------------------------
Adelaide A. Sink Director
/s/R. James Stroker March 16, 1998
- -----------------------------
R. James Stroker Director
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Sykes Enterprises, Incorporated
We have audited the consolidated balance sheet of Sykes Enterprises,
Incorporated and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1997, which financial statements are
included on pages 24 through 44 of the Sykes Enterprises, Incorporated and
subsidiaries Annual Report and incorporated by reference herein. We have also
audited the financial statement schedule on page 26 of this Form 10-K. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sykes
Enterprises, Incorporated and subsidiaries as of December 31, 1997 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
We previously audited and reported on the consolidated statements of income and
cash flows of Sykes Enterprises, Incorporated and subsidiaries for the years
ended December 31, 1995 and 1996, prior to their restatement for the 1997
pooling of interest of McQueen International Limited. The contribution of Sykes
Enterprises, Incorporated and subsidiaries to revenues and net income
represented 69 percent and 69 percent in 1995 and 73 percent and 84 percent in
1996, respectively, of the respective restated totals. Separate financial
statements of McQueen International Limited included in the 1995 and 1996
restated consolidated statements of income and cash flows were audited and
reported on separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and the
statements of income and cash flows for the years ended December 31, 1995 and
1996, after restatement for the 1997 pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Notes 1 and 2 of notes to consolidated financial statements.
Coopers & Lybrand L.L.P.
Tampa, Florida
March 6, 1998
24
<PAGE> 25
MCQUEEN INTERNATIONAL LIMITED
REPORT OF THE INDEPENDENT AUDITORS
Board of Directors
McQueen International Limited
We have audited the consolidated balance sheets of McQueen International Limited
and its subsidiaries as of February 28, 1997 and 1996 and the related
consolidated statement of earnings, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McQueen
International Limited and its subsidiaries as of February 28, 1997 and 1996 and
the consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles in the United States.
GRANT THORNTON
Edinburgh
United Kingdom
February 18, 1998
25
<PAGE> 26
SYKES ENTERPRISES, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Additional
Charge to
Beginning Cost and Ending
Balance Expenses Deductions(1) Balance
--------------- ------------------- ------------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful
Accounts.............................. $192,396 $251,200 $132,857 $310,739
Year ended December 31, 1996
Allowance for doubtful
Accounts.............................. 310,739 317,811 130,421 498,129
Year ended December 31, 1997
Allowance for doubtful
Accounts.............................. 498,129 167,396 128,130 537,395
- --------------------------
</TABLE>
(1) Write-offs and recoveries
26
<PAGE> 27
EXHIBIT INDEX
Exhibit
Number Exhibit Description
2.1 -- Articles of Merger between Sykes Enterprises, Incorporated, a
North Carolina corporation, and Sykes Enterprises,
Incorporated, a Florida corporation, dated March 1, 1996. (1)
2.2 -- Articles of Merger between Sykes Enterprises, Incorporated and
Sykes Realty, Inc. (1)
2.3 -- Stock Purchase Agreement dated July 1, 1996 among Sykes
Enterprises, Incorporated and Johan Holm, Arne Weinz and
Norhold Invest AB. (2)
2.4 -- Stock Purchase Agreement dated August 30, 1996 among Sykes
Enterprises, Incorporated and Gordon H. Kraft. (3)
2.5 -- Merger Agreement dated as of January 10, 1997 among Sykes
Enterprises, Incorporated, Info Systems of North Carolina,
Inc. and ISNC Acquisition Co. (4)
2.6 -- Stock Purchase Agreement dated March 28, 1997 among Sykes
Enterprises, Incorporated, Sykes Holdings of Belgium,
B.V.B.A., Cycle B.V.B.A. and Michael McMahon. (6)
2.7 -- Joint Marketing and Distribution Agreement dated April 30,
1997 by and between Sykes Enterprises, Incorporated and
SystemSoft Corporation. (10)
2.8 -- Common Stock Purchase Agreement dated May 6, 1997 by and
between Sykes Enterprises, Incorporated and SystemSoft
Corporation. (10)
2.9 -- Acquisition Agreement, dated May 30, 1997, by and among the
holders of all of the capital interests of Telcare
Gesellschaft fur Telekommunikations-Mehrwertdienste mbH, Sykes
Enterprises GmbH, and Sykes Enterprises, Incorporated. (7)
2.10 -- Acquisition Agreement, dated September 19, 1997, by and among
the holders of all of the capital interests of TAS
Telemarketing Gesellschaft fur Kommunikation und Dialog mbH,
Sykes Enterprises GmbH, and Sykes Enterprises, Incorporated.
(8)
2.11 -- Acquisition Agreement, dated September 25, 1997, by and among
the holders of all of the capital interests of TAS Hedi
Fabinyi GmbH, Sykes Enterprises GmbH, and Sykes Enterprises,
Incorporated. (8)
2.12 -- Shareholder Agreement, dated December 18, 1997, by and among
Sykes Enterprises, Incorporated and HealthPlan Services
Corporation (filed herewith).
27
<PAGE> 28
2.13 -- Acquisition Agreement, dated December 31, 1997, by and among
the holders of all of the capital interests of McQueen
International Limited and Sykes Enterprises, Incorporated.
(11)
3.1 -- Articles of Incorporation of Sykes Enterprises, Incorporated
as amended. (12)
3.2 -- Bylaws of Sykes Enterprises, Incorporated, as amended. (12)
4.1 -- Specimen certificate for the Common Stock of Sykes
Enterprises, Incorporated. (1)
10.1 -- Loan Agreement between NationsBank, N.A. and Sykes
Enterprises, Incorporated dated as of December 31, 1996. (6)
10.2 -- Employment Agreement dated as of January 1, 1996 between John
H. Sykes and Sykes Enterprises, Incorporated. (1)
10.3 -- Form of Employment Agreement between executive officers and
Sykes Enterprises, Incorporated. (1)
10.4 -- Stock Option Agreement between Sykes Enterprises, Incorporated
and David E. Garner dated as of December 31, 1995. (1)
10.5 -- 1996 Employee Stock Option Plan. (1)
10.6 -- 1996 Non-Employee Director Stock Option Plan. (1)
10.7 -- 1996 Non-Employee Directors' Fee Plan. (1)
10.8 -- Form of Split Dollar Plan Documents. (1)
10.9 -- Form of Split Dollar Agreement. (1)
10.10 -- Form of Indemnity Agreement between directors and executive
officers and Sykes Enterprises, Incorporated. (1)
10.11 -- Aircraft Lease Agreement between JHS Leasing of Tampa, Inc. as
lessor and Sykes Enterprises, Incorporated as lessee, dated
December 1, 1995. (1)
10.12 -- Single Tenant Property Lease Agreement between Sykes
Investments as landlord and Sykes Enterprises, Incorporated as
tenant dated October 31, 1989, for building in Charlotte,
North Carolina. (1)
10.13 -- Tax Indemnification Agreement between Sykes Enterprises,
Incorporated and John H. Sykes. (1)
10.14 -- Consultant Agreement between Sykes Enterprises, Incorporated
and E.J. Milani Consulting Corp. dated April 1, 1996. (1)
28
<PAGE> 29
13.1 -- 1996 Sykes Enterprises, Incorporated Annual Report (incorporates
sections only in electronic filing).
21.1 -- List of subsidiaries of Sykes Enterprises, Incorporated.
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Grant Thornton.
24.1 -- Power of Attorney relating to subsequent amendments (included on
the signature page of this report).
27.1 -- Financial Data Schedule (for SEC use only).
99.1 -- McQueen International Limited Consolidated Financial Statements
for Years Ended February 28, 1997 and 1996 (filed herewith).
99.2 -- McQueen International Limited Pro Forma Financial Statements for
Ten Months Ended December 31, 1997 (filed herewith).
- ---------------
(1) Filed as the same numbered Exhibit to Registration No. 333-2324 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 31,
1996 and incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Form 8-K dated September
16, 1996 and incorporated herein by reference.
(4) Included as Appendix A to the Proxy Statement/Prospectus contained
in the Registrant's Registration Statement on Form S-4
(Registration No. 333-20465) and incorporated herein by this
reference.
(5) Filed as an Exhibit to the Registrant's Form 8-K dated March 30,
1997 and incorporated herein by reference.
(6) Filed as Exhibit 2.5 to the Registrant's Registration Statement on
Registration No. 333-20465.
(7) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated June 16, 1997 and incorporated herein by reference.
(8) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated September 26, 1997 and incorporated herein by reference.
(9) Filed as the same numbered Exhibit to Registrant's Registration
Statement on Form S-3 (Registration No. 333-38513) and incorporated
herein by reference.
(10) Filed as an Exhibit to the Registrant's Form 10-Q dated June 29,
1997 and incorporated herein by reference.
(11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K
dated January 15, 1998 and incorporated herein by reference.
(12) Filed as an Exhibit to Registrant's Registration Statement on Form
S-3 (Registration No. 333-38513) and incorporated herein by
reference.
(13) Filed as an Exhibit to Registrant's Registration Statement on Form
S-3 (Registration No. 333-46569) and incorporated herein by
reference.
29
<PAGE> 1
Exhibit 2.12
SHAREHOLDER AGREEMENT
by and among
SYKES ENTERPRISES, INCORPORATED
and
HEALTHPLAN SERVICES CORPORATION
=============================================================================
December 11, 1997
=============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. ORGANIZATION AND PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. Scope and Purpose of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4. Articles of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5. Registered Office/Location of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6. Authorized Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7. No Partnership or Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1. Initial Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2. Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3. Lending Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4. Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. VOTING OF SHARES AND GOVERNANCE OF NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1. Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2. Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.5. Actions by Board of Directors to Follow Shareholder Consent . . . . . . . . . . . . . . . . . . . . 5
3.6. Actions by Board of Directors Requiring a Super Majority Vote . . . . . . . . . . . . . . . . . . . 5
3.7. Budget and Business Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.8. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.9. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.10. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.11. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.12. Severance of Business Relationship Upon Deadlock of Board of Directors or Investor Shareholders . . 8
4. PREEMPTIVE RIGHTS, RIGHT OF FIRST REFUSAL, TAG-ALONG RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2. Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3. Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4. Sale of Shares to a Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.5. Determination of Share Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6. Remedy for Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.7. Endorsement on Certificates Evidencing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
i
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<TABLE>
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5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.1. Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.2. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.3. No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6. OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1. Noncompetition; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.2. HSR Act Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3. Subcontract for Existing Call Center Services of HPS . . . . . . . . . . . . . . . . . . . . . . . . 19
6.4. Support Service Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5. SEi Call Center Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. CONDITIONS PRECEDENT TO OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.1. Representations and Warranties True on the Closing Date . . . . . . . . . . . . . . . . . . . . . . 20
7.2. Compliance With Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.3. Absence of Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4. Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.1. Documents to be Delivered by SEi and HPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2. Organization Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.1. Survival of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.2. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.3. Consequences of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.4. Dissolution of Newco Upon Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10. FURTHER ASSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11. DISCLOSURES AND ANNOUNCEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12. ASSIGNMENT; PARTIES IN INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.1. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.2. Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13. RESOLUTION OF DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13.1. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13.2. Arbitrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
13.3. Procedures; No Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
ii
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<TABLE>
<CAPTION>
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----
<S> <C> <C>
13.4. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
13.5. Entry of Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
13.6. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
13.7. Continued Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
13.8. Tolling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
13.9. Expenses of Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
14. LAW GOVERNING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
15. AMENDMENT AND MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17.1. Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17.2. Pre-Closing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17.3. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17.4. Costs of Litigation or Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
19. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
20. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
21. FURTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Articles of Incorporation of Newco
Exhibit B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bylaws of Newco
Exhibit C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Agreements
Exhibit D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes
</TABLE>
iii
<PAGE> 5
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT ("Agreement") is made and entered into on
December 11, 1997, by and among SYKES ENTERPRISES, INCORPORATED, a Florida
corporation ("SEi"), and HEALTHPLAN SERVICES CORPORATION, a Delaware
corporation ("HPS") (SEi and HPS are sometimes referred to individually as an
"Investor Shareholder" and together with those persons signing from time to
time as a shareholder are referred to individually as a "Shareholder" and
collectively as the "Shareholders").
Upon the formation of Sykes HealthPlan Services, Inc. ("Newco")
pursuant to Section 1.1 below, Newco shall also become a party to this
Agreement.
WHEREAS:
A. HPS is a provider of marketing, administration and risk
management services and solutions for health and other benefit programs;
B. SEi provides information technology outsourcing services,
including information technology support services and information technology
development services and solutions;
C. SEi and HPS desire to establish a new business venture for the
purpose of providing information technology support services through call
centers for health insurance, managed care and other benefit programs;
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. ORGANIZATION AND PURPOSE
1.1. Formation. As soon as practicable following the execution of
this Agreement and pursuant to the terms and conditions of this Agreement, SEi
and HPS shall organize a new Florida corporation.
1.2. Name. The name of Newco shall be Sykes HealthPlan Services,
Inc. If such name is unavailable, SEi and HPS shall promptly agree on another
name.
1.3. Scope and Purpose of Business. The purpose of Newco shall be
to build, own and operate call centers focused on customer services related to
the insurance industry, health care management services and such other health
industry related services as may be approved from time to time by the requisite
vote of the Board of Directors of Newco, and to market and sell such services
throughout the United States.
<PAGE> 6
(a) Articles of Incorporation and Bylaws. The Articles
of Incorporation and Bylaws of Newco shall be substantially in the form of
Exhibits A and B hereto, respectively. Each of the Shareholders shall take, and
shall cause the director or directors of Newco elected by it to take, all
actions necessary to ensure that the Articles of Incorporation and Bylaws of
Newco do not at any time conflict with the provisions of this Agreement.
1.4. Registered Office/Location of Facilities. The administrative
offices of Newco shall first be located at Tampa, Florida.
1.5. Authorized Capital. The aggregate number of shares which
Newco shall initially have authority to issue shall be Ten Million (10,000,000)
shares of Class A voting common stock having a par value of $.01 per share (the
"Shares") and Two Million (2,000,000) shares of Class B nonvoting common stock
having a par value of $.01 per share.
1.6. No Partnership or Joint Venture. The parties acknowledge that
Newco, as a newly formed Florida corporation, constitutes an independent and
distinct legal entity. Neither this Agreement nor any other document delivered
in connection herewith, nor any prior agreements, actions or omission shall in
any respect be interpreted, deemed or construed as making any Shareholder a
partner or joint venturer with Newco or any other Shareholder or any of them,
and the parties agree not to make any contrary assertion, contention, claim or
counterclaim in any action, suit or other legal proceeding.
2. CAPITAL CONTRIBUTIONS
2.1. Initial Contributions. At the Closing, SEi and HPS shall each
subscribe for and make initial capital contributions to Newco of $2,959,200.
2.2. Method of Payment. All payments under this Article 2 shall be
made by wire transfer of immediately available funds to an account designated
by the recipient not less than 48 hours prior to the time for payment specified
herein.
2.3. Lending Commitment.
(a) At the Closing, SEi and HPS shall each commit to make
available to Newco a term loan in the amount of $9,040,800 which shall be drawn
upon by Newco from time to time in increments of $100,000 (the "Loans"). The
Loans shall require quarterly interest only payments with all outstanding
principal and interest due three (3) years from the date hereof. Such lending
commitment and loan shall be evidenced, and described in further detail, by
Loan Agreements in the forms of each Exhibit C hereto (the "Loan Agreements"),
and the related forms of promissory notes of Newco also included in Exhibit D
hereto (the "Notes").
2
<PAGE> 7
(b) SEi and HPS shall each fund 50% of the total Loans. All
payments by Newco of principal and interest shall be applied pro rata to the
respective loans from SEi and HPS. SEi and HPS further covenant among
themselves that in the event action to collect the Loans becomes necessary or
desirable, SEi and HPS shall coordinate and cooperate, in good faith, to collect
the Loans and shall share the net proceeds (after payment of all costs and
expenses of collection, including reasonable attorneys fees) ratably so that SEi
and HPS each receive simultaneous payment of an amount that is equal to the
ratio of (A) the total amount of indebtedness of Newco owed to each of them on
the Loans, respectively, from time to time, and at each relevant time, to (B)
the aggregate amount of indebtedness of Newco to both of them on the Loans, from
time to time, and at each relevant time until the aggregate indebtedness of
Newco to each of them has been paid in full. SEi and HPS shall promptly give
written notice to the other of the occurrence of a "default" or "event of
default" or any condition or event that, with notice or lapse of time, or both,
would give such party the right to accelerate payment of any indebtedness of
Newco owed to it under any agreement, instrument or document to which Newco is a
party. SEi and HPS also shall promptly give written notice to the other if it
demands payment of, or takes action to collect, its Loan. SEi and HPS covenant
among themselves that they shall not amend their respective Loan Agreements or
take any collateral or security for their Loans without the consent of the
other, it being the intention of both that their Loan Agreements should contain
identical provisions to make their Loans pari passu to the greatest extent
possible. SEi and HPS covenant among themselves to execute and deliver such
other and further documents and instruments as may be necessary or desirable to
implement fully or evidence further the provisions of this Section 2.3.(b).
(c) The parties acknowledge that if either Investor
Shareholder defaults in its obligations to fund its share of the Loans, as
provided in subsections (a) and (b) above, and such borrowing has previously
been approved by Newco's Board of Directors pursuant to the terms of the annual
Budget adopted in accordance with Section 3.6, then the nondefaulting Investor
Shareholder shall have the right, but not the obligation, to fund the shortfall
pursuant to a senior convertible note issued by Newco and Newco shall have the
right to borrow from the nondefaulting Investor Shareholder upon the following
terms and conditions: (i) the loan shall be due and payable on demand; (ii)
Newco shall pay interest on the principal balance at five percent (5%) in excess
of the 30-day LIBOR Rate; (iii) the senior convertible note (which shall be
subordinate to Newco's senior bank credit facility) shall be senior in payment
and priority to all Loans payable to either Investor Shareholder; (iv) at the
option of the nondefaulting Investor Shareholder, the senior convertible note
shall be convertible, in whole or in part, into Shares, at a conversion price
per share equal to the original purchase price paid for Shares at Closing
(determined by dividing the initial capital contributions from the Investor
Shareholders to Newco by the total number of Shares issued to the Investor
Shareholders, with an appropriate adjustment for any stock splits) if the
defaulting Investor Shareholder does not refinance the senior convertible note
(i.e., fund its pro rata share of all Loans so that the senior convertible note
is repaid by Newco), within six months of the date funds are advanced by the
nondefaulting Investor Shareholder; and (v) if any Investor Shareholder converts
more than $5 million (in the aggregate)
3
<PAGE> 8
of senior convertible notes to Shares, the super majority voting requirements
(including Sections 3.5 and 3.6), voting agreement concerning election of
directors (including Section 3.2, 3.3 and 3.4) and all other provisions of this
Agreement designed to give shared control of Newco to each Investor Shareholder
shall no longer apply, thereby providing, among other things, that the
nondefaulting Investor Shareholder shall have control of Newco's Board of
Directors. The Shareholders and Newco shall have the right to implement this
subsection (c) and Newco shall have the right to borrow pursuant to the senior
convertible notes contemplated herein, without any further approval or action
by any Shareholder or any director nominated or designated by the defaulting
Investor Shareholder, and the Shareholders covenant among themselves to take
such further actions and to execute and deliver such other and further
documents and instruments as may be necessary or desirable to implement fully
or evidence further the provisions of the Section 2.3(c).
(d) The parties acknowledge and confirm that SEi and HPS
are arm's length lenders with respect to the Loans. The parties acknowledge
that SEi and HPS shall exercise their respective remedies under the Notes and
Loan Agreements to collect the Loans if Newco defaults.
2.4. Issuance of Shares. In exchange for the initial capital
contribution described in Section 2.1, SEi and HPS each shall be issued
5,000,000 Shares at the Closing.
3. VOTING OF SHARES AND GOVERNANCE OF NEWCO
3.1. Number of Directors. Each Shareholder agrees to vote its
Shares and all Shares as to which the Shareholder is entitled to exercise
voting power at any meeting of shareholders in favor of a resolution fixing the
number of directors of Newco at two (2), or such greater number as SEi and HPS
may mutually agree from time to time.
3.2. Voting Agreement. Each Shareholder agrees to vote its Shares
in favor of one individual (or if the number of directors is increased to more
than two, one-half of the total directors at each relevant time) who shall be
nominated as a director by SEi (the "SEi Directors") and in favor of one
individual (or if the number of directors is increased to more than two,
one-half of the total directors at each relevant time) who shall be nominated
as a director by HPS (the "HPS Directors").
3.3. Vacancies. In the event of a vacancy on the Board of
Directors with respect to a SEi Director, each Shareholder agrees to vote its
Shares and all Shares as to which the Shareholder is entitled to exercise
voting power for any individual nominated in writing by SEi; and in the event
of a vacancy on the Board of Directors with respect to a HPS Director, each
Shareholder agrees to vote its Shares and all Shares as to which the
Shareholder is entitled to exercise voting power for an individual nominated in
writing by HPS. Until any such vacancy is filled, the Board of Directors shall
not take any action unless the Shareholder with the right to fill the vacancy
consents in writing.
4
<PAGE> 9
3.4. Removal. Newco agrees to call meetings of its Board of
Directors to be held at least quarterly. If at any time between meetings of
Shareholders of Newco, SEi or HPS shall request the right to remove one or more
of the SEi Directors or one or more of the HPS Directors, respectively, which
were originally nominated by such party or to elect or appoint to the Board of
Directors a nominee to which it is entitled pursuant to this Article 3, each
party hereto shall use its best efforts to bring about the immediate removal of
such director or the election or appointment of such nominee to the Board of
Directors, as the case may be.
3.5. Actions by Board of Directors to Follow Shareholder Consent.
The Board of Directors shall not take any of the following actions, except upon
the prior affirmative vote of not less than 90% of the total number of the then
outstanding shares of the capital stock of Newco entitled to vote thereon, or
with the written consent of such Shareholders:
(a) sale of all or substantially all of the assets of
Newco or any of its subsidiaries;
(b) any material acquisition (including acquisition of
stock or assets) of any other company, business or enterprise;
(c) any merger or consolidation involving Newco or any of
its subsidiaries or the dissolution or liquidation of Newco or any of its
subsidiaries;
(d) any payment of any dividend in cash or property other
than cash by Newco or redemption of any Shares;
(e) any recapitalization, restatement of assets,
reduction of capital or other change in the capitalization of Newco or its
subsidiaries;
(f) any issuance or reissuance or agreement to issue or
reissue any capital stock of Newco or any option or warrant for, or any
security convertible into, any capital stock of Newco;
(g) any filing of any registration statement of the
Securities Act of 1933, as amended;
(h) the amendment to the Articles of Incorporation or
Bylaws of Newco;
(i) the acquisition by Newco of material assets unrelated
to the business described in Section 1.3 of this Agreement; or
(j) engaging in a material line of business other than
the business described in Section 1.3 of this Agreement.
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3.6. Actions by Board of Directors Requiring a Super Majority Vote.
The Board of Directors shall not take any of the following actions, except upon
the prior affirmative vote of all of the directors:
(a) approval or revision of the annual Budget in form
acceptable to the Board of Directors setting forth the estimated receipts and
expenditures of, capital expenditures of, and reasonable reserves for working
capital for, Newco for the succeeding calendar year;
(b) capital improvements or expenditures (including
capitalized leases and interest costs) in excess of $50,000 which are not
included in the Budget approved by the Board of Directors;
(c) filing of bankruptcy;
(d) any issuance, reissuance or redemption by Newco of
any shares of its capital stock or securities convertible into or exchangeable
for shares of such stock, including any options, warrants or other rights to
purchase or otherwise acquire any shares of such stock or securities
convertible into or exchangeable for such stock;
(e) any declaration of dividends by Newco;
(f) the selection of corporate officers of Newco and the
determination of the compensation and benefits payable to each such officer;
(g) any proposal for Newco to (i) create, assume or
incur, or become liable in respect of, any indebtedness in excess of $100,000
per obligation, except for accounts payable incurred in the ordinary course of
business and indebtedness included in the Budget approved by the Board of
Directors, (ii) become a lessee of real property if the annual rentals payable
under the relevant lease would exceed $100,000, (iii) acquire the securities
of, make any other investment in, any other person, or (iv) make loans, provide
guarantees or otherwise extend or pledge credit to others with respect to any
such loan, guarantee, extension or pledge, except endorsements and extensions
of credit in the ordinary course of operations of Newco;
(h) any proposal for Newco to confess any judgment
against Newco or create, assume, incur, or suffer to be created, assumed or
incurred or to exist, any mortgage, pledge, encumbrance, lien or charge of any
kind (each, a "Lien") upon any of the assets or properties of Newco, or to
acquire or hold or agree to acquire or hold any such assets or properties
subject to any such Lien if such Lien is proposed in connection with any
proposal referred to in paragraph (g) above except in the normal course of
business and in accordance with the Budget approved by the Board of Directors;
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(i) any proposal for Newco to sell or transfer any assets
of Newco valued in excess of $10,000 in one or a series of related transactions
not in the ordinary course of business;
(j) any proposal to enter into any contract, obligation,
commitment, capital investment, or any other program involving aggregate
expenditures reasonably estimated to be in excess of $200,000;
(k) any proposal for Newco to acquire the capital stock
or assets of another entity;
(l) any proposal to select or change Newco's independent
auditors, legal counsel or any outside consultant which shall be paid more than
$75,000 during any fiscal year;
(m) make a gift, loan, advance or political contribution
to any person, except loans and advances to employees of up to $2,500 for
ordinary and necessary business expenses;
(n) any decision whether to redeem or to purchase any
Shares pursuant to the Right of First Refusal contained in Section 4.3 of this
Agreement or the assignment of such right to a third party. (In deciding
whether to exercise a Right of First Refusal with respect to a disposing
Investor Shareholder's Shares, any directors designated by, or who is an
officer, director, employee or agent of the disposing Investor Shareholder,
shall abstain from voting to the extent necessary to avoid a conflict of
interest and such director's affirmative vote shall not be necessary to approve
such action); and
(o) determination of the Determined Value of Shares
pursuant to Section 4.5 of this Agreement.
3.7. Budget and Business Plans. Before the beginning of each
fiscal year management of Newco shall prepare and present to the Board of
Directors of Newco for its approval an annual budget and multi-year business
plans for Newco in accordance with timing, format and instructions to be
determined by the Board of Directors of Newco. Newco's management shall use
their reasonable good faith efforts to manage Newco's business pursuant to any
business plan or budget approved by the Board of Directors, as it may be
revised from time to time with approval of the Board.
3.8. Dividends. SEi and HPS currently anticipate that all of
Newco's earnings will be retained for development and expansion of Newco's
business and acknowledge and agree that Newco does not anticipate paying any
dividends in the foreseeable future. Notwithstanding the foregoing, dividend
policy shall be vested in the Board of Directors as provided in this Agreement.
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3.9. Fiscal Year. The fiscal year of Newco shall end on December
31 of each year. The first fiscal year of Newco shall commence upon completion
of the organization of Newco and shall end on the next succeeding December 31.
3.10. Books and Records. The Board of Directors of Newco, in
consultation with its auditors, shall establish such books, records and
accounts for Newco as are customary for corporations similarly situated and as
accurately reflect the financial condition and position of Newco in accordance
with generally accepted accounting principles. The books and records of Newco
shall be subject to inspection by any Shareholder during ordinary business
hours.
3.11. Reports. Newco shall prepare and provide the Shareholders
with unaudited monthly and quarterly financial statements (including a balance
sheet and profit and loss statement), audited annual financial statements and
such other reports as the Shareholders shall reasonably request. Newco's
management shall consult regularly with the Investor Shareholders and provide
the Investor Shareholders' designated representatives reasonable access to all
books and records of Newco.
3.12. Severance of Business Relationship Upon Deadlock of Board of
Directors or Investor Shareholders. In the event that the Board of Directors
or Investor Shareholders are deadlocked on a material matter, and such deadlock
continues for the longer of (a) three (3) consecutive meetings (including
special meetings) or (b) ninety (90) days, either SEi or HPS may institute a
severance of business relationship as provided in this Section 3.12.
(a) Notice of Intent to Pursue Severance. SEi or HPS may
send a Deadlock Notice to Newco and the other Investor Shareholder proposing a
resolution of the deadlock and providing notice that if the proposal is not
accepted by the other Investor Shareholder within twenty (20) days, SEi or HPS
may institute a severance of business relationship as provided below. A
"Deadlock Notice" means a written notice to be delivered to Newco and each
other Investor Shareholder by SEi or HPS which shall state that a deadlock
exists among the Board of Directors or the Investor Shareholders concerning a
material issue, and shall describe SEi or HPS's proposed resolution of the
deadlock, and shall provide notice that unless the other Investor Shareholder
accepts the proposal within twenty (20) days, SEi or HPS may institute the
severance of business relationship procedures pursuant to this Section 3.12.
(b) Initiation of Severance. If the deadlock continues
to exist for more than twenty (20) days after mailing of the Deadlock Notice
provided in Section 3.12.(a), for a period of thirty (30) days thereafter, SEi
or HPS (called the "Severing Shareholder"), if it wishes to sever its
relationship in Newco with the other Investor Shareholder (the "Responding
Shareholder"), it shall so notify the Responding Shareholder and Newco in
writing (the "Severance Notice") stating a date not less than thirty (30) days
after the mailing of such notice when the Severing Shareholder wishes the
severance to take place. The Severance Notice shall also state the price per
Share which the Severing Shareholder believes is the fair market value for the
Shares then outstanding
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(the "Severance Price"). If, however, neither Investor Shareholder delivers a
Severance Notice within thirty (30) days following the Investor Shareholder's
failure to accept the proposed resolution, then such severance opportunity will
lapse as though the Deadlock Notice had never been given.
(c) Response. The Responding Shareholder shall have
thirty (30) days after the mailing of the Severance Notice to advise the
Severing Shareholder, in writing, whether the Responding Shareholder wishes (i)
to sell all of its Shares to the Severing Shareholder for the Severance Price
per Share, or (ii) to purchase all of the Severing Shareholder's Shares for the
Severance Price per Share. If the Responding Shareholder does not advise the
Severing Shareholder of its election within that time, the Responding
Shareholder shall be deemed to have elected to sell all its Shares to the
Severing Shareholder.
(d) Closing. Upon the effective date of the Severance as
designated in the Severance Notice, the purchase or sale of Shares as described
above shall be closed in Newco's principal business office and all appropriate
documents will be executed and delivered to effect the severance of the
relationship and sale of Shares, free and clear of all encumbrances. The
Severance Price shall be paid by the purchasers to the sellers in immediately
available funds.
(e) Continued Operation. Newco shall continue to operate
during any period of deadlock or dispute and during the continuance of any
default under this Agreement (or alleged default), and in no event shall a
deadlock, dispute or allegation of default interfere with the right of the
directors and officers of Newco to operate within the scope of business
activity contemplated by Section 1.3 of this Agreement; provided, however, that
no action may be taken by the directors and officers that would prejudice the
outcome of any matter in deadlock, any dispute or any allegation of default,
except with the consent of 100% of the members of the Board of Directors;
provided, however, that the service activities (and all related marketing,
administrative, and other activities) of Newco in accordance with the Business
Plan and Budget shall not be stopped or delayed, except with the consent of
100% of the members of the Board of Directors.
(f) Only Exercise if Substantial Business Disagreement.
The parties may only exercise the Severance Provisions of this Section 3.12 if
the Investor Shareholders have a substantial disagreement regarding the
management or future direction of Newco. Examples of areas of potential
"substantial disagreements" include, without limitation, (i) whether Newco
should go public, (ii) whether Newco should be sold, (iii) whether Newco should
make a material acquisition, (iv) termination of a senior executive, and (v)
whether to approve an annual business plan and budget. After delivery of a
Deadlock Notice, the potential Severing Shareholder shall thereafter be
available, upon reasonable prior notice, to meet with the Responding
Shareholder (and in the case of SEi or HPS, they shall make their respective
chairmen and chief executive officers available to meet with each other) and
discuss in good faith the potential resolution to the substantial disagreement.
For a period of sixty (60) days following the expiration of such thirty
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(30) days prior written notice period, either Investor Shareholder may
thereafter institute the Severance of Business Relationship as provided under
subsection (b) of this Section 3.12. Notwithstanding the foregoing, the
Responding Shareholder may prevent the Severance from occurring by accepting
and agreeing to the resolution of the substantial disagreement proposed by the
Severing Shareholder and agreeing to take such further action as the Severing
Shareholder reasonably requests to implement such resolution. (Such agreement
by the Responding Shareholder must be made by written notice delivered prior to
the time that the Responding Shareholder is otherwise required to elect to buy
or sell pursuant to subsection (c) of this Section 3.12.
(g) Applicability of Arbitration. The right to initiate
a severance of business relationship as described herein shall supersede the
agreement to arbitrate a dispute contained in Section 13 of this Agreement,
except that the parties shall arbitrate any dispute concerning whether a
particular dispute constitutes a "deadlock on a material matter" as described
herein.
(h) Repayment of Loans/Release of Guarantees. In the
event of a severance of Business Relationship under this Section 3.12, at the
Closing the purchasing Shareholder shall cause Newco to repay in full all Loans
from the selling Shareholder and shall cause the selling Shareholder to be
released from all guarantees of Newco's indebtedness.
4. PREEMPTIVE RIGHTS, RIGHT OF FIRST REFUSAL, TAG-ALONG RIGHTS
4.1. Definitions. For purposes of this Article 4, the following
terms shall have the following meanings:
(a) "Dispose of" means any transfer or assignment,
whether voluntary or involuntary to a person other than a Permitted Transferee,
whether by sale, exchange, pledge, encumbrance, judicial attachment,
contribution to a trust or other entity, or otherwise. "Dispose of" shall not
include: (i) a pledge of shares to a responsible financial institution in the
United States, as collateral security for a bona fide loan made by such
financial institution, provided that such financial institution agrees in
writing that any disposition of the pledged shares for the account of the
pledging Shareholder in the event of any default by such Shareholder shall be
subject to the obligations imposed on such Shareholder by this Agreement,
including but not limited to the right of first refusal granted to Newco and
the other Shareholders hereunder, or (ii) a disposition to a wholly owned
subsidiary of a Shareholder, so long as such transferees agree in writing to be
bound by the terms of this Agreement.
(b) "Disposing Shareholder" means a Shareholder who
desires to Dispose of all or a part of the shares owned by that Shareholder.
(c) "First Refusal Notice" means the written notice to be
mailed to Newco and SEi and HPS by the Disposing Shareholder which shall
describe in adequate detail the terms and
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conditions offered by, and the identity of, a bona fide prospective purchaser,
lender or other transferee to whom the Disposing Shareholder is considering
Disposing of all or a part of the Disposing Shareholder's shares, which notice
shall include a complete copy of the written offer of such purchaser, lender or
other transferee.
(d) "First Refusal Price" means the price agreed upon
between the Disposing Shareholder and the party or parties electing to exercise
a right of first refusal under the terms hereof. In the absence of an agreed
upon price, the term shall mean a purchase or redemption on terms and
conditions substantially the same as those described in the First Refusal
Notice given to the other parties hereto in accordance with the terms of this
Agreement. In the event such notice describes terms and conditions that are
unique to a proposed transaction and cannot readily be assumed by other
parties, e.g., an exchange of shares in return for property or services, or in
the event of a proposed gift, in the absence of an agreed upon price, the First
Refusal Price shall be the Determined Value as provided in Section 4.5.
(e) "Permitted Transferee" means a wholly owned
subsidiary of a Shareholder, provided, however, that no person shall become a
"Permitted Transferee" without first agreeing to be bound by the terms of this
Agreement in a manner satisfactory to Newco's Board of Directors.
(f) "Pro Rata" means with respect to any right to
acquire shares hereunder, pro rata based upon the number of shares owned by
those Shareholders (assuming more than two parties are Shareholders under this
Agreement) who shall duly exercise their option to acquire any shares offered
hereunder. Thus, if only two Shareholders, each owning ten percent (10%) of
Newco's shares, should elect to exercise their right of first refusal granted
in this Agreement, each of them would have the right to purchase fifty percent
(50%) of the shares available for purchase. "Pro Rata" means with respect to
Tag-along Rights, pro rata based on the ratio of the shares proposed to be sold
in the transaction to the total number of shares then outstanding.
4.2. Preemptive Rights.
(a) Right of First Refusal for Purchase of Stock Sold by
Newco. If at any time Newco shall propose to sell any additional securities
(including any stock held in the treasury and securities convertible into
additional stock), Newco shall give the Investor Shareholders a written notice
which shall describe in adequate detail the terms and conditions on which the
Company proposes to sell additional securities, including, if applicable,
conditions offered by, and the identity of, a bona fide prospective purchaser
(the "Company First Refusal Notice") respecting such securities, offering them
for disposition at the First Refusal Price.
(b) Time for Election to Purchase. Any Investor
Shareholder electing to purchase any of the securities so offered for purchase
shall notify Newco and the other Investor Shareholder of that election within
the time period for elections set forth in the Newco First
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Refusal Notice, which shall be a reasonable period of time under the
circumstances after the date of mailing of the Company First Refusal Notice.
Such notice shall specify the number of securities that the Shareholder is
willing to purchase. In the event that any electing Investor Shareholder is
unwilling to purchase the entire Pro Rata portion of securities allocable to
such Investor Shareholder for purchase, the portion rejected shall be allocated
to the other electing Investor Shareholder if and to the extent it has
indicated in its notice that it is willing to purchase more than what would be
their Pro Rata portion if all Shareholders elected to exercise in full their
right of first refusal. If an election to purchase shall not have been timely
made as to the securities, or any portion thereof, offered for purchase, the
portion of such securities as to which a right of refusal has not been
exercised hereunder may, during a period of sixty (60) days after the
expiration of the first refusal period granted herein to the Investor
Shareholders, be sold upon substantially the same terms and conditions
described in the Company First Refusal Notice previously given, provided that
the purchaser executes this Agreement and agrees to be bound by the terms
hereof. If, however, such securities shall not have been so sold, in whole or
in part, within that sixty (60) day period, then a new Company First Refusal
Notice must be sent hereunder to SEi and HPS in the event that Newco wishes to
sell such securities.
(c) Closing of Purchase. If SEi or HPS elects to
purchase all or any portion of the securities offered by Newco for purchase,
the purchase shall be closed and the securities delivered free and clear of all
liens and encumbrances, (other than any purchase money liens taken back by
Newco at the closing, if applicable) at a closing to be held at the principal
offices of Newco within (30) days after the expiration of the first refusal
period granted herein to the Investor Shareholders.
4.3. Right of First Refusal.
(a) Right of First Refusal for Redemption or Purchase of
Shares Disposed of by Shareholders. If at any time any Shareholder shall
desire or be required to Dispose of all or any of the shares owned by such
Shareholder, the Disposing Shareholder shall give Newco, SEi and HPS, a First
Refusal Notice respecting those shares offering them for disposition at the
First Refusal Price. If Newco, within twenty (20) days after the date of
mailing of the First Refusal Notice, does not elect to redeem all of the shares
offered for redemption or purchase in accordance with the terms of this
Agreement, then for an additional twenty-five (25) days, the Investor
Shareholders shall have the option of purchasing the remaining shares offered
for disposition, Pro Rata, at the First Refusal Price. If the Investor
Shareholders do not elect to purchase all the remaining shares, the Board of
Directors (exclusive of any Director who is designated by, or who is an
officer, director, employee or an agent of, the Disposing Shareholder or its
Affiliate), acting on behalf of Newco, may assign the right to purchase the
remaining shares at the First Refusal Price to one or more third parties
provided that such third parties pay the First Refusal Price in cash and agree
to execute a shareholder agreement acceptable to Newco and Non-disposing
Shareholders and agree to be bound by the terms hereof.
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(b) Time for Election to Redeem or to Purchase. Newco,
and/or SEi and/or HPS, and/or any assignee of Newco who elects to redeem or to
purchase any of the Shares so offered for redemption or purchase shall notify
the Disposing Shareholder, Newco and all other Shareholders of that election
within twenty (20) days after the date of mailing of the First Refusal Notice
if the electing party is Newco, or within forty-five (45) days after such date
of mailing if any Investor Shareholder or an assignee of Newco. Such notice
shall specify the number of shares that the sender is willing to purchase. In
the event that any electing Investor Shareholder is unwilling to purchase the
entire Pro Rata portion of shares allocable to such Investor Shareholder for
purchase, the portion rejected shall be allocated among the other electing
Investor Shareholder if and to the extent it has indicated in its notice that
it is willing to purchase more than what would be its Pro Rata portion if both
Investor Shareholders elected to exercise in full their right of first refusal.
If an election to redeem or to purchase shall not have been timely made, either
by Newco, and/or by the Investor Shareholders, and/or by any assignees of
Newco, or any combination of the foregoing, as to all (and not less than all)
the shares offered for redemption or purchase, such shares may, during a period
of one hundred twenty (120) days after the expiration of the first refusal
period granted herein, be Disposed of to the purchaser or other transferee
named in, and upon substantially the same terms and conditions described in,
the First Refusal Notice previously given the other parties, provided that the
transferee executes this Agreement and agrees to be bound by the terms hereof.
If, however, such shares shall have not been so Disposed of, in whole or in
part, and the certificates therefor presented for transfer within that one
hundred twenty (120) -day period, then such shares shall again become
restricted as though they had never been offered to Newco or to the Investor
Shareholders in accordance with this Agreement. No Shareholder shall dispose
of shares without first complying with the Right of First Refusal.
Shareholders other than Investor Shareholders shall have no right to purchase
shares pursuant to this Right of First Refusal, except in the capacity as
assignor of Newco.
(c) Closing of Redemption or Purchase. If Newco, and/or
SEi and/or HPS and/or any assignee(s) of Newco elect to purchase collectively
all (and not less than all) the shares offered for redemption or purchase, the
redemption and/or purchase shall be closed and the Disposing Shareholder's
shares offered for redemption or purchase shall be delivered free and clear of
all liens and encumbrances (other than any purchase money liens taken back by
the Disposing Shareholder at the closing, if applicable), at a closing to be
held at the principal offices of Newco within thirty (30) days after the
expiration of the first offer period granted herein to the Investor
Shareholders.
4.4. Sale of Shares to a Third Party.
(a) Tag-Along Rights. If, at any time, SEi or HPS (the
"Disposing Shareholders") propose to sell shares to any one or more third
parties who are not, and following such sale will not be, a wholly owned
subsidiary of an Investor Shareholder (a "Third Party"), the other Investor
Shareholder shall have the right to participate (a "Tag- Along Right") in such
sale with respect to any shares, including any shares issuable upon exercise of
any vested options or
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warrants (if any) held by such Investor Shareholder, on a Pro Rata basis for
the same consideration per Share and otherwise on the same terms as the
Disposing Shareholders. If circumstances occur which give rise to the
Tag-Along Right, then the Disposing Shareholder shall give written notice to
Newco and the other Investor Shareholder, providing the particulars of the
proposed sale to the Third Party and advising such other Investor Shareholder
of its Tag-Along Rights. This notice shall not be given until the expiration
of all rights of First Refusal under Section 4.3. The other Investor
Shareholder may exercise its Tag-Along Right by written notice to Newco and the
Disposing Shareholder within twenty-five (25) days of the date of mailing of
the Disposing Shareholder's notice stating the number of shares that it wishes
to sell, up to the maximum number permitted herein. If any Investor
Shareholder gives written notice indicating that such Investor Shareholder
wishes to sell, such Investor Shareholder shall be obligated to sell that
number of shares specified in its written acceptance notice upon the same terms
and conditions as the Disposing Shareholder is selling to the Third Party and
shall not be subject to the requirements of Section 4.3. The Tag-Along Right
provided in this Section 4.4 shall be in addition to the Right of First Refusal
provided in Section 4.3 and shall not relieve the Disposing Shareholder of the
obligation to provide the First Refusal Notice provided herein. No
Shareholder, other than an Investor Shareholder, shall have any Tag-Along
Right.
(b) Drag-Along Rights. If, at any time, any Investor
Shareholder (the "Disposing Shareholder") proposes to sell shares to a Third
Party, such Shareholder shall, upon written notice to the Company and the other
Shareholders given at least twenty-five (25) days prior to the proposed sale,
have the right to require each other Shareholder, other than an Investor
Shareholder, to participate (a "Drag-Along Right") in such sale with respect to
any shares, including any shares issuable upon exercise of any vested options,
which are held by such Shareholder, on a pro rata basis (based on the
percentage of the number of such shares held by any such Shareholder
corresponding to the relationship of the aggregate number of such shares to be
sold by the Shareholders to the total number of shares outstanding for the same
consideration per Share and otherwise on the same terms as the Disposing
Shareholder.
(c) Coordination with Options. For purposes of Section
4.4.(b), to the extent that Shares issuable upon exercise of a vested option
are to be sold pursuant to the exercise of a Drag-Along Right, the holders of
such options or securities shall not be required to exercise their options or
convert their securities, as the case may be, until all conditions to the
commitment by the Third Party to purchase the shares into which such options
are exercisable or such securities are convertible pursuant to the exercise of
a Drag-Along Right have been satisfied or waived.
4.5. Determination of Share Value. Whenever the Determined Value
of shares is required to be determined hereunder, the Determined Value shall be
agreed upon by the holder of the shares and Newco within ten (10) days
following the expiration of the applicable notice period. If the interested
Shareholders and Newco are unable to agree upon the Determined Value within
such period of time, Newco shall promptly select a firm experienced in valuing
businesses similar to Newco's business and shall promptly notify the interested
Shareholders of its selection.
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The interested Shareholders shall have ten (10) days after the receipt of such
notification to accept the firm selected by Newco or to select another firm
experienced in valuing businesses similar to Newco's. If the interested
Shareholders accept the firm selected by Newco, (i) such firm shall promptly
provide to Newco and the interested Shareholders its estimate of the Determined
Value, whereupon such estimate shall be the Determined Value, and (ii) Newco
shall pay the fees charged by such firm. If the interested Shareholders do not
accept the firm selected by Newco, such firm and the firm selected by a
majority of the interested Shareholders shall each promptly submit to Newco,
the interested Shareholders and each other its estimate of the Determined
Value. If the lower of the two estimates is greater or equal to ninety percent
(90%) of the higher of the two estimates, the average of the two estimates
shall be the Determined Value. If the lower estimate is less than ninety
percent (90%) of the higher estimate, the two firms shall select a third firm
experienced in valuing businesses similar to Newco's, which firm shall select
from the two estimates the estimate that is closest to such third firm's
estimate of the Determined Value, whereupon such selected estimate shall be the
Determined Value. In the event that a majority of the interested Shareholders
do not accept the firm selected by Newco, each of Newco and the interested
Shareholders (Pro Rata among them based on the relative number of shares owned
by each) shall pay the fees charged by the firm selected by it or them. Newco
and the interested Shareholders (Pro Rata among them based on the relative
number of shares owned by each) shall share equally the fees charged by the
third firm. The Determined Value shall be determined as of the last day of the
month preceding the date on which the right to purchase the shares arose. In
no event shall the Determined Value reflect a discount for minority interests.
The parties intend that the Determined Value per share shall be equal to the
Determined Value of Newco divided by the total number of shares outstanding
(with reasonable and appropriate adjustments for any vested stock options where
the exercise price of the option is less than the fair market value of the
shares). The Determined Value of shares issuable upon exercise of a vested
option shall be equal to the Determined Value of the underlying shares, less
the exercise price of such option.
4.6. Remedy for Violation. In the event that any person Disposes
of any shares in violation of any of the provisions of this Agreement, such
disposition shall be void. In the event any restriction on transfer herein
shall be held invalid, Newco and the other Shareholders shall have the right to
redeem or purchase, as the case may be, all or any shares disposed of in
violation of the invalidated restrictions from the then holder thereof (a) at
the price and on the terms on which such shares were acquired by such holder,
if such shares were acquired by the holder in a purchase transaction, or (b) at
the election of the redeeming or purchasing parties, or in the case of a
transaction that is unique or the terms of which cannot readily be assumed by
other parties, at the Determined Value of such shares. The rights given by
this paragraph shall accrue first to Newco and then, Pro Rata, to the Investor
Shareholders and then, Pro Rata to the other Shareholders, and then to any
assignee(s) of Newco. Newco shall notify the Shareholders promptly of the
final judgment holding the transfer restriction invalid, and shall have one
hundred twenty (120) days after the date of mailing of such notice to elect to
exercise its redemption option by mailing written notice of such election to
the holder of the shares and to the Shareholders. In the event that Newco
elects not to exercise its option hereunder as to all the shares available for
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redemption or purchase hereunder, each Shareholder shall have sixty (60) days
after the date of mailing of Newco's initial notice to notify the holder of the
shares, Newco and all other Shareholders of such Shareholder's election to
purchase all or any part of such Shareholder's Pro Rata portion of the shares.
If the other Shareholders do not elect to purchase all the remaining shares,
Newco may assign the right to purchase all or any part of the remaining shares
to one or more third parties provided that such third parties agree to execute
this Agreement and agree to be bound by the terms hereof.
4.7. Endorsement on Certificates Evidencing Shares. Each
certificate representing Shares now or hereafter held by Shareholders or their
transferees and successors, shall be stamped with a legend in substantially the
following form:
"This certificate represents Shares, the sale, disposition, pledge,
encumbrance or other transfer of which is subject to limitations and
restrictions (including without limitation, certain rights of first
refusal and mandatory purchase and sale obligations), and the voting
of which is subject to agreements and restrictions, a full statement
of which will be furnished by Newco to any Shareholder upon request
and without charge."
5. REPRESENTATIONS AND WARRANTIES
SEi, with respect to SEi, makes the following representations and
warranties to HPS, and HPS with respect to HPS, makes the following
representations and warranties to SEi, each of which, in any case, is true and
correct on the date hereof, shall remain true and correct to and including the
Closing Date, shall be unaffected by any investigation heretofore or hereafter
made by SEi or HPS, as the case may be, or any knowledge of SEi or HPS, as the
case may be, other than as specifically disclosed in the Schedules to this
Agreement, and shall survive the Closing of the transactions provided for
herein. The term "Company" as used in this Agreement, means either SEi or HPS,
as the case may be.
5.1. Corporate.
(a) Organization. SEi is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
HPS is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) Corporate Power. Company has all requisite corporate
power and authority to own, operate and lease its properties, to carry on its
business as and where such is now being conducted, to enter into this Agreement
and the other documents and instruments to be executed and delivered by it
pursuant hereto and to carry out the transactions contemplated hereby and
thereby.
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(c) Authority. The execution and delivery of this
Agreement and the other documents and instruments to be executed and delivered
by Company pursuant hereto and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the Board of Directors of the
Company. No other or further corporate act or proceeding on the part of Company
is necessary to authorize this Agreement or the other documents and instruments
to be executed and delivered by Company pursuant hereto or the consummation of
the transactions contemplated hereby and thereby. This Agreement constitutes,
and when executed and delivered, the other documents and instruments to be
executed and delivered by Company pursuant hereto will constitute, valid binding
agreements of Company, enforceable in accordance with their respective terms,
except as such may be limited by bankruptcy, insolvency, reorganization or other
laws affecting creditors' rights generally, and by general equitable principles.
5.2. No Violation. Neither the execution and delivery of this
Agreement or the other documents and instruments to be executed and delivered
by Company pursuant hereto, nor the consummation by Company of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any
rule, regulation, order, writ, injunction or decree of any court or
governmental authority, (b) except for applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), will
require any authorization, consent, approval, exemption or other action by or
notice to any court, administrative or governmental agency, instrumentality,
commission, authority, board or body, or (c) will violate or conflict with, or
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or will result in the termination of, or
accelerate the performance required by, or result in the creation of any Lien
upon any of the assets of Company, under any term or provision of the Articles
of Incorporation or Bylaws of Company or of any contract, commitment,
understanding, arrangement, agreement or restriction of any kind or character
to which Company is a party or by which Company or any of its assets or
properties may be bound or affected.
6. OTHER MATTERS
6.1. Noncompetition; Confidentiality. Subject to the Closing, and
as an inducement to execute this Agreement and complete the transactions
contemplated hereby, SEi and HPS each hereby covenant and agree as follows:
(a) Covenant Not to Compete. During the term of this
Agreement and for a period of sixty (60) months following the termination or
expiration of this Agreement, (1) Newco agrees that it will not directly or
indirectly engage in any businesses which competes with HPS in the HPS Core
Business or which competes with SEi in the SEi Core Business; (2) HPS agrees
that it will not directly or indirectly engage in any business which competes
with Newco in the Newco Core Business or with SEi in the SEi Core Business,
provided that nothing contained herein shall prohibit HPS from continuing to
provide Care Management Services pursuant to contracts with Care Management
Services already in place as of the date hereof; and (3) SEi agrees that it
will not directly or indirectly engage in any business which competes with
Newco in the
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Newco Core Business or with HPS in the HPS Core Business. This covenant not to
compete shall have worldwide scope.
For purposes of this Section 6.1, the following terms shall have the
following meanings:
(i) "HPS Core Business" means the business of
providing marketing, distribution, enrollment, premium billing and
collection, claims administration, and information services to medical
benefits payors and health care providers, including customer service
activities related thereto. While HPS is in the business of providing
Care Management Services to medical benefits payors and health care
providers and will continue to contract with payors and providers to
provide such services in the future, it shall outsource this business
to Newco pursuant to its Care Management Outsourcing Agreement with
Newco except to the extent that it currently has other contractual
commitments with other care management providers to provide such
services.
(ii) "Care Management Services" means the business
of providing utilization review (which includes, but is not limited
to, pre-admission certification, prior authorization, prospective
length of stay approvals, second opinions, concurrent review and
discharge planning), catastrophic medical case management, disease
management and demand (24 hours a day, 7 days a week) management
services to benefits payors and health care providers, including third
party administrators, provider organizations such as independent
professional associations and provider management companies.
(iii) "SEi Core Business" means the business of (A)
operating stand-alone call centers to provide (1) technical product
support services to end users for computer hardware and software
companies, and (2) help desk services to major companies to provide
their employees with help in operating their equipment and software,
(B) providing information technology development services and
solutions to large corporations on a contract or temporary staffing
basis, including software design, development integration and
implementation services, systems support and maintenance (C) providing
foreign language translation and software localization services, and
(D) providing a standalone/physically dedicated call center and
related services (both inbound and outbound) to customers.
(iv) "Newco's Core Business" means the business of
operating call centers to provide Care Management Services to medical
benefits payors, health care providers and organizations comprised of
such entities and other providers of Care Management Services, such as
third party administrators, provider organizations and provider
management companies.
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(v) "Compete" means, in addition to the customary
and accepted definition of compete, all of the following:
(A) directly or indirectly engage in,
continue in or carry on any business which competes with such
business or is substantially similar thereto, including owning
or controlling any financial interest in any corporation,
partnership, firm or other form of business organization which
is so engaged; and
(B) engage in any practice the purpose
of which is to evade the provisions of this covenant not to
compete.
The term "Competes with" shall not include the ownership of securities
of corporations which are listed on a national securities exchange or traded in
the national over-the-counter market in an amount which shall not exceed 5% of
the outstanding shares of any such corporation. The parties agree that the
geographic scope of this covenant not to compete shall extend throughout the
United States and the entire world. The parties agree that the geographic
scope of this covenant not to compete is reasonable because telecommunications
is a global business and SEi has substantial international operations. In the
event a court of competent jurisdiction determines that the provisions of this
covenant not to compete are excessively broad as to duration, geographical
scope or activity, it is expressly agreed that this covenant not to compete
shall be construed so that the remaining provisions shall not be affected, but
shall remain in full force and effect, and any such over broad provisions shall
be deemed, without further action on the part of any person, to be modified,
amended and/or limited, but only to the extent necessary to render the same
valid and enforceable in such jurisdiction. This covenant not to compete has
been separately bargained for and is a material inducement to the willingness
of the Investor Shareholders to invest in Newco and enter into this Agreement.
(b) Covenant of Confidentiality. Neither SEi, HPS nor
Newco shall at any time subsequent to the Closing, except as explicitly
requested by SEi, HPS or Newco, as the case may be, (i) use for any purpose,
(ii) disclose to any person, or (iii) keep or make copies of documents, tapes,
discs or programs containing, any confidential information concerning any other
party hereto. For purposes hereof, "confidential information" shall mean and
include, without limitation, all Trade Rights in which SEi, HPS or Newco, as
the case may be, has an interest, all customer lists and customer information,
and all other information concerning processes, apparatus, equipment, services,
marketing and distribution methods of SEi, HPS or Newco, as the case may be,
not previously disclosed to the public directly by SEi, HPS or Newco, as the
case may be. (Notwithstanding the foregoing, this provision shall not limit in
any way the Investor Shareholders' rights to consult with management of Newco
and inspect the books and records of Newco.)
(c) Equitable Relief for Violations. SEi, HPS, Newco and
the other Shareholders agree that the provisions and restrictions contained in
this Section 6.1 are necessary
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to protect the legitimate continuing interests of SEi, HPS and Newco, and that
any violation or breach of these provisions will result in irreparable injury to
SEi, HPS and Newco, respectively, for which a remedy at law would be inadequate
and that, in addition to any relief at law which may be available to SEi, HPS
and Newco, respectively, for such violation or breach and regardless of any
other provision contained in this Agreement, SEi, HPS and Newco, respectively,
shall be entitled to injunctive and other equitable relief as a court may grant
after considering the intent of this Section 6.1.
6.2. HSR Act Filings. To the extent such filings have not been
completed prior to the execution of this Agreement, SEi and HPS shall, in
cooperation with the other, file any reports or notifications that may be
required to be filed by it under the HSR Act, with the Federal Trade Commission
and the Antitrust Division of the Department of Justice, and shall furnish to
the other all such information in its possession as may be necessary for the
completion of the reports or notifications to be filed by the other. Prior to
making any communication, written or oral, with the Federal Trade Commission,
the Antitrust Division of the federal Department of Justice or any other
governmental agency or authority or members of their respective staffs with
respect to this Agreement or the transactions contemplated hereby, SEi and HPS
shall consult with each other.
6.3. Subcontract for Existing Call Center Services of HPS.
Following the Closing, and to the extent HPS is not contractually prohibited
from doing such and can obtain the necessary consents, Newco and HPS shall
enter into an agreement (the "Care Management Agreement") providing for the
subcontracting of call center services provided by HPS which relate to
utilization review, medical case management special claims review and other
managed care related services. The scope of such Agreement shall be as may be
mutually agreed upon in good faith by the parties.
6.4. Support Service Contract. Following the Closing, Newco, SEi
and HPS shall enter into a contract or contracts providing for various
administrative support services to be provided at actual cost by SEi and HPS to
Newco (the "Support Service Contract"). The scope of such contract or
contracts shall be as may be mutually agreed upon in good faith by the parties.
6.5. SEi Call Center Support. Following the Closing, SEi shall
consult, if asked, with Newco regarding call center technology and shall assist
Newco in designing Newco's call center and training newco's call center staff.
The scope and terms of such support shall be as may be mutually agreed upon in
good faith.
7. CONDITIONS PRECEDENT TO OBLIGATIONS
Each and every obligation of SEi and each and every obligation of HPS
to be performed on the Closing Date shall be subject to the satisfaction prior
to or at the Closing of each of the following conditions:
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7.1. Representations and Warranties True on the Closing Date. Each
of the representations and warranties made by the other party in this Agreement,
and in any instrument, list, certificate or writing delivered by the other party
pursuant to this Agreement, shall be true and correct in all material respects
when made and shall be true and correct in all material respects at and as of
the Closing Date as though such representations and warranties were made or
given on and as of the Closing Date, except for any changes permitted by the
terms of this Agreement or consented to in writing by SEi or HPS, as the case
may be.
7.2. Compliance With Agreement. The other parties shall have in
all material respects performed and complied with all of their agreements and
obligations under this Agreement which are to be performed or complied with by
them prior to or on the Closing Date, including the delivery of the closing
documents specified in Section 8.1.
7.3. Absence of Suit. No action, suit or proceeding before any
court or any governmental authority shall have been commenced or threatened,
and no investigation by any governmental or regulating authority shall have
been commenced, against SEi, HPS or any of the shareholders, affiliates,
officers or directors of either of them, seeking to restrain, prevent or change
the transactions contemplated hereby, or questioning the validity or legality
of any such transactions, or seeking damages in connection with, or imposing
any condition on, any such transactions.
7.4. Consents and Approvals. All approvals, consents and waivers
with respect to the other party that are required to effect the transactions
contemplated hereby shall have been received, and executed counterparts thereof
shall have been delivered.
8. CLOSING
The closing of this transaction ("the Closing") shall take place at
the offices of Foley & Lardner in Tampa, Florida, at 12 p.m. on December 11,
1997, or at such other time and place as the parties hereto shall agree upon.
Such date is referred to in this Agreement as the "Closing Date".
8.1. Documents to be Delivered by SEi and HPS. At the Closing,
SEi, HPS and Newco shall deliver all the following documents, in each case duly
executed or otherwise in proper form:
(a) SEi and HPS shall deliver to Newco, the payment of the
initial capital contribution referred to in Section 2.1;
(b) SEi, HPS and Newco shall deliver the Loan Agreements;
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(i) All other documents, instruments or writings
required to be delivered by SEi, HPS or Newco at or prior to the
Closing pursuant to this Agreement and such other certificates of
authority and documents as SEi or HPS may reasonably request.
8.2. Organization Meeting. At the Closing, simultaneously with the
delivery of documents referred to in Section 8.1, the Shareholders shall hold
an organization meeting of Newco. At such meeting, (a) the Shareholders shall
appoint the initial Board of Directors of Newco; (b) the newly-elected Board of
Directors shall meet for the purpose of electing officers of Newco; and (c) the
agreements and documents referred to in this Agreement to which Newco is a
party shall be authorized on behalf of Newco.
9. TERMINATION
9.1. Survival of Agreement. It is the intention of the parties
that this Agreement shall survive the formation of Newco and serve as a binding
agreement on the parties and their respective successors and assigns including,
without limitation, any future shareholders of Newco who agree to be bound by
the terms hereof.
9.2. Termination. Notwithstanding the provisions of Section 9.1
hereof, this Agreement shall terminate, and shall no longer have any force or
effect, upon the earliest of (a) its termination by mutual written consent of
SEi and HPS, (b) the failure of any of the conditions precedent set forth in
Section 7, (c) any transfer of shares of Newco which results in Newco having no
more than one Shareholder, or (d) the dissolution and liquidation of Newco.
9.3. Consequences of Termination. Upon the termination of this
Agreement pursuant to Section 9.2 above, all rights and obligations under this
Agreement shall immediately terminate except the following which shall survive
termination of this Agreement for any reason: (a) all claims of any Party
against the other party for damages arising out of acts or omissions of such
other Party outside the scope of this Agreement, or in breach of this
Agreement, (b) all rights and obligations of the parties accrued during the
term of this Agreement, and (c) the provisions of Section 2.3.(b) (pro rata
repayment of Loans), Section 6.1 (Non-Competition; Confidentiality), and
Article 13 (Resolution of Disputes) of this Agreement.
9.4. Dissolution of Newco Upon Termination. In the event this
Agreement is terminated as herein provided prior to Closing, but Newco shall
already have been organized and capitalized, Newco shall be promptly liquidated
and all capital contributions shall be returned to the Shareholders, less their
pro rata share of expenses incurred in connection with the negotiation and
execution of this Agreement, the formation of Newco, and the organization and
liquidation of Newco.
10. FURTHER ASSURANCE
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From time to time, at the other party's request and without further
consideration, each party to this Agreement will execute and deliver to the
other party such documents and take such other action as the other party may
reasonably request in order to consummate more effectively the transactions
contemplated hereby.
11. DISCLOSURES AND ANNOUNCEMENTS
Both the timing and the content of all disclosure to third parties and
public announcements concerning the transactions provided for in this Agreement
by either SEi or HPS shall be subject to the approval of the other in all
essential respects, except that approval shall not be required as to any
statements and other information which a party may submit to the Securities and
Exchange Commission, the New York Stock Exchange or the Nasdaq National Market,
or its shareholders or be required to make pursuant to any rule or regulation
of the Securities and Exchange Commission, New York Stock Exchange, Nasdaq
National Market, or otherwise required by law.
12. ASSIGNMENT; PARTIES IN INTEREST
12.1. Assignment. Except as expressly provided herein, the rights
and obligations of a party hereunder may not be assigned, transferred or
encumbered without the prior written consent of the other parties.
12.2. Parties in Interest. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the respective successors and
permitted assigns of the parties hereto. Nothing contained herein shall be
deemed to confer upon any other person any right or remedy under or by reason
of this Agreement.
13. RESOLUTION OF DISPUTES
13.1. Arbitration. Any dispute, controversy or claim arising out of
or relating to this Agreement or any contract or agreement entered into
pursuant hereto or the performance by the parties of its or their terms shall
be settled by binding arbitration held in Tampa, Florida, in accordance with
the Commercial Arbitration Rules of the American Arbitration Association then
in effect, except as specifically otherwise provided in this Article 13.
Notwithstanding the foregoing, Newco may, in its discretion, apply to a court
of competent jurisdiction for equitable relief from any violation or threatened
violation of the covenants of SEi or HPS under Section 6.1 (covenant not to
compete) of this Agreement.
13.2. Arbitrators. If the matter in controversy (exclusive of
attorney fees and expenses) shall appear, as at the time of the demand for
arbitration, to exceed $1,500,000, then the panel to be appointed shall consist
of one neutral arbitrator to be mutually agreed upon by the parties; otherwise,
the panel shall be comprised of three neutral arbitrators of whom one shall be
selected by each party within twenty (20) days, and a third arbitrator shall be
selected by these two selected
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arbitrators. If one of the parties fails to timely select an arbitrator, the
arbitrator that was timely selected shall be the sole arbitrator. If neither
party timely selects an arbitrator, the first arbitrator selected thereafter
shall be the sole arbitrator, no others being appointed. Where each of the
parties timely selects an arbitrator, said arbitrators will have ten (10) days
from the end of the twenty (20) -day period to select the third arbitrator. In
the event the arbitrators are unable to timely agree on the third arbitrator,
either party may petition any official of the American Arbitration Association
for appointment of the third arbitrator and the parties agree to accept any
arbitrator appointed by such official subject to the limitations hereof.
Arbitrators must be reasonably independent of the parties and their principals.
Persons who are hereby expressly disqualified to serve as arbitrators are
principals of the parties, relatives of said principals, employees of the
parties or said principals, persons not residing within 100 miles of Tampa,
Florida, attorneys, accountants, and other business persons have professional or
business relationships with the parties or said principals.
13.3. Procedures; No Appeal. The arbitrator(s) shall allow such
discovery as the arbitrator(s) determine appropriate under the circumstances,
provided that any party shall be entitled to reasonable production of documents
and not less than (i) 16 hours of deposition examination and 20 written
interrogatories if the matter in controversy (exclusive of attorneys fees and
costs) is $1,500,000 or less; and (ii) 24 hours of deposition examination and
40 written interrogatories if the matter in controversy (exclusive of attorneys
fees and costs) exceeds $1,500,000. The arbitrators shall resolve the dispute
as expeditiously as practicable, and if reasonably practicable, within one
hundred twenty (120) days after the selection of the arbitrator(s). The
arbitrator(s) shall give the parties written notice of the decision, with the
reasons therefor set out, and shall have thirty (30) days thereafter to
reconsider and modify such decision if any party so requests within ten (10)
days after the decision. Thereafter, the decision of the arbitrator(s) shall
be final, binding, and nonappealable with respect to all persons, including
(without limitation) persons who have failed or refused to participate in the
arbitration process. The privileges, including, without limitation, the
attorney-client privilege, shall apply in arbitration.
13.4. Authority. The arbitrator(s) shall have authority to award
relief under legal or equitable principles, including interim or preliminary
relief, and to allocate responsibility for the costs of the arbitration and to
award recovery of attorneys fees and expenses in such manner as is determined
to be appropriate by the arbitrator(s).
13.5. Entry of Judgment. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having in personam and subject matter
jurisdiction. Each party hereby submits to the in personam jurisdiction of the
Federal and State courts in Hillsborough County, for the purpose of confirming
any such award and entering judgment thereon.
13.6. Confidentiality. All proceedings under this Article 13 and
all evidence given or discovered pursuant hereto, shall be maintained in
confidence by all parties.
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13.7. Continued Performance. The fact that the dispute resolution
procedures specified in this Article 13 shall have been or may be invoked shall
not excuse any party from performing its obligations under this Agreement and
during the pendency of any such procedure all parties shall continue to perform
their respective obligations in good faith, subject to any rights to terminate
this Agreement that may be available to any party.
13.8. Tolling. All applicable statues of limitation shall be tolled
while the procedures specified in this Article 13 are pending. The parties
will take such action, if any, required to effectuate such tolling.
13.9. Expenses of Arbitration. Except as otherwise may be provided
in this Agreement, the expenses of arbitration will be borne equally by the
parties, provided that each party will bear the cost of its own experts,
evidence and attorneys' fees, except that, in the discretion of the
arbitrators, any award in arbitration may include attorneys' fees if the
arbitrators expressly determine that the party against whom such an award is
entered has caused the dispute to be submitted to arbitration in bad faith or
as a dilatory tactic. No arbitration will be commenced after the date when
institution of legal or equitable proceedings based upon the same subject
matter would be barred by the applicable statute of limitations.
14. LAW GOVERNING AGREEMENT
This Agreement may not be modified or terminated orally, and shall be
construed and interpreted according to the internal laws of the State of
Florida, excluding any choice of law rules that may direct the application of
the laws of another jurisdiction.
15. AMENDMENT AND MODIFICATION
The parties may amend, modify and supplement this Agreement in such
manner as may be agreed upon by them in writing.
16. NOTICE
All notices, requests, demands and other communications hereunder
shall be given in writing and shall be: (a) personally delivered; (b) sent by
telecopier, facsimile transmission or other electronic means of transmitting
written documents; or (c) sent to the parties at their respective addresses
indicated herein by registered or certified U.S. mail, return receipt
requested and postage prepaid, or by private overnight mail courier service.
The respective addresses to be used for all such notices, demands or requests
are as follows:
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(a) If to SEi, to:
Sykes Enterprises, Incorporated
100 North Tampa Street, Suite 3900
Tampa, FL 33602
Attention: John H. Sykes
Facsimile: 813-273-0148
(with a copy to)
Martin A. Traber, Esq.
Foley & Lardner
100 North Tampa, Suite 2700
Tampa, FL 33602
Facsimile: 813-221-4210
or to such other person or address as SEi shall furnish to HPS in writing.
(b) If to HPS, to:
HealthPlan Services Corporation
3501 Frontage Road
Tampa, FL 33607
Attention: Phil Dingle, Esq.
Facsimile: 813-287-6629
(with a copy to)
David C. Shobe, Esq.
501 E. Kennedy Blvd., Suite 1700
Tampa, FL 33601
Facsimile: 813-229-8313
or to such other person or address as HPS shall furnish to SEi in writing.
If personally delivered, such communication shall be deemed delivered
upon actual receipt; if electronically transmitted pursuant to this paragraph,
such communication shall be deemed delivered the next business day after
transmission (and sender shall bear the burden of proof of delivery); if sent
by overnight courier pursuant to this paragraph, such communication shall be
deemed delivered upon receipt; and if sent by U.S. mail pursuant to this
paragraph, such communication shall be deemed delivered as of the date of
delivery indicated on the receipt issued by the relevant postal service, or, if
the addressee fails or refuses to accept delivery, as of the date of such
failure or refusal. Any party to this Agreement may change its address for the
purposes of this Agreement by giving notice thereof in accordance with this
Section.
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17. EXPENSES
Regardless of whether or not the transactions contemplated hereby are
consummated:
17.1. Brokerage. SEi and HPS each represent and warrant to each
other that there is no broker involved or in any way connected with the subject
matter of this transaction. SEi agrees to hold HPS harmless from and against
all claims for brokerage commissions or finder's fees incurred through any act
of SEi in connection with the execution of this Agreement or the transactions
provided for herein. HPS agrees to hold SEi harmless from and against all
claims for brokerage commissions or finder's fees incurred through any act of
HPS in connection with the execution of this Agreement or the transactions
provided for herein.
17.2. Pre-Closing Expenses. SEi and HPS shall each pay their
respective expenses in negotiating and drafting this Agreement and the
documents delivered at Closing. Newco shall pay any filing fees (including,
without limitation, the HSR Act filing fee) and the fee of its registered
agent.
All fees and expenses of Newco's legal, accounting, investment
banking and other professional counsel in connection with the transactions
contemplated hereby shall be paid by Newco.
17.3. Other. Except as otherwise provided herein, each of the
parties shall bear its own expenses and the expenses of its counsel and other
agents in connection with the transactions contemplated hereby.
17.4. Costs of Litigation or Arbitration. The parties agree that
(subject to the discretion, in an arbitration proceeding, of the arbitrator as
set forth in Section 13) the prevailing party in any action brought with
respect to or to enforce any right or remedy under this Agreement shall be
entitled to recover from the other party or parties all reasonable costs and
expenses of any nature whatsoever incurred by the prevailing party in
connection with such action, including without limitation attorneys' fees and
prejudgment interest.
18. ENTIRE AGREEMENT
This instrument embodies the entire agreement between the parties
hereto with respect to the transactions contemplated herein, and there have
been and are no agreements, representations or warranties between the parties
other than those set forth or provided for herein. For purpose of
interpretation, no party shall be deemed the draftsperson of this Agreement or
any document delivered at Closing.
19. COUNTERPARTS
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This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
20. HEADINGS
The headings in this Agreement are inserted for convenience only and
shall not constitute a part hereof.
21. FURTHER DOCUMENTS
The parties each agree to execute all other documents and to take such
other action or corporate proceedings as may be necessary or desirable to carry
out the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
SYKES ENTERPRISES, INCORPORATED
By /s/ John H. Sykes
------------------------------
John H. Sykes, President
HEALTH PLAN SERVICES CORPORATION
By /s/ James K. Murray, Jr.
-------------------------------
James K. Murray, Jr., President
28
<PAGE> 33
AGREEMENT TO BE BOUND BY AGREEMENT
Effective as of December 11, 1997, Sykes HealthPlan Services, Inc., a
Florida corporation, hereby and agrees to be bound by all of the terms,
covenants, representations, warranties and other provisions of the Agreement by
and between SEi and HPS dated December 11, 1997 ("Agreement") that are
applicable to Newco, any "Party," the "Parties" (as those terms are defined in
the Agreement) as if Newco was an original signatory of the Agreement.
SYKES HEALTHPLAN SERVICES, INC.
By /s/ David E. Garner
---------------------------------
David E. Garner, President
29
<PAGE> 1
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
consolidated financial statements. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's Consolidated
Financial Statements and related notes.
<TABLE>
<CAPTION>
Five Months
Year Ended Year Ended Ended Year Ended Year Ended Year Ended
July 31, July 31, December 31, December 31, December 31, December 31,
1993 1994 1994 1995 1996 1997
--------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $101,588 $104,545 $ 51,750 $155,957 $218,996 $313,185
Income from operations(1) 3,203 2,984 2,235 7,081 16,936 33,058
Net income(2)(3) 1,081 1,144 808 2,714 10,257 21,993
PER SHARE DATA:
Basic (1)(2)(3)(4) $ 0.04 $ 0.04 $ 0.03 $ 0.09 $ 0.30 $ 0.56
Dilutive $ 0.04 $ 0.04 $ 0.03 $ 0.09 $ 0.29 $ 0.55
</TABLE>
<TABLE>
<CAPTION>
July 31, July 31, December 31, December 31, December 31, December 31,
1993 1994 1994 1995 1996 1997
-------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 5,484 $ 2,920 $ 4,707 $ 271 $109,373 $108,316
Total assets 36,491 48,311 56,953 56,577 214,524 241,663
Long-term debt, less
current installments 4,362 9,779 13,153 9,584 5,178 33,313
Shareholders' equity 13,847 12,968 13,764 12,375 144,143 147,787
</TABLE>
(1) The balance for 1997 is exclusive of $13,451 of charges associated
with the impairment of long-lived assets pursuant to SFAS No. 121
and one-time merger and related charges associated with the
Company's acquisition of McQueen International Limited.
(2) The balance for 1997 is exclusive of $2,795 of expense associated
with acquisition related in-process research and development costs
incurred by a joint venture entity and $13,451 of one-time charges
as identified above.
(3) Adjusted as if an affiliate of the Company included in the
consolidated financial statements, which was a S corporation for
federal income tax purposes, were subject to income taxes for all
periods presented, based on the tax laws in effect during the
respective periods.
(4) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, Earnings Per Share.
<PAGE> 2
MARKET SHAREHOLDER DATA
Sykes common stock has been quoted on the Nasdaq National Market under the
symbol SYKE since Sykes' initial public offering in April 1996. The
following table sets forth, for the periods indicated, certain information
as to the high and low sale prices per share of Sykes common stock as quoted
on the Nasdaq National Market since April 30, 1996, as adjusted for
three-for-two stock splits effected on July 28, 1996 and May 29, 1997,
respectively.
Year ending December 31, 1997 High Low
First Quarter $30 3/16 $16 5/16
Second Quarter 28 3/4 17
Third Quarter 32 19 3/4
Fourth Quarter 27 5/8 16 7/8
Year ending December 31, 1996 High Low
First Quarter N/A N/A
Second Quarter (commencing April 30) $24 3/16 $13 11/16
Third Quarter 32 1/2 16 3/4
Fourth Quarter 35 3/8 23 11/16
Holders of Sykes common stock are entitled to receive dividends out of the
funds legally available when and if declared by the Board of Directors.
Sykes has not declared or paid any cash dividends on its common stock in the
past. Sykes currently anticipates that all of its earnings will be retained
for development and expansion of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future.
As of March 11, 1998, the last sale price of the registrant's common stock
was $18 15/16 on the Nasdaq National Market, and there were approximately
200 holders of record of the common stock. The Company believes that there
are approximately 10,000 beneficial owners of common stock.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto. The following discussion
compares the year ended December 31, 1997 ("1997") to the year ended
December 31, 1996 ("1996"), and 1996 to the year ended December 31, 1995
("1995"). The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Future events and the
Company's actual results could differ materially from the results reflected
in these forward-looking statements, as a result of certain of the factors
set forth below and elsewhere in this analysis.
OVERVIEW
The Company derives its revenues from providing information
technology ("IT") support services, fulfillment solutions and information
technology development services and solutions. Revenues from information
technology support services provided through the IT call centers are
recognized as services are rendered. These services are billed on a fee per
call, rate per minute or time and material. Fulfillment services are
generally billed on a per unit basis. Information technology development
services and solutions usually are billed on a time and material basis,
generally by the hour, and revenues generally are recognized as the services
are provided. Revenue from software licenses are sold on a per unit or site
basis and are recognized when the related software is delivered. Revenues
from fixed price contracts, generally with terms of less than one year, are
recognized using the percentage-of-completion method. Most of the Company's
revenues are derived from non-fixed price contracts. The Company has not
experienced material losses due to fixed price contracts and does not
anticipate a significant increase in revenues derived from such contracts in
the future.
In 1993, in an effort to capitalize on a trend toward the
outsourcing of information technology services, the Company began providing
information technology support services through the opening of IT call
centers while phasing out its non-information technology services. The
phase-out of these services was substantially completed in 1995.
Direct salaries and related costs include direct personnel
compensation, statutory and other benefits associated with such personnel
and other direct costs associated with providing services to customers.
General and administrative expenses include administrative, sales and
marketing, occupancy and other indirect costs. General and administrative
costs incurred in opening new IT call centers are expensed when incurred.
Interest and other income (expense) consist primarily of interest expense or
income and foreign currency transaction gains and losses. Foreign currency
transaction gains and losses generally result from exchange rate
fluctuations on intercompany transactions. During 1997, the Company entered
into a joint venture and the results of this entity are included in the
Other Income section of the Statements of Income.
Grants from local or state governments for the acquisition of
property and equipment are deferred and recognized as income over the
corresponding useful lives of the related property and equipment. The
deferred grants, net of amortization, totaled $12.1 million and $14.1
million at December 31, 1996 and 1997, respectively.
The Company's effective tax rate for the periods presented reflects
the effects of foreign taxes, net of foreign income not taxed in the United
States, nondeductible expenses for income tax purposes and the provision of
potential additional income tax liability resulting from an Internal Revenue
Service examination currently being conducted. The Company believes its
reserves for any liability that may result from this examination are
adequate.
<PAGE> 4
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of revenues represented by certain items reflected in the
Company's statements of income:
YEARS ENDED DECEMBER 31,
PERCENTAGE OF REVENUES 1995 1996 1997
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Direct salaries and related costs 65.2 61.3 62.4
General and administrative(1)(2) 30.3 31.0 31.3
----- ----- -----
Income from operations 4.5 7.7 6.3
Interest and other expense(3) (0.9) (0.0) (1.0)
----- ----- -----
Income before income taxes 3.6 7.7 5.3
Provision for income taxes(4) 1.7 3.0 3.5
----- ----- -----
Net income(1)(2)(3)(4) 1.9% 4.7% 1.8%
===== ===== =====
(1) Includes non-cash compensation expense of 0.6% related to the grant
of stock options to an executive officer in 1995.
(2) Includes charges associated with the impairment of long-lived
assets pursuant to SFAS No. 121 and one-time merger and related
charges of 4.3% related to the acquisition of McQueen International
Limited ("McQueen") in 1997.
(3) Includes expense associated with acquired in-process research and
development costs of 0.9% related to an acquisition completed by a
joint venture entity in 1997.
(4) Adjusted as if an affiliate of the Company included in the
consolidated financial statements, which was an S corporation for
federal income tax purposes, were subject to income taxes for all
periods presented, based on the tax laws in effect during the
respective periods. See Note 16 of Notes to Consolidated Financial
Statements.
1997 COMPARED TO 1996
Revenues. Revenues increased $94.2 million, or 43.0%, to $313.2
million in 1997 from $219.0 million in 1996. These results reflect an
increase in revenues of $44.5 million from fulfillment services, an increase
in revenues of $40.8 million from information technology support services
provided through IT call centers and an increase in revenues of $8.9 million
from information technology services and solutions. At the completion of
1997, information technology support services, fulfillment services and
information technology services and solutions accounted for 48.4%, 27.3%,
and 24.3%, respectively, of the Company's consolidated revenues, as compared
to 50.5%, 18.8% and 30.7%, respectively in 1996.
The increase in fulfillment services revenue is primarily
associated with an acquisition completed in 1997 by McQueen accounted for
utilizing the purchase method of accounting. Sykes acquired McQueen in the
fourth quarter of 1997 utilizing the pooling-of-interests method of
accounting. The increase in information technology support services revenues
was primarily attributable to an increase in the number of IT call centers
providing services throughout the period, the addition of several
significant customers since 1995 and the resultant increase in call volumes
from clients. During 1996, the Company opened three new IT call centers
which were fully operational throughout 1997, and opened three additional
centers in 1997. The increase in revenues for information technology
services and solutions was primarily attributable to the increase in hours
billed to customers for professional services when compared to the prior
period.
<PAGE> 5
Direct Salaries and Related Costs. Direct salaries and related
costs increased $61.2 million, or 45.6%, to $195.4 million in 1997 from
$134.2 million in 1996. As a percentage of revenues, direct salaries and
related costs increased to 62.4% in 1997 from 61.3% in the comparable 1996
year. The increase in the amount of direct salaries and related costs was
primarily attributable to the change in the Company's mix of business
associated with the McQueen acquisition referenced above and the addition of
personnel to support revenue growth.
General and Administrative. General and administrative expenses
increased $30.3 million, or 44.7%, to $98.1 million in 1997, inclusive of
special one-time charges, from $67.8 million in 1996. As a percentage of
revenues, and inclusive of special one-time charges, general and
administrative expenses remained relatively constant at 31% in 1997 and
1996. The increase in the amount of general and administrative expenses was
attributable to the occurrence of special one-time charges identified below.
General and administrative expenses exclusive of $13.4 million of charges
associated with the impairment of long-lived assets pursuant to SFAS No. 121
and one-time merger and related charges associated with the Company's
acquisition of McQueen, increased $16.9 million, or 24.9%, to $84.7 million,
or 27.0% of revenue. The decrease as a percentage of revenues resulted from
economies of scale associated with spreading costs over a larger revenue
base.
Interest and Other Expense. Interest and other expense increased to
$3.0 million during 1997 from $0.1 million during 1996. As a percentage of
revenues, interest and other expense was 1.0% in 1997 compared to less than
0.5% in 1996. The increase in interest and other expense was primarily
attributable the occurrence of approximately $2.8 million of acquisition
related in-process research and development costs, which was recorded as
other expense and an increase in the Company's debt position as a result of
the acquisition of McQueen completed during 1997,partially offset by
interest income earned on available funds realized from the Company's public
offerings.
Income Taxes. Income taxes increased $4.4 million, or 67.7%, to
$10.9 million during 1997 from $6.5 million during 1996, and increased as a
percentage of revenues to 3.0% from 2.8%, respectively. This increase was
attributable to the significant increase in the amount of income before
income taxes and in income before income taxes as a percentage of revenues.
However, the Company's marginal tax rate increased to 65% during 1997
primarily as a result of nondeductible expenses being a significantly higher
percentage of income before income taxes. These nondeductible expenses
consisted primarily of goodwill and in-process research and development
costs.
Net Income. As a result of the foregoing, net income inclusive of
special one-time charges decreased to $5.7 million in 1997 from $10.3
million in 1996. Net income for 1997 exclusive of the $13.4 million of
charges associated with the impairment of long-lived assets pursuant to SFAS
No. 121 and one-time merger and related charges, and exclusive of the $2.8
million associated with acquisition related in-process research and
development would have been $21.9 million for 1997.
1996 COMPARED TO 1995
Revenues. Revenues increased $63.0 million, or 40.4%, to $219.0
million in 1996 from $156.0 million in 1995. These results reflect an
increase in revenues of $48.3 million from information technology support
services provided through IT call centers, an increase in revenues of $15.8
million from information technology services and solutions, and a $3.0
million increase in revenues from fulfillment services, partially offset by
a $4.1 million reduction in revenues from non-information technology
services that were substantially phased out in 1995. At the completion of
1996, information technology support services, fulfillment services and
information technology services and solutions accounted for 50.5%,
<PAGE> 6
18.8% and 30.7%, respectively, of the Company's consolidated revenues, as
compared to 39.9%, 24.5% and 35.6%, respectively, in 1995.
The increase in information technology support services revenues
was primarily attributable to an increase in the number of IT call centers
providing services throughout the period, the addition of several
significant customers since 1995 and the resultant increase in call volumes
from clients. During the fourth quarter of 1995, the Company opened two new
IT call centers which were fully operational throughout 1996, and opened
three additional centers in 1996. In addition, the Company has added 36
customers in its information technology support services since the beginning
of 1995, giving it 58 customers that utilized these services as of December
31, 1996. The increase in revenues for information technology services and
solutions was primarily attributable to the increase in hours billed to
customers for professional services when compared to the prior period. The
increase in revenues for fulfillment services was primarily attributable to
an increase in orders from the Company's largest customer.
Direct Salaries and Related Costs. Direct salaries and related
costs increased $32.5 million, or 32.0%, to $134.2 million in 1996 from
$101.7 million in 1995. As a percentage of revenues, however, direct
salaries and related costs decreased to 61.3% in 1996 from 65.2% 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 and the continued
change in the Company's mix of business reflecting the growth of information
technology support services as a percentage of consolidated results.
General and Administrative. General and administrative expenses
increased $20.6 million, or 43.6% to $67.8 million in 1996 from $47.2
million in 1995. As a percentage of revenues, general and administrative
expenses increased to 31.0% in 1996 from 30.3% in 1995. The increase in the
amount of general and administrative expenses was primarily attributable to
the addition of management and administrative personnel to support the
Company's growth and depreciation expenses associated with facility and
capital equipment expenditures incurred in connection with the IT call
centers.
Interest and Other Expense. Interest and other expense decreased to
$0.1 million during 1996 from $1.5 million during 1995. As a percentage of
revenues, interest and other expense was less than 0.5% in 1996 from
interest and other expense of 0.9% in 1995. The decrease was primarily
attributable to a reduction of interest expense as a result of certain debt
repayments from proceeds realized from the Company's public offerings
completed during 1996.
Income Taxes. Income taxes increased $3.6 million, or in excess of
100.0%, to $6.5 million during 1996 from $2.9 million during 1995, and increased
as a percentage of revenues to 3.0% from 1.8%, respectively. This increase was
attributable to the significant increase in the amount of income before income
taxes and in income before income taxes as a percentage of revenues. However,
the Company's marginal tax rate decreased to 38.6% during 1996 primarily as a
result of nondeductible expenses being a lower percentage of the larger income
before income taxes and tax-exempt interest income earned during the year.
Net Income. As a result of the foregoing, net income increased to
$10.3 million in 1996 from $2.7 million in 1995.
<PAGE> 7
QUARTERLY RESULTS
The following information presents unaudited quarterly operating
results for the Company for 1996 and 1997. The data has been prepared by the
Company on a basis consistent with the Consolidated Financial Statements
included elsewhere in this Form 10-K, and include all adjustments,
consisting of normal recurring accruals, that the Company considers
necessary for a fair presentation thereof. These operating results are not
necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
3/31/96 6/30/96 9/29/96 12/31/96 3/30/97 6/29/97 9/28/97 12/31/97
------- ------- ------- -------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $51,797 $50,252 $52,155 $64,791 $66,597 $79,224 $79,802 $87,561
Direct salaries
and related costs 31,424 30,592 32,935 39,285 39,639 49,618 50,828 55,364
General and
Administrative(1)(2) 15,321 15,625 16,358 20,518 19,306 32,620 21,606 24,595
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from
Operations(1)(2) 5,052 4,035 2,862 4,988 7,652 (3,014) 7,368 7,602
Interest and
other income
(expense)(3) (378) (108) 84 260 442 152 84 (3,662)
------- ------ ------ ------ ------ ------ ------ -------
Income (loss) before
income taxes(1)(2) 4,674 3,927 2,946 5,248 8,094 (2,862) 7,452 3,940
Provision for
income taxes(4) 1,391 1,811 1,262 2,026 2,947 2,695 2,702 2,532
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)
(1)(2)(4) $3,283 $2,116 $1,684 $3,222 $5,147 $(5,557) $ 4,750 $ 1,408
====== ====== ====== ====== ====== ======= ======= =======
Net income (loss) per
share(1)(2)(4) $ 0.10 $ 0.06 $ 0.04 $ 0.08 $ 0.13 $ (0.14) $ 0.12 $ 0.04
====== ====== ====== ====== ====== ======= ======= =======
Total diluted
shares 31,328 35,686 37,552 39,251 40,165 40,326 40,299 40,222
</TABLE>
(1) The quarter ended June 29, 1997 includes $10.4 million of
charges associated with the impairment of long-lived assets
pursuant to SFAS No. 121. Exclusive of such charges, income
from operations, income before income taxes, net income, and
net income per diluted share would have been approximately
$7.4 million, $7.5 million, 4.8 million and $0.12,
respectively.
(2) The quarter ended December 31, 1997 includes $3,051 of
one-time merger and related charges associated with the
acquisition of McQueen. Exclusive of such charges and the
expense referenced in (3) below, income from operations,
income before income taxes, net income and net income per
diluted share would have been approximately $13.4 million,
$9.8 million, $7.3 million and $0.18, respectively.
(3) The quarter ended December 31, 1997 includes $2,795 of expense
associated with acquisition related in-process research and
development cost.
(4) Adjusted as if an affiliate of the Company included in the
consolidated financial statements, which was an S corporation
for federal income tax purposes, were subject to income taxes
for all periods presented, based on the tax laws in effect
during the respective periods. See Note 15 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are equity offerings, cash
flows from operations and available borrowings under its credit facility.
The net proceeds to the Company of $39.7 million from its April 1996 initial
public offering were used to repay certain debt outstanding at such time and
make capital expenditures. In November 1996, the Company received proceeds,
net of offering expenses, of $71.5 million from the sale of approximately
2.4 million shares of common stock pursuant to a secondary offering. The
Company has utilized certain of these proceeds and the balance of the funds
available from the initial public offering to make additional capital
expenditures associated primarily with its technical support services as
identified above, to repay debt associated with
<PAGE> 8
entities it has acquired subsequent to the public offerings, to acquire
interest in and provide capitalization to a joint venture entry into the
healthcare service industry, invest in technology applications to further
the Company's service offerings and for working capital and general
corporate purposes. In addition, the Company intends similar uses from the
balance of such funds, including possible additional acquisitions. Pending
any such use, the Company will invest the balance of its available funds in
short-term, investment grade securities or money market instruments.
Subsequent to December 1997, the Company entered into a new $150.0
million syndicated credit facility which provides for multi-currency
lending. This new facility will accrue borrowings at tiered levels between
75 and 175 basis points above listed LIBOR pursuant to a defined ratio
calculation within the agreement. The facility which matures in February
2001, contains certain financial covenants associated with debt ratios,
leverage, coverage and capital expenditures and acquisitions as defined by
the agreement.
During 1997, the Company generated approximately $14.8 million in cash,
net from operating activities. The combination of these funds with the $3.0
million received from issuance of common stock, $2 million received from
grants associated with the construction of its eighth domestic IT call
center and available cash and cash equivalents, were used in 1997 to fund
$21.8 million of capital expenditures, $8 million in marketable security
investments, $5.4 million in repayment of debt, $5.1 million of investments
in a joint venture and $1.8 million to make an acquisition. The capital
equipment expenditures were predominantly the result of the Company's
continued expansion, both domestically and internationally, in providing
technical product support services. During 1997, the Company constructed its
eighth domestic IT call center, outfitted another and funded the expansion
and enhancing of the technology base from which services are provided.
Internationally, the Company opened two new IT call centers, expanded four
other call centers and also enhanced its technology base. As a result of the
Company's expansion and continued integration of its 1997 acquisitions, it
is anticipated that 1998 capital expenditures will approximate $20 million.
The debt repayments were associated with assumed debt levels resulting from
certain acquisitions the Company completed during 1997. Also in 1997, the
Company was involved in the formation of a joint venture entity, Sykes
HealthPlan Services, Inc. During 1997, the Company funded approximately $5.1
million and has committed another $12.4 million for its share of the
capitalization of this organization.
During 1997, the Company acquired Info Systems of North Carolina, Inc.,
Telcare Gesellschaft fur Telekommunikations-Mehrwertdieste mbH, TAS
Telemarketing Gesellschaft fur Kommunikations und Dialog mbH, TAS Hedi
Fabinyi GmbH, and McQueen International Limited. The aggregate purchase
price for these acquisitions was approximately 6,020,000 shares of the
Company's common stock plus assumed debt, and were accounted for using the
pooling-of-interests method of accounting. In addition, the Company also
acquired the stock of Translation, Fulfillment & Communication, N.V
('Traffic") and related assets for $1.8 million in cash and accounted for
the acquisition utilizing the purchase method of accounting. In the
aggregate, the acquisitions expanded the Company's geographical presence in
Europe and expanded the service offerings that the Company provides.
Pursuant to the acquisitions, the Company has approximately $36.3 million in
debt at December 31, 1997.
During 1996, the Company generated approximately $0.6 million in cash,
net, from operations. The Company has used these funds plus a portion of its
$111.2 million proceeds from its public offerings, together with $5.6
million received as incentive grants from local and state governmental
agencies, to fund $23.1 million of capital expenditures in 1996
predominantly to construct and outfit three new IT call centers.
During 1996, the Company increased its European technical support
presence and acquired additional sophisticated information technology
capabilities to enhance its technical support services through the
acquisitions of Datasvar Support AB and
<PAGE> 9
DiagSoft, Inc. The purchase price for these acquisitions was approximately
1.4 million shares of the Company's common stock, and were accounted for
using the pooling-of-interests method of accounting.
The Company has evaluated the year 2000 impact on its internal
financial and operational systems. Management does not believe that the year
2000 will have a material effect on its or its subsidiaries financial
condition or business operations.
The Company believes that its current cash levels, accessible funds
under its credit facilities and cash flows from future operations, will be
adequate to meet its continued expansion objectives, anticipated levels of
capital expenditures and debt repayment requirements, including those that
may be required pursuant to the integration of its acquisitions, for the
foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financing Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" which is effective for
periods ending after December 15, 1998. This statement establishes standards
for computing and presenting comprehensive income which includes translation
adjustments. In June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is also effective
for periods ending after December 15, 1998. This statement establishes
additional disclosure requirements for business segments.
Management is currently assessing the future period impact of SFAS No. 130
and 131 on the Company's presentation of results of operations, changes in
shareholders' equity and segment disclosures.
SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company's joint venture entity signed
definitive agreements to acquire Health International ("HI") and Prudential
Service Bureau, Inc. ("PSBI"). The combined purchase price of the two
acquisitions was $72.6 million and the transactions were expected to be
completed by March 31, 1998. HI is a disease management company that provides a
comprehensive managed medical care program for employees and plan
administrators. PSBI provides a wide range of call center-based health and
welfare benefits and administrative services.
These acquisitions will be accounted for by the joint venture utilizing the
purchase method of accounting. As a result, the Company anticipates the
recording of non-recurring charges approximating $11.8 million, representing its
share of the joint venture's acquired in process research and development.
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Sykes Enterprises, Incorporated
We have audited the consolidated balance sheet of Sykes Enterprises,
Incorporated and subsidiaries as of December 31, 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sykes
Enterprises, Incorporated and subsidiaries as of December 31, 1997 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of income and
cash flows of Sykes Enterprises, Incorporated and subsidiaries for the years
ended December 31, 1995 and 1996, prior to their restatement for the 1997
pooling of interest of McQueen International Limited. The contribution of Sykes
Enterprises, Incorporated and subsidiaries to revenues and net income
represented 69 percent and 69 percent in 1995 and 73 percent and 84 percent in
1996, respectively, of the respective restated totals. Separate financial
statements of McQueen International Limited included in the 1995 and 1996
restated consolidated statements of income and cash flows were audited and
reported on separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and the
statements of income and cash flows for the years ended December 31, 1995 and
1996, after restatement for the 1997 pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Notes 1 and 2 of notes to consolidated financial statements.
Coopers & Lybrand L.L.P.
Tampa, Florida
March 6, 1998
<PAGE> 11
MCQUEEN INTERNATIONAL LIMITED
REPORT OF THE INDEPENDENT AUDITORS
Board of Directors
McQueen International Limited
We have audited the consolidated balance sheets of McQueen International Limited
and its subsidiaries as of February 28, 1997 and 1996 and the related
consolidated statement of earnings, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McQueen
International Limited and its subsidiaries as of February 28, 1997 and 1996
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with generally accepted
accounting principles in the United States.
GRANT THORNTON
Edinburgh
United Kingdom
February 18, 1998
<PAGE> 12
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................. $ 92,836,884 $ 70,523,067
Receivables, including unbilled ............................ 56,970,273 68,520,471
Prepaid expenses and other current assets .................. 8,266,841 11,377,920
------------- -------------
Total current assets ...................................... 158,073,998 150,421,458
Property and equipment, net ................................. 53,620,430 71,282,183
Marketable securities ....................................... -- 7,800,002
Investment in joint venture ................................. -- 2,285,142
Deferred charges and other assets ........................... 2,829,103 9,874,680
------------- -------------
$ 214,523,531 $ 241,663,465
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt ..................... $ 8,345,239 $ 2,989,271
Accounts payable ........................................... 15,104,013 19,905,671
Income tax payable ......................................... 1,899,168 2,725,177
Accrued employee compensation and benefits ................. 10,203,068 10,035,233
Other accrued expenses and current liabilities ............. 13,149,137 6,449,650
------------- -------------
Total current liabilities ................................. 48,700,625 42,105,002
Long-term debt .............................................. 5,177,678 33,312,597
Deferred income taxes ....................................... 4,420,562 4,374,963
Deferred grants ............................................. 12,081,537 14,083,691
------------- -------------
Total liabilities ........................................ 70,380,402 93,876,253
------------- -------------
Commitments and contingencies (Notes 7 and 10)
Shareholders' equity
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding .............. -- --
Common stock, $.01 par value; 200,000,000 shares authorized;
38,858,274 and 39,057,626 issued and oustanding ........... 388,583 390,576
Additional paid-in capital ................................. 131,013,883 133,579,200
Retained earnings .......................................... 12,930,738 17,106,620
Unrealized loss on securities, net of taxes ................ -- (734,518)
Accumulated foreign currency translation adjustments ....... (190,075) (2,554,666)
------------- -------------
Total shareholders' equity ............................... 144,143,129 147,787,212
------------- -------------
$ 214,523,531 $ 241,663,465
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 13
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ........................... $ 155,956,584 $ 218,995,751 $ 313,184,554
------------- ------------- -------------
Operating expenses
Direct salaries and related costs . 101,702,512 134,235,748 195,449,373
General and administrative ........ 47,172,960 67,823,910 87,727,877
Impairment of long-lived asset .... -- -- 10,400,000
------------- ------------- -------------
Total operating expenses ......... 148,875,472 202,059,658 293,577,250
------------- ------------- -------------
Income from operations ............. 7,081,112 16,936,093 19,607,304
Other income (expense)
Interest, net ..................... (1,685,656) (596,828) 766,637
Loss from joint venture ........... -- -- (2,828,000)
Other ............................. 175,797 455,215 (922,735)
------------- ------------- -------------
Total other income (expense) ..... (1,509,859) (141,613) (2,984,098)
------------- ------------- -------------
Income before income taxes ......... 5,571,253 16,794,480 16,623,206
Provision for income taxes
Current ........................... 1,429,857 6,437,122 10,863,000
Deferred .......................... 1,255,753 (14,185) 13,000
------------- ------------- -------------
Total provision for income taxes . 2,685,610 6,422,937 10,876,000
------------- ------------- -------------
Net income ......................... 2,885,643 10,371,543 5,747,206
Preferred stock dividends .......... -- (47,343) --
------------- ------------- -------------
Net income applicable to
common shareholders ............... $ 2,885,643 $ 10,324,200 $ 5,747,206
============= ============= =============
Pro forma income data (unaudited)
Income before income taxes ......... $ 5,571,253 $ 16,794,480
Pro forma provision for income taxes
relating to S corporation ......... 172,000 67,000
Actual provision for income taxes .. 2,685,610 6,422,937
------------- -------------
Total provision and pro forma
provision for income taxes ...... 2,857,610 6,489,937
------------- -------------
Pro forma net income ............... 2,713,643 10,304,543
Preferred stock dividends .......... -- (47,343)
------------- -------------
Pro forma net income
applicable to common shareholders . $ 2,713,643 $ 10,257,200
============= =============
Pro forma basic net income per share
(actual for 1997) ................. $ 0.09 $ 0.30 $ 0.15
============= ============= =============
Pro forma diluted net income per
share (actual for 1997) ........... $ 0.09 $ 0.29 $ 0.14
============= ============= =============
Shares outstanding
Basic ............................. 29,945,275 34,411,266 38,982,002
Diluted ........................... 31,328,520 35,954,323 40,253,046
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 14
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Foreign
Additional Unrealized Currency
Common Stock Paid-In Retained Unearned Loss on Translation
Shares Amount Capital Earnings Compensation Securities Adjustment
---------- -------- ------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 ... 27,015,159 $270,152 $ 3,314,571 $ 8,310,368 $(2,081,611) $ -- $ (18,079)
Issuance of common
stock ............ 62,013 620 6,261,892 -- -- -- --
Stock dividend .... 123,104 1,231 (1,231) -- -- -- --
Repurchase of
common stock ..... -- -- (150,815) -- -- -- --
Distributions ..... -- -- -- (683,452) -- -- --
Unearned employee
compensation from
Employee Stock
Ownership Plan
Trust ............ -- -- -- -- 743,570 -- --
Reserve adjustment -- -- -- (716,100) -- -- --
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- 64,209
Net income ........ -- -- -- 2,885,643 -- -- --
---------- -------- ------------- ------------ ----------- --------- -----------
Balance at
December 31, 1995 . 27,200,276 272,003 9,424,417 9,796,459 (1,338,041) -- 46,130
Merger with
Sykes Realty, Inc. 2,745,000 27,450 238,116 (827,554) -- -- --
Conversion of
redeemable
preferred stock .. 448,029 4,480 5,371,872 (5,376,352) -- -- --
Issuance of
common stock ..... 6,427,632 64,277 112,276,067 -- -- -- --
Three-for-two
stock split ...... 2,037,337 20,373 (20,373) -- -- -- --
Repurchase of
common stock ..... -- -- (142,702) -- -- -- --
Distributions ..... -- -- -- (986,015) -- -- --
Tax effect of
non-qualified
exercise of
stock options .... -- -- 3,866,486 -- -- -- --
Unearned employee
compensation from
Employee Stock
Ownership Plan
Trust ............ -- -- -- -- 1,338,041 -- --
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- (236,205)
Preferred stock
dividends ........ -- -- -- (47,343) -- -- --
Net income ........ -- -- -- 10,371,543 -- -- --
---------- -------- ------------- ------------ ----------- --------- -----------
Balance at
December 31, 1996 . 38,858,274 388,583 131,013,883 12,930,738 -- -- (190,075)
Issuance of
common stock ..... 199,352 1,993 3,037,968 -- -- -- --
Capital
contribution ..... -- -- 1,237,000 -- -- -- --
Repurchase of
common stock ..... -- -- (2,623,651) -- -- -- --
Tax effect of
non-qualified
exercise of
stock options .... -- -- 914,000 -- -- -- --
Unrealized loss
on securities, net
of income taxes .. -- -- -- -- -- (734,518) --
Distributions ..... -- -- -- (496,972) -- -- --
Adjustments to
conform fiscal
year of McQueen
International
Limited (Note 2).. -- -- -- (1,074,352) -- -- --
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- (2,364,591)
Net income ........ -- -- -- 5,747,206 -- -- --
---------- -------- ------------- ------------ ----------- --------- -----------
Balance at
December 31, 1997 . 39,057,626 $390,576 $ 133,579,200 $ 17,106,620 $ -- $(734,518) $(2,554,666)
========== ======== ============= ============ =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 15
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 2,885,643 $ 10,371,543 $ 5,747,206
Depreciation and amortization ..................................... 4,629,638 7,978,342 13,260,621
Impairment of long-lived asset .................................... -- -- 10,400,000
In-process research and development
costs expensed by joint venture................................... -- -- 2,795,000
Capital contributions ............................................. -- -- 1,237,000
Deferred compensation ............................................. 949,960 -- --
Deferred income taxes ............................................. 1,255,753 283,582 13,000
ESOP allocation (unearned compensation) ........................... 743,570 1,338,041 --
Loss (gain) on disposal of property
and equipment .................................................... 38,022 (99,286) (105,416)
Changes in assets and liabilities
Receivables, including unbilled .................................. (12,953,900) (21,553,135) (6,567,198)
Prepaid expenses and other current assets ........................ (2,406,143) (3,132,602) (683,079)
Deferred charges and other assets ................................ (1,316,847) (743,451) (1,098,577)
Accounts payable ................................................. 5,546,764 (1,715,852) 852,658
Income tax payable ............................................... 255,427 566,643 1,740,009
Accrued employee compensation and benefits ....................... 5,834,552 1,901,386 (167,835)
Other accrued expenses and current liabilities ................... 433,119 5,393,607 (7,808,556)
------------- ------------- -------------
Net cash provided by
operating activities .......................................... 5,895,558 588,818 19,614,833
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................. (16,443,031) (23,115,413) (21,784,482)
Investment in marketable securities .............................. -- -- (8,000,000)
Investment in joint ventures ..................................... -- -- (5,080,142)
Acquisition of business .......................................... -- -- (1,800,000)
Proceeds from sale of property and equipment ..................... 100,402 201,425 208,351
------------- ------------- -------------
Net cash used for investing activities ......................... (16,342,629) (22,913,988) (36,456,273)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Paydowns under revolving line of
credit agreements ................................................ (32,413,539) (20,771,718) (72,441,000)
Borrowings under revolving line of
credit agreements ................................................ 31,013,422 19,916,835 72,441,000
Proceeds from issuance of stock ................................... 6,261,892 112,340,344 3,039,961
Proceeds from grants .............................................. 2,603,485 5,642,335 2,000,000
Proceeds from issuance of long-term debt .......................... 6,233,753 6,668,403 350,467
Subsidiary stock redemption ....................................... (150,815) (142,702) (2,623,651)
Payment of long-term debt ......................................... (3,728,725) (12,255,388) (5,377,591)
Dividends paid .................................................... (683,452) (1,033,358) (496,972)
------------- ------------- -------------
Net cash provided by (used for)
financing activities .......................................... 9,136,021 110,364,751 (3,107,786)
------------- ------------- -------------
Adjustment for foreign currency translation ........................ 64,209 (236,205) (2,364,591)
------------- ------------- -------------
Net increase (decrease) in cash, cash equivalents
and temporary investments ......................................... (1,246,841) 87,803,376 (22,313,817)
CASH AND CASH EQUIVALENTS - BEGINNING .............................. 6,280,349 5,033,508 92,836,884
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING ................................. $ 5,033,508 $ 92,836,884 $ 70,523,067
============= ============= =============
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest ........................................................ $ 1,910,043 $ 1,414,925 $ 2,614,600
Income taxes .................................................... $ 2,345,408 $ 4,913,279 $ 5,845,721
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 16
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sykes Enterprises, Incorporated and consolidated subsidiaries (the "Company"
or "Sykes") provides comprehensive information technology outsourcing
services including information technology support services, information
technology development services and solutions, and software fulfillment. The
Company's services are provided to a wide variety of industries.
Unless otherwise noted, all information has been adjusted to retroactively
reflect three-for-two stock splits in the form of 50% stock dividends to
shareholders of record on July 18, 1996 and May 19, 1997, which was
reflected on the Nasdaq National Market on July 29, 1996 and May 29, 1997,
respectively.
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of Sykes Enterprises, Incorporated and its wholly owned
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
Recognition of Revenue - The Company primarily recognizes its revenue as
services are performed. Royalty revenue is recognized at the time royalties
are earned and the remaining revenue is recognized on fixed price contracts
using the percentage-of-completion method of accounting. Adjustments to
fixed price contracts and estimated losses, if any, are recorded in the
period when such adjustments or losses are known. Software and product sales
are recognized upon shipment.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid short term investments classified as available for sale as defined
under the Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At December 31,
1997, cash in the amount of approximately $40.6 million was held in tax free
interest bearing investments, approximately $29.9 million was held in
taxable interest bearing investments, both of which are classified as
available for sale and have an average maturity of approximately 30 days.
Property and Equipment - Property and equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives
of the respective assets. Improvements to leased premises are amortized over
the shorter of the related lease term or the useful lives of the
improvements. Cost and related accumulated depreciation on assets retired or
disposed of are removed from the accounts and any gains or losses resulting
therefrom are credited or charged to income. Depreciation expense was
approximately $6.3, $9.2 and $13.2 million for the years ended December 31,
1995, 1996 and 1997, respectively. Property and equipment includes
approximately $620,000 and $1.3 million of additions included in accounts
payable at December 31, 1996 and 1997, respectively. Accordingly, these
non-cash transactions have been excluded from the accompanying Consolidated
Statements of Cash Flows for the years ended December 31, 1996 and 1997,
respectively.
<PAGE> 17
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES, continued
Land received from various governmental agencies under grants is recorded at
fair value (as determined by an independent appraiser) at date of grant.
During the years ended December 31, 1995, 1996 and 1997 the Company recorded
approximately $1,824,000, $317,000 and $430,000, respectively, in land
acquisitions as a result of such grants. Accordingly, these non-cash
transactions have been excluded from the accompanying consolidated
statements of cash flows for the years ended December 31, 1995, 1996 and
1997.
Investment in Joint Venture - The Company has a fifty percent interest in a
joint venture that is accounted for using the equity method of accounting.
Accordingly, the Company records its proportionate share of the gains and losses
of the joint venture in the consolidated statement of income.
Deferred Charges and Other Assets - Deferred charges and other assets
consist primarily of goodwill, long-term deposits, and covenants not to
compete arising from business acquisitions. These intangible assets are
being amortized over periods ranging from two to fifteen years. Amortization
expense was approximately $337,000, $415,000 and $499,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. Accumulated
amortization was approximately $752,000 and $1,251,000 at December 31, 1996
and 1997, respectively.
Impairment of Long-Lived Assets - The Company reviews long-lived assets and
certain identifiable intangibles for impairment and writes down to fair value
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. In 1996, under this analysis, the Company determined that
the value of the assets were not impaired. During 1997, the Company recorded an
impairment loss of $10.4 million related to an acquisition made during the year.
Income Taxes - Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year end based
on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income.
The Company and its consolidated subsidiaries are either taxed as C
corporations or have elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code through the effective date of the
Company's initial public offering (See Note 16). The Company's affiliate
which elected to be taxed as an S corporation terminated its S corporation
election during 1996 and accordingly became subject to federal and state
income taxes.
Deferred Grants - Grants for relocation and the acquisition of property and
equipment are deferred and recognized in income over the corresponding
useful lives of their related property and equipment. There are no
significant contingencies associated with the grants that would impact the
Company's ability to utilize assets received in association with the grants.
<PAGE> 18
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES, continued
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 accumulated as a separate
component of shareholders' equity. Foreign currency transactional gains and
losses are included in determining net income. Such gains and losses are not
material for any period presented.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates; however, management does not believe these differences would have
a material effect on operating results.
Year 2000 - The Company has evaluated the year 2000 impact on its internal
financial and operational systems. Management does not believe that the year
2000 will have a material effect on its financial condition or business
operations.
Accounting Pronouncements - In June 1997, the Financing Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" which
is effective for periods ending after December 15, 1998. This statement
establishes standards for computing and presenting comprehensive income
which includes translation adjustments. In June 1997, FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is also effective for periods ending after December 15, 1998. This
statement establishes additional disclosure requirements for business
segments.
Management is currently assessing the future period impact of SFAS No. 130
and 131 on the Company's presentation of results of operations, changes in
shareholders' equity and segment disclosures.
NOTE 2 - ACQUISITIONS AND MERGERS
Effective January 1, 1997, the Company acquired all of the common stock of
Traffic, N.V. ("Traffic") of Brussels, Belgium, and certain other assets,
for approximately $1.8 million in cash. Traffic specializes in foreign
language translation and multi-media documentation development. The
transaction was accounted for under the purchase method of accounting and
pro forma information is not presented, as the operating results are not
material to the Company's consolidated operations.
<PAGE> 19
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS AND MERGERS, continued
On March 31, 1997, the Company acquired Info Systems of North Carolina, Inc.
("Info Systems") in exchange for approximately 1.1 million shares of the
Company's common stock. The Company accounted for the acquisition utilizing
the pooling-of-interests method of accounting. Info Systems is engaged in
the design, development, licensing and support of information management
solutions to the retail, manufacturing and distribution industries.
On June 16, 1997, the Company acquired all of the stock of Telcare
Gesellschaft fur Telekommunikations-Mehrwertdieste mbH ("Telcare") of
Wilhelmshaven, Germany, in exchange for 750,000 shares of the Company's
common stock. The Company accounted for the acquisition utilizing the
pooling-of-interests method of accounting. Telcare operates an information
technology call center and provides technical support and service to
numerous industries in Germany.
On September 26, 1997, the Company acquired all of the stock of TAS
Telemarketing Gesellschaft fur Kommunikation und Dialog mbH ("TAS I") of
Bochum, Germany in exchange for 400,000 shares of the Company's common
stock. The Company accounted for the acquisition utilizing the
pooling-of-interests method of accounting. TAS I provides technical call
center support and customer care services, database development, consulting
and training services to customers in Germany and surrounding countries.
On September 26, 1997, the Company acquired all of the stock of TAS Hedi
Fabinyi GmbH ("TAS II") of Stuttgart, Germany, in exchange for 180,000
shares of the Company's common stock. The Company accounted for the
acquisition utilizing the pooling-of-interests method of accounting. TAS II
provides technical call center support and customer care services, to
customers in Germany and surrounding countries.
On December 31, 1997, the Company acquired all of the stock of McQueen
International Limited ("McQueen") of Galashiels, Scotland, in exchange for
3,540,000 shares of the Company's common stock. The Company accounted for
the acquisition utilizing the pooling-of-interests method of accounting.
McQueen provides inbound call center support and customer service, software
fulfillment and foreign language translation and localization services.
On April 7, 1997 McQueen acquired the Media Services divisions of Rand McNally &
Company, comprising the US Division, Rand McNally Media Services Inc., and Rand
McNally International Business Services BV, a Netherlands division with an
operational branch in Ireland, for approximately $30.0 million, including
acquisition costs. This purchase price was entirely financed through the
issuance of notes to the seller. Accordingly, this non-cash transaction has been
excluded from the accompanying Consolidated Statement of Cash Flows for the
year ended December 31, 1997. The acquisition has been accounted for by the
purchase method of accounting. Accordingly, the results of operations for the
eight months ended December 31, 1997 of Rand McNally Media Services Inc and Rand
McNally International Business Services BV have been included in the
accompanying financial statements. The excess of the total acquisition cost over
the fair value of net assets acquired in the amount of $6.9 million after an
impairment of $10.4 million is being amortized on a straight line basis over
fifteen years. The unaudited pro forma combined historical results, as if the
Media Services division of Rand McNally & Company had been acquired on January
1, 1996.
<PAGE> 20
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS AND MERGERS, continued
January 1, 1996 are estimated to be revenues of $285,249,000, net income of
$10,752,000, and basic and diluted earnings per share of $0.31 and $0.30,
respectively for 1996 and revenues of $329,748,000, net income of $5,871,000,
and basic and diluted earnings per share of $0.15 and $0.15, respectively for
1997. The pro forma results include amortization of the intangibles noted above
and interest expense on the debt assumed to finance the purchase. The pro forma
results are not necessarily indicative of what actually would have occurred if
the acquisition had been completed as of the beginning of 1996, nor are they
necessarily indicative of future consolidated results.
McQueen had a February 28 fiscal year end and, accordingly, the McQueen
statements of income for the years ended February 28, 1996 and 1997 have
been combined with the Sykes' statements of income for the years ended
December 31, 1995 and 1996, respectively. In order to conform McQueen's
fiscal year end to Sykes' calendar year end, the consolidated statement of
income for 1997 includes two months (January and February 1997) for McQueen
which are also included in the consolidated statements of income for the
year ended December 31, 1996. Accordingly, an adjustment has been made
during 1997 to retained earnings for the duplication of net income of
approximately $1.1 million for such two month period. McQueen's revenue for
the two months (January and February 1997) was approximately $12.3 million.
The above transactions, excluding Traffic and McQueen's purchase of the Media
Services division of Rand McNally & Company, have been accounted for as
pooling-of-interests and, accordingly, the consolidated financial statements for
the periods presented have been restated to include the accounts of Info
Systems, Telcare, TAS I, TAS II and McQueen.
<PAGE> 21
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS AND MERGERS, continued
Separate results of operations for the periods prior to the mergers with
Info Systems, Telcare, TAS I, TAS II and McQueen are outlined below.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenue:
Sykes........................................... $ 74,594,634 $117,018,154
Info Systems.................................... 23,317,923 25,196,629
Telcare......................................... 3,587,292 6,405,423
TAS I........................................... 4,318,972 7,922,762
TAS II.......................................... 2,075,363 3,467,533
McQueen......................................... 48,062,400 58,985,250
------------ ------------
Combined......................................... $155,956,584 $218,995,751
============ ============
Net income:
Sykes........................................... $ 2,396,085 $ 9,817,484
Info Systems.................................... (304,526) (1,982,510)
Telcare......................................... (489,725) 282,130
TAS I........................................... 337,453 435,729
TAS II.......................................... 53,556 124,560
McQueen......................................... 892,800 1,694,150
------------ ------------
Combined......................................... $ 2,885,643 $ 10,371,543
============ ============
Other changes in shareholders' equity:
Sykes........................................... $ 190,775 $113,916,826
Info Systems.................................... 678,051 2,356,235
Telcare......................................... 46,912 69,494
TAS I........................................... (275,691) (290,208)
TAS II.......................................... (18,151) (13,445)
McQueen......................................... 5,614,128 (464,865)
------------ ------------
Combined......................................... $ 6,236,024 $115,574,037
============ ============
</TABLE>
NOTE 3 - CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. With
the exception of approximately $2.3 million of receivables from a
significant customer (See Note 15), the Company's credit concentrations are
limited due to the wide variety of customers and markets into which the
Company's services are sold.
<PAGE> 22
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Trade accounts receivable....................... $ 49,416,729 $ 52,765,811
Unbilled accounts receivable.................... 2,843,193 9,937,777
Note from officer............................... - 418,958
Other........................................... 5,208,480 5,935,320
------------ ------------
57,468,402 69,057,866
Less allowance for doubtful accounts............ 498,129 537,395
------------ ------------
$ 56,970,273 $ 68,520,471
============ ============
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Land............................................ $ 2,506,421 $ 3,008,222
Buildings and leasehold improvements............ 18,777,157 24,340,797
Equipment, furniture and fixtures............... 56,469,008 82,950,507
Transportation equipment........................ 759,822 441,647
Construction in progress........................ - 6,344,495
------------ ------------
78,512,408 117,085,668
Less accumulated depreciation................... 24,891,978 45,803,485
------------ ------------
$ 53,620,430 $ 71,282,183
============ ============
</TABLE>
NOTE 6 - MARKETABLE SECURITIES
On May 8, 1997, the Company purchased approximately 1.066 million shares of
SystemSoft Corp. common stock in conjunction with a strategic technology
exchange agreement between the parties. On June 20, 1997, the Company
converted a $1.0 million note receivable into a to be determined number of
shares of InfoCure Corporation common stock, which will have a market value
of $1.0 million. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the investments are classified as available-for-sale securities
and are carried at an aggregate market value of $7.8 million as of December
31, 1997. The Company's cost basis in these investments is $9.0 million, and
the unrealized loss of approximately $1.2 million, net of deferred income
taxes of approximately $465,000, is reported as a separate component of
shareholders' equity.
<PAGE> 23
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
Long term debt consists of the following:
December 31,
---------------------------
1996 1997
----------- -----------
Secured loan note, principal and
interest payable in annual installments
through November 1999, interest at 8
percent, collateralized by certain
assets ................................. $ -- $ 855,675
Secured loan notes, interest payable in
quarterly installments through December
1999, interest at varying rates up to
9.6 percent, principal due in three
installments during 1999, collateralized
by certain assets ...................... -- 26,950,400
Notes payable and capital leases,
principal and interest payable in
monthly installments through December
2002, interest at varying rates up to
prime plus 1 percent, collateralized by
certain receivables and equipment ...... 13,522,917 8,495,793
----------- -----------
13,522,917 36,301,868
Less current portion ................... 8,345,239 2,989,271
----------- -----------
$ 5,177,678 $33,312,597
=========== ===========
Future principal maturities subsequent to December 31, 1998 are as follows:
1999............................ $29,569,573
2000............................ 1,232,487
2001............................ 1,140,042
2002............................ 1,370,495
-----------
$33,312,597
===========
Effective December 31, 1996, the Company entered into an agreement replacing
its previous credit line with an unsecured revolving $25.0 million
facility. This new facility accrues borrowings at tiered levels between 125
and 200 basis points above listed LIBOR pursuant to a defined ratio
calculation within the agreement, and includes as annual commitment fee of
0.1 percent of the committed amount. The facility matures in June 1998, and
contains certain covenants associated with tangible net worth, debt and debt
funding as defined by the agreement. There were no borrowings outstanding
under this agreement at December 31, 1996 or 1997, respectively.
Subsequent to December 1997, the Company entered into a new $150 million
syndicated credit facility which provides for multi-currency lending. This
new facility will accrue borrowings at tiered levels between 75 and 175
basis points above listed LIBOR pursuant to a defined ratio calculation
within the agreement, and will accrue as unused commitment fee at tiered
levels between 15 and 37.5 basis points above listed LIBOR. The facility
which matures in
<PAGE> 24
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT, continued
February 2001, contains certain financial covenants associated with debt
ratios, leverage, coverage and capital expenditures and acquisitions as
defined by the agreement.
During 1996, a subsidiary of the Company entered into a $2.0 million and a
$1.25 million credit facility. These facilities consisted of a revolving
line of credit maturing in November 1997. The Company had no borrowings
under either credit facility at December 31 1996 or 1997, respectively, and
both of these credit facilities were canceled during 1997.
NOTE 8 - INCOME TAXES
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.............................. $ 1,179,908 $10,823,955 $ 8,551,740
Foreign............................... 4,391,345 5,970,525 8,071,466
----------- ----------- -----------
Total income before
income taxes........................ $ 5,571,253 $16,794,480 $16,623,206
=========== =========== ===========
</TABLE>
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ (174,520) $ 3,573,533 $ 6,906,000
State................................ (35,875) 610,632 1,229,000
Foreign.............................. 1,640,252 1,955,190 2,728,000
----------- ----------- -----------
Total current provision
for income taxes................... 1,429,857 6,139,355 10,863,000
----------- ----------- -----------
Deferred:
Federal.............................. 1,054,967 (2,000) (99,000)
State................................ 183,006 56,250 (25,000)
Foreign.............................. 17,780 229,332 137,000
----------- ----------- -----------
Total deferred provision
for income taxes................... 1,255,753 283,582 13,000
----------- ----------- -----------
Total provision for
income taxes...................... $ 2,685,610 $ 6,422,937 $10,876,000
=========== =========== ===========
</TABLE>
<PAGE> 25
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME Taxes, continued
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Domestic current:
Deferred tax asset:
Accrued expenses .................................. $ 686,000 $ 800,000
Deferred compensation ............................. -- 246,000
Bad debt reserve .................................. 15,000 119,000
Other ............................................. 53,000 7,000
----------- -----------
Total current deferred tax asset ................. $ 754,000 $ 1,172,000
----------- -----------
Deferred tax liability:
Property and equipment ............................ $ (149,000) $ --
Cash to accrual-Section 481 adjustment ............ (277,000) (488,000)
----------- -----------
Total current deferred tax liability ............. (426,000) (488,000)
----------- -----------
Net domestic current deferred tax asset ......... $ 328,000 $ 684,000
----------- -----------
Foreign current:
Deferred tax asset:
Net operating loss carry-forward .................. $ 571,000 $ 135,000
Less: valuation allowance ......................... (571,000) (135,000)
----------- -----------
Total foreign non-current deferred tax asset ..... $ -- $ --
----------- -----------
Net current deferred asset ......................... $ 328,000 $ 684,000
=========== ===========
Domestic non-current:
Deferred tax asset:
Deferred compensation ............................. $ 240,000 $ --
Unrealized loss on security ....................... -- 466,000
Intangible assets ................................. -- 40,000
Accrued expenses .................................. 3,000 --
Other ............................................. -- 3,000
----------- -----------
Total non-current deferred tax asset ............. $ 243,000 $ 509,000
----------- -----------
Deferred tax liability:
Property and equipment ............................ $ (338,000) $ (504,000)
Cash to accrual-Section 481 adjustment ............ (2,903,000) (2,437,000)
Accrued liabilities ............................... -- (258,000)
Other ............................................. (244,562) (526,963)
----------- -----------
Total non-current deferred tax liability ......... (3,485,562) (3,725,963)
----------- -----------
Net domestic non-current deferred tax liability . $(3,242,562) $(3,216,963)
----------- -----------
Foreign non-current:
Deferred tax liability:
Property and equipment ............................ $(1,178,000) $(1,158,000)
----------- -----------
Total non-current deferred tax liability ......... (1,178,000) (1,158,000)
----------- -----------
Net foreign non-current deferred tax liability .. $(1,178,000) $(1,158,000)
----------- -----------
Net non-current deferred tax liability ............. $(4,420,562) $(4,374,963)
=========== ===========
</TABLE>
<PAGE> 26
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES, continued
The corporation has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations. Undistributed earnings amounted to
approximately $6.0 million at December 31, 1997, excluding amounts which, if
remitted, generally would result in minimal additional U.S. income taxes
because of available foreign tax credits. If the earnings of such foreign
subsidiaries were not indefinitely reinvested, a deferred tax liability of
approximately $700,000 would have been required.
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. The corresponding adjustment will be included in taxable
income over a period not to exceed four years.
The following summarizes the principal differences between income taxes at
the federal statutory rate and the effective income tax amounts reflected in
the financial statements:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax................... $ 1,894,000 $ 5,710,000 $ 5,818,000
State income taxes net of
federal tax benefit............ 67,000 316,000 759,000
Effect of income not subject to
federal and state income tax... (155,000) (284,000) (1,015,000)
Change in tax rate.............. - - 71,000
Non-deductible amortization..... - - 3,640,000
Loss on joint venture........... - - 990,000
Foreign taxes, net of foreign
income not taxed in the
United States.................. 444,264 276,937 133,000
Permanent differences........... 366,555 153,000 582,000
Tax credits..................... (90,209) - -
Other........................... 159,000 251,000 (102,000)
----------- ----------- -----------
Total provision for income
taxes....................... $ 2,685,610 $ 6,422,937 $10,876,000
=========== =========== ===========
</TABLE>
The Company is currently under examination by the Internal Revenue Service
for tax years ended July 31, 1991, 1992, 1993 and 1994. The Company has
reviewed various matters that are under consideration and believes that it
has adequately provided for any liability that may result from this
examination. In the opinion of management, any liability that may arise from
prior periods as a result of the examination will not have a material effect
on the Company's financial condition or results of operations.
<PAGE> 27
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 periods
and further assumes, (i) that the redeemable preferred stock was converted
at the beginning of each period, or date of issuance, if later, and (ii)
that earnings were increased for preferred dividends that would not have
been incurred had conversion taken place. Diluted earnings per share
includes, dilutive stock options using the treasury stock method.
The numbers of shares used in the earnings per share computation are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average
common outstanding.............. 29,945,275 34,411,266 38,982,002
---------- ---------- ----------
Total basic.................... 29,945,275 34,411,266 38,982,002
Diluted:
Conversion of
preferred stock................. 672,044 227,151 -
Dilution of stock options........ 711,201 1,315,906 1,271,044
---------- ---------- ----------
Total diluted.................. 31,328,520 35,954,323 40,253,046
========== ========== ==========
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and buildings under operating leases
having terms ranging from one to twenty-two years. The building leases
contain up to two five year renewal options.
Rental expense under operating leases for the years ended December 31, 1995,
1996 and 1997 was approximately $2,569,000, $6,177,000 and $4,949,000,
respectively. Rental expense for an office building leased from the
Company's major shareholder, net of subleases was approximately $104,000,
$104,000 and $88,000 for each of the years ended December 31, 1995, 1996 and
1997, respectively. This building was sold during November 1997, which
terminated the sublease agreement.
The Company has a ten-year operating lease agreement, signed in 1995, with
the Company's majority shareholder for its corporate aircraft. The lease
expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $51,000, $615,000 and $618,000, respectively.
The Company had a five year sublease agreement with an unrelated tenant for
its Charlotte, North Carolina facility. The minimum sublease rental amounts
the Company was expected to receive for the years ended December 31, 1998
and 1999, was approximately $187,000 and $94,000 respectively. This building
was sold during November 1997, which terminated the sublease agreement.
<PAGE> 28
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES, continued
The following is a schedule of future minimum rental payments under
operating leases having a remaining noncancelable term in excess of one year
subsequent to December 31, 1997:
<TABLE>
<CAPTION>
Related Non-Related Total
Year Party Party Amount
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
1998.............................. $ 618,000 $ 3,417,000 $ 4,035,000
1999.............................. 618,000 2,820,000 3,438,000
2000.............................. 618,000 2,131,000 2,749,000
2001.............................. 618,000 1,802,000 2,420,000
2002.............................. 618,000 1,306,000 1,924,000
Thereafter........................ 1,803,000 12,485,000 14,288,000
----------- ----------- -----------
Total minimum payments required.. $ 4,893,000 $23,961,000 $28,854,000
=========== =========== ===========
</TABLE>
During 1997, the Company entered into a joint venture with HealthPlan
Services, Inc., for the purpose of managing call centers focused on customer
services related to the health care services industry. The Company has
committed to invest $17.5 million for a fifty percent equity interest in the
joint venture. As of December 31, 1997, the Company has invested
approximately $5.1 million of its commitment in the joint venture.
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 11 - EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan covering defined employees who meet
established eligibility requirements. Under the original plan provisions,
the Company matched 25% of participant contributions to a maximum matching
amount of 1% of participant compensation. During 1997, the Company increased
the 401 (k) matching provision to 50% of participating contributions to a
maximum matching amount of 2% of participant compensation. Company
contributions are funded on a bi-weekly basis. The Company contribution was
approximately $143,000, $170,000 and $295,000 for the years ended December
31, 1995, 1996 and 1997, respectively. In addition, one of the Company's
subsidiaries maintains a separate defined contribution plan. The
contributions made to this plan was approximated $180,000, $198,000 and
$244,000 for the years ended December 31, 1995, 1996, and 1997,
respectively.
<PAGE> 29
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLAN, continued
In June 1992, one of the Company's subsidiaries established an Employee
Stock Ownership Plan ("ESOP") for the benefit of its employees. In August
1992, the ESOP purchased 249,350 shares of the subsidiary's common stock. In
connection with the stock purchase, the subsidiary made a cash contribution
of $1.0 million to the ESOP and entered into a note payable of $3.1 million.
As the debt was repaid, shares were released from collateral and allocated
to active employees, based on the proportion of debt service paid in the
current year. The note payable associated with the ESOP was repaid as of
December 31, 1996 and all shares were released to eligible employees.
NOTE 12 - PUBLIC OFFERINGS
In April 1996, the Company completed its initial public offering for the
sale of 4,500,000 shares of common stock. Coincident with such offering, the
underwriters of the offering exercised their 15% over-allotment and
accordingly an additional 939,978 shares of the Company's common stock were
sold by the Company. The Company received approximately $39.7 million from
the sale of the shares, net of underwriting discounts and expenses
associated with such offering. The proceeds were used to repay all
outstanding indebtedness and make capital expenditures, with the remaining
balance held for general corporate and working capital purposes.
In November 1996, the Company completed a secondary offering for the sale of
2,419,890 shares of common stock, inclusive of the underwriters
over-allotment option. The Company received approximately $71.5 million from
the offering, net of underwriting discounts and expenses. The net proceeds
were held for general corporate and working capital purposes.
NOTE 13 - STOCK OPTIONS
In 1995, the Company granted options to an executive officer to purchase
1,143,000 shares of common stock at $3.02 per share. The Company determined
that the price was approximately $0.83 below fair market value at the date
of the grant and recognized $949,960 as compensation expense for the year
ended December 31, 1995. The options become exercisable three years from the
date of grant, except that one-third were exercisable to the extent that the
underlying shares were permitted to be included by the underwriters in an
underwritten public offering. In November, 1996 the Company completed its
secondary public offering and 381,000 of the options granted to the
executive officer were exercised and sold in the offering. The remaining
762,000 options expire if not exercised by the tenth anniversary of their
grant date.
Another executive officer was granted options under the Company's 1996
Employee Stock Option Plan to purchase 209,841 shares of the Company's
common stock with an exercisable price of (i) 33 1/3% of such shares at
$8.00 per share, (ii) 33 1/3% at $7.55 per share, and (iii) 33 1/3% at $6.67
per share. Compensation expense of approximately $28,000 and $42,000 is
recognized in the general and administrative expenses in the accompanying
consolidated statements of operations for the years ended December 31, 1996
and 1997, respectively.
<PAGE> 30
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTIONS, continued
1996 Employee Stock Option Plan - The Company's 1996 Employee Stock Option
Plan (the "Employee Plan") permits the granting of incentive or nonqualified
stock options to purchase up to approximately 2,324,000 shares of the
Company's common stock at not less than the fair value at the time the
options are granted. Certain other officers and employees hold options to
purchase additional shares of common stock at a range of $0.03 to $31.27 per
share and vest ratably over the three-year period following the date of
grant, except for approximately 360,000 options associated with the
outstanding options from the acquisition of McQueen and options granted to
key employees of a 1996 acquisition, all of which are immediately
exercisable. All options granted under the Employee Plan expire if not
exercised by the tenth anniversary of their grant date with the exception of
outstanding options converted pursuant to the acquisition of McQueen
consistent with pooling-of-interests rules and expire five years from grant
date.
Transactions related to the 1996 Employee Stock Option Plan are summarized
as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1995 . --
Granted ......................... 973,605 $ 10.00
Exercised ....................... --
Expired or terminated ........... (71,813) $ 8.00
---------
Outstanding at December 31, 1996 . 901,792 $ 15.22
(Excercisable: 180,000 at $27.67)
Granted ......................... 893,816 $ 19.86
Exercised ....................... (190,322) $ 8.00
Expired or terminated ........... (231,300) $ 19.38
---------
Outstanding at December 31, 1997 . 1,373,986 $ 16.67
=========
Options available for future grant 831,610
=========
</TABLE>
The following table further summarizes information about the 1996 Employee
Stock Option Plan at December 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
- ---------------- ----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.03 to $ 1.24 236,441 5.0 $ 0.63 236,441 $ 0.63
$ 8.00 to $10.00 328,970 8.3 $ 8.00 6,150 $ 8.00
$19.18 to $31.27 808,575 9.6 $24.89 148,375 $27.70
$ 0.03 to $31.27 1,373,986 8.5 $16.67 390,966 $11.02
</TABLE>
1996 Non-Employee Director Stock Option Plan - The Company's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") permits
the granting of nonqualified stock options to purchase up to approximately
431,000 shares of the Company's common stock to members of the Board of
Directors who are not employees of the Company. Each outside director will
receive options to
<PAGE> 31
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTIONS, continued
purchase 5,000 shares of common stock on the day following each annual
meeting of shareholders. Also, on the date on which a new outside director
is first elected or appointed, he or she will automatically be granted
options to purchase 5,000 shares of common stock. All options granted will
have an exercise price equal to the then fair market value of the common
stock. At December 31, 1996 and 1997, no options granted were exercisable.
All options granted under the Non-Employee Plan expire if not exercised by
the tenth anniversary of their grant date.
Transactions related to the 1996 Non-Employee Director Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995............ -
Granted.................................... 56,250 $ 8.00
Exercised.................................. -
Expired or terminated...................... -
----------
Outstanding at December 31, 1996............ 56,250 $ 8.00
Granted.................................... 42,500 $22.61
Exercised.................................. (26,250) $ 8.00
Expired or terminated...................... -
----------
Outstanding at December 31, 1997............ 72,500 $16.56
==========
Options available for future grant.......... 341,250
==========
</TABLE>
The following table further summarizes information about the 1996
Non-Employee Director Stock Option Plan at December 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
- ---------------- ------------ --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 8.00 to $10.00 30,000 8.3 $ 8.00 - $ -
$22.23 to $25.42 42,500 9.4 $22.61 - $ -
$ 8.00 to $25.42 72,500 8.9 $16.56 - $ -
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation", but applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Therefore, no
compensation expense has been recognized for stock options granted under its
plans. If the Company had elected to recognize compensation expense for
stock options based on the fair value at grant date, consistent with the
method prescribed by SFAS No. 123, net income and earnings per share would
have been reduced to the pro forma amounts shown on the following page:
<PAGE> 32
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTIONS, continued
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1996 1997
-------- ------- -------
($ in thousands, except per share amounts)
<S> <C> <C> <C>
Pro forma net income
as reported (actual for 1997) $ 2,741 $10,305 $ 5,747
Pro forma net income (loss)
as prescribed by SFAS 123 $ 784 $ 7,970 $ (300)
Pro forma net income
per diluted share as reported
(actual for 1997) $ 0.09 $ 0.29 $ 0.14
Pro forma net income (loss)
per diluted share
as prescribed by SFAS 123 $ 0.03 $ 0.22 $ (0.01)
</TABLE>
The pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (i) a discount rate of 6.0 percent
for 1995 and 1996 and 6.05 percent for 1997; (ii) a volatility factor
initially based upon the average trading price since the Company's common
stock has traded on the Nasdaq National Market; (iii) no dividend yield; and
(iv) an average expected option life of approximately 4 years, for each year
presented.
NOTE 14 - GEOGRAPHIC INFORMATION
Information about the Company's operations by geographic location are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
United States..................... $ 86,231,484 $130,653,666 $193,898,426
International..................... 69,725,100 88,342,085 119,286,128
------------ ------------ ------------
$155,956,584 $218,995,751 $313,184,554
============ ============ ============
Income before income taxes:
United States..................... $ 1,179,908 $ 10,823,955 $ 8,551,740
International..................... 4,391,345 5,970,525 8,071,466
------------ ------------ ------------
$ 5,571,253 $ 16,794,480 $ 16,623,206
============ ============ ============
Total assets:
United States..................... $ 44,766,987 $162,831,598 $176,310,372
International..................... 41,191,342 51,691,933 65,353,093
------------ ------------ ------------
$ 85,958,329 $214,523,531 $241,663,465
============ ============ ============
</TABLE>
NOTE 15 - SIGNIFICANT CUSTOMER
Revenues from one customer amounted to 13%, 13% and 11% for the years ended
December 31, 1995, 1996 and 1997, respectively.
<PAGE> 33
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PRO FORMA DISCLOSURES
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. Effective
immediately prior to the Company's initial public offering, the preferred
stock and non-voting common stock was automatically converted into shares of
common stock. These shares were sold in connection with such offering.
Pro Forma Income Taxes - An affiliate of the Company had elected to be
treated as an S corporation for federal and state income tax purposes. As
such, the affiliate's taxable income was reported to and subject to tax to
the affiliate's shareholder. Prior to the Company's initial public offering,
the Company's affiliate terminated its S corporation election and
accordingly became subject to federal and state income taxes. The pro forma
provision for income taxes reported on the consolidated statements of
operations presents federal and state income taxes that would have been
incurred if the affiliate had been subject to tax as a C corporation. In
addition, the Company changed its method of accounting for income taxes from
the cash basis to the accrual method in connection with the offering. The
corresponding adjustment will be included in taxable income over a period
not to exceed four years.
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. At that time, the Company approved a 95-to-1 stock split of all
outstanding common stock, and 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 (subsequently further amended to 200,000,000). As part
of the change of state of incorporation, each share of common stock of the
North Carolina corporation was exchanged for 88 shares (198 shares as
adjusted for the three-for-two stock splits) 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.
Weighted average common shares outstanding includes the common share
equivalents discussed in Note 9, consistent with FAS Statement No. 128. In
addition, the calculation includes certain preferred stock issued during the
year that was converted to common stock immediately prior to the closing of
and sold in the Company's initial public offering. Such shares were deemed
outstanding for all periods presented.
In addition, the Company issued 2,745,000 shares of common stock as a result
of the merger involving Sykes Realty, Inc. immediately prior to the
offering, which shares were deemed outstanding for all periods presented.
<PAGE> 34
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company's joint venture entity signed
definitive agreements to acquire Health International ("HI") and Prudential
Service Bureau, Inc. ("PSBI"). The combined purchase price of the two
acquisitions was $72.6 million and the transactions were expected to be
completed by March 31, 1998. HI is a disease management company that
provides a comprehensive managed medical care program for employees and plan
administrators. PBSI provides a wide range of call center-based health and
welfare benefits and administrative services.
These acquisitions will be accounted for by the joint venture utilizing the
purchase method of accounting. As a result, the Company anticipates the
recording of non-recurring charges approximating $11.8 million, representing
its share of the joint venture's acquired in process research and
development.
<PAGE> 1
<TABLE>
<CAPTION>
Exhibit Number - 21.1
Sykes Enterprises, Incorporated
List of Subsidiaries
<S> <C>
Sykes Enterprises Incorporated of Canada Canada
Sykes Enterprises Incorporated Holdings B.V. Netherlands
Sykes Enterprises Incorporated, B.V. Netherlands
Sykes Realty, Inc. Florida
Sykes Enterprises-South Africa, Inc. Florida
DiagSoft, Inc. Florida
Datasvar Support AB Sweden
Info Systems of North Carolina, Inc. North Carolina
Sykes Holdings of Belgium B.V.B.A. Belgium
Translation, Fulfillment & Communication, N.V. ("Traffic") Belgium
Sykes Enterprises GmbH Germany
Telcare Gesellschaft fur Telekommunikations-Mehrwertdieste mbH ("Telcare") Germany
TAS Telemarketing Gesellschaft fur Kommunikations und Dialog mbH ("TAS I") Germany
TAS Hedi Fabinyi GmbH ("TAS II") Germany
McQueen Limited Scotland
McQueen International Limited Scotland
McQueen Integrated Manufacturing Services Ltd. Scotland
McQueen Graphics Ltd. Scotland
McQueen Europe Ltd. Scotland
Link Network Ltd. Scotland
McQueen Benelux BV Netherlands
McQueen France SA France
McQueen Inc. United States
McQueen Skandinavian AB Sweden
</TABLE>
30
<PAGE> 1
Exhibit Number - 23.2
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statements of
Sykes Enterprises, Incorporated and subsidiaries on Forms S-3 (file Nos.
333-38513 and 333-46569) and on Form S-8 (File No. 333-23681) of our report
dated March 6, 1998, on our audits of the consolidated financial statements of
Sykes Enterprises, Incorporated and subsidiaries as of December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997, which is
incorporated by reference in this Annual Report on Form 10-K. Separate financial
statements of McQueen International Limited included in the 1995 and 1996
restated consolidated statements of income and cash flows were audited and
reported on separately by other auditors.
Coopers & Lybrand
March 13, 1998
31
<PAGE> 1
Exhibit Number - 23.3
Consent of Independent Accountants
We have issued our report dated February 18, 1998 accompanying the financial
statements of McQueen International Limited and subsidiaries for the years ended
February 28, 1997 and 1996 included in Form 10-K of Sykes Enterprises,
Incorporated as of and for the year ended December 31, 1997. We consent to the
incorporation by reference of said report in the registration statements of
Sykes Enterprises, Incorporated and subsidiaries on Forms S-3 (File Nos.
333-38513 and 333-46569) and on Form S-8 (File No.333-23681).
GRANT THORNTON
Edinburgh
United Kingdom
March 13, 1998
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 70,523,067
<SECURITIES> 0
<RECEIVABLES> 69,057,866
<ALLOWANCES> 537,395
<INVENTORY> 0
<CURRENT-ASSETS> 150,421,458
<PP&E> 117,085,668
<DEPRECIATION> 45,803,485
<TOTAL-ASSETS> 241,663,465
<CURRENT-LIABILITIES> 42,105,002
<BONDS> 0
0
0
<COMMON> 390,576
<OTHER-SE> 147,396,636
<TOTAL-LIABILITY-AND-EQUITY> 241,663,465
<SALES> 0
<TOTAL-REVENUES> 313,184,554
<CGS> 0
<TOTAL-COSTS> 195,449,373
<OTHER-EXPENSES> 98,127,877
<LOSS-PROVISION> (3,750,735)
<INTEREST-EXPENSE> 766,637
<INCOME-PRETAX> 16,623,206
<INCOME-TAX> 10,876,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,747,206
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
<PAGE> 1
Exhibit 99.1
MCQUEEN INTERNATIONAL
LIMITED
CONSOLIDATED FINANCIAL
STATEMENTS
FOR YEARS ENDED
FEBRUARY 28 1997 AND 1996
<PAGE> 2
MCQUEEN INTERNATIONAL LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of the Independent Auditors on the Consolidated Financial Statements of
McQueen international Limited 1
Consolidated Balance Sheets as of February 28, 1997 and 1996 2
Consolidated Statements of Earnings for the years ended February 28, 1997 and 1996 3
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1997 and 1996 4
Consolidated Statements of Cash Flows for the years ended February 28, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-19
</TABLE>
<PAGE> 3
MCQUEEN INTERNATIONAL LIMITED
REPORT OF THE INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
The Board of Directors
McQueen International Limited
Report of the Independent Auditors
We have audited the accompanying consolidated balance sheets of McQueen
International Limited and its subsidiaries as of February 28, 1997 and 1996, and
the related consolidated statements of earnings, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McQueen
International Limited and its subsidiaries as of February 28, 1997 and 1996 and
the consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles in the United States.
GRANT THORNTON
Edinburgh
United Kingdom
February 18, 1998
Page 1
<PAGE> 4
MCQUEEN INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 1,713 1,327
Accounts receivable, net 8,484 7,214
Other receivables 244 460
Prepayments 1,246 476
Inventories, net 2,398 1,594
------ ------
Total current assets 14,085 11,071
Property and equipment, net 7,482 7,128
Investments 31 3
Goodwill 493 754
------ ------
Total assets 22,091 18,956
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 3,216 289
Current portion of secured subordinated loan stock debentures 375 375
Current portion of capital leases 440 470
Accounts payable 4,394 4,722
Deferred grants 82 156
Accrued expenses 6,280 5,573
------ ------
Total current liabilities 14,787 11,585
Long term portion of capital leases 525 886
Deferred grants 171 250
Deferred income taxes 587 425
Secured subordinated loan stock debentures, less current portion 1,691 2,051
------ ------
Total liabilities 17,761 15,197
Cumulative redeemable preference, L.1 stated value,
632,801 shares authorized, issued and outstanding 633 633
"A" Cumulative convertible preference, L.1 stated value,
2,408,272 shares authorized, issued and outstanding 2,408 2,408
"B" Convertible redeemable preference, L.1 stated value,
573,405 shares authorized, issued and outstanding 573 573
------ ------
3,614 3,614
Commitments and contingencies - -
Shareholders' equity
Ordinary L.0.10 stated value, 102,485 (1996 - 159,061) shares authorized, issued and outstanding 10 16
"A" Ordinary L.0.10 stated value, 361,772 shares authorized, issued and outstanding 36 36
"B" Ordinary L.0.10 stated value, 121,827 shares authorized, 58,814 shares issued
and outstanding 6 -
Cumulative convertible participating preferred ordinaryL.0.10 stated value,
65,121 shares authorized, issued and outstanding 6 6
Cumulative translation adjustment (339) (72)
Additional paid in capital 285 285
Retained earnings/(accumulated deficit) 712 (126)
------ ------
Total shareholders' equity 4,330 3,759
------ ------
Total liabilities and shareholders' equity 22,091 18,956
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE> 5
MCQUEEN INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Sales 38,055 31,008
Cost of sales (14,258) (14,310)
------- -------
Gross profit 23,797 16,698
Operating expenses (21,467) (15,093)
------- -------
Income from operations 2,330 1,605
Interest income 42 16
Interest expense (581) (482)
------- -------
Income before tax and minority interest 1,791 1,139
Income taxes (727) (562)
------- -------
Income after tax and before minority interest 1,064 577
Minority interest 29 (1)
------- -------
Net income 1,093 576
======= =======
Net earnings per share L.2.09 L.1.10
======= =======
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
Number Number
------- -------
<S> <C> <C>
Weighted average shares outstanding 522 521
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE> 6
MCQUEEN INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED FEBRUARY 28
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ordinary Shares "A" Ordinary
Shares Amount Shares Amount
L. 000 L. 000
<S> <C> <C> <C> <C>
Balance at
March 1, 1995 159,061 16 361,772 36
Share capital issued -- -- -- --
Minority interest -- -- -- --
Cumulative translation
adjustment -- -- -- --
Dividends paid -- -- -- --
Net income -- -- -- --
----------------------------------------------
Balance at
February 28, 1996 159,061 16 361,772 36
Share capital converted (56,576) (6) -- --
Share capital issued -- -- -- --
Cumulative translation
adjustment -- -- -- --
Dividends paid -- -- -- --
Minority interest -- -- -- --
Net income -- -- -- --
----------------------------------------------
Balance at
February 28, 1997 102,485 10 361,772 36
==============================================
<CAPTION>
Preferred Ordinary "B" Ordinary
Shares Amount Shares Amount
L. 000 L. 000
<S> <C> <C> <C> <C>
Balance at
March 1, 1995 -- -- -- --
Share capital issued 65,121 6 -- --
Minority interest -- -- -- --
Cumulative translation
adjustment -- -- -- --
Dividends paid -- -- -- --
Net income -- -- -- --
----------------------------------------------
Balance at
February 28, 1996 65,121 6 -- --
Share capital converted -- -- -- --
Share capital issued -- -- 58,145 6
Cumulative translation
adjustment -- -- -- --
Dividends paid -- -- -- --
Minority interest -- -- -- --
Net income -- -- -- --
----------------------------------------------
Balance at
February 28, 1997 65,121 6 58,145 6
==============================================
<CAPTION>
Cumulative Convertible Cumulative Additional
Preference Shares translation paid in
Shares Amount adjustment capital
L. 000 L. 000
<S> <C> <C> <C> <C>
Balance at
March 1, 1995 3,041,073 3,041 -- --
Share capital issued 573,405 573 -- 285
Minority interest -- -- -- --
Cumulative translation
adjustment -- -- (72) --
Dividends paid -- -- -- --
Net income -- -- -- --
--------------------------------------------------
Balance at
February 28, 1996 3,614,478 3,614 (72) 285
Share capital converted -- -- -- --
Share capital issued -- -- -- --
Cumulative translation
adjustment -- -- (267) --
Dividends paid -- -- -- --
Minority interest -- -- -- --
Net income -- -- -- --
--------------------------------------------------
Balance at
February 28, 1997 3,614,478 3,614 (339) 285
==================================================
</TABLE>
<TABLE>
<CAPTION>
(Accum-
ulated
deficit/
retained
earnings Total
L. 000 L. 000
<S> <C> <C>
Balance at
March 1, 1995 (462) 2,631
Share capital issued -- 864
Minority interest 5 5
Cumulative translation
adjustment -- (72)
Dividends paid (245) (245)
Net income 576 576
------------------------
Balance at
February 28, 1996 (126) 3,759
Share capital converted -- (6)
Share capital issued -- 6
Cumulative translation
adjustment -- (267)
Dividends paid (245) (245)
Minority interest (10) (10)
Net income 1,093 1,093
------------------------
Balance at
February 28, 1997 712 4,330
========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE> 7
MCQUEEN INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,093 576
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
(USED IN)/PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 1,148 1,266
Deferred tax expense/(benefit) 162 (130)
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF ACQUISITION
Increase in inventories (804) (876)
Increase in receivables (1,804) (1,790)
(Decrease)/increase in accounts payable (328) 1,674
Increase in accrued expenses 707 2,186
(Decrease)/increase in other liabilities (190) 584
------ ------
Total adjustments (1,109) 2,914
------ ------
Net cash (used in)/provided by operating activities (16) 3,490
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,021) (1,133)
Acquisition of business, net of bank overdraft acquired -- (816)
Proceeds from sale of property and equipment 339 104
Purchase of investments (28) --
------ ------
Net cash used for investing activities (1,710) (1,845)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in bank overdraft 2,927 (1,357)
Principal payments under long-term debt and capital leases (766) (963)
Proceeds from issuance of shares -- 1,052
Proceeds from grants 438 413
Proceeds from issuance of long-term debt, net -- 1,000
Payments in connection with issuance of loan notes and shares -- (224)
Dividends paid (220) (163)
------ ------
Net cash (used in)/provided by financing activities 2,379 (242)
Effect of exchange rate changes on cash and cash equivalents (267) (76)
------ ------
Net increase in cash and cash equivalents 386 1,327
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 1,327 --
------ ------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 1,713 1,327
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest 539 466
Income taxes 425 663
====== ======
Non cash investing and financing activities:
New capital leases 213 --
====== ======
Acquisition of business:
Fair value of assets acquired -- 2,925
Cash paid -- (786)
------ ------
Liabilities assumed -- 2,139
====== ======
</TABLE>
Page 5
<PAGE> 8
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE A - DESCRIPTION OF THE BUSINESS
The Company
McQueen International Limited and its subsidiaries (the "Company") are
principally engaged in the provision of outsourced services to the technology
and information industries.
The Company provides an integrated range of outsourced services through three
business units: Localization, Fulfillment Services and Call Center Services.
Localization translates and re-engineers software products and documentation
into multiple languages. Fulfillment Services fulfills the physical product by
printing documentation, replicating disk media, procuring components, assembling
the final product and shipping it to whichever level within the distribution
chain the client designates. Call Center Services provides a range of access
services for inquiries, direct sales and technical support to end users.
These business units provide national and international services through the
Company's operational sites in the United Kingdom ("UK"), the Netherlands,
Sweden, France and the United States ("US").
Incorporation and history
The Company was incorporated in Scotland on September 16, 1994 as Dunwilco (415)
Limited and on September 29, 1994 changed its name to McQueen International
Limited. On February 3, 1995 it acquired the entire share capital of McQueen
Limited.
On July 7, 1995 McQueen Limited acquired the entire share capital of Winners SA,
a French company engaged in the provision of Localization and Fulfillment
Services.
Companies Act 1985
These financial statements do not comprise accounts within the meaning of
Section 240 of the UK Companies Act 1985 (the "Companies Act"). The Company's
statutory accounts, which are its primary financial statements, are prepared in
accordance with generally accepted accounting principles in the United Kingdom
("UK GAAP") in compliance with the Companies Act and are presented in Great
Britain pounds sterling ("pounds sterling"). Dividends are required to be
declared in pounds sterling out of profits available for that purpose as
determined by UK GAAP and in accordance with the Companies Act.
Page 6
<PAGE> 9
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of McQueen
International Limited and its subsidiaries, McQueen Limited, McQueen France SA,
McQueen Benelux BV, McQueen Inc., McQueen Skandinavien AB, McQueen ESOT Trustees
Limited, Link Network Limited, McQueen Integrated Manufacturing Services
Limited, McQueen Graphics Limited, McQueen Direct Limited and Portfolio
Solutions Limited. All significant intercompany balances and transactions have
been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. Actual results may differ from those estimates.
Revenue Recognition
Revenue is recognized on sales when a product is shipped and from services when
performed.
Earnings Per Share
Primary earnings per common share are based on the weighted average number of
common shares outstanding.
Fully diluted earnings per common share are based on the assumption that all
stock options were converted at the beginning of the year or at the time of
issuance if later.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Fair value of Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate their carrying values due to
the relatively short maturities of these instruments.
Inventories
Inventories are priced at the lower of cost (determined by first-in, first-out)
or market value (defined as net realizable value).
Page 7
<PAGE> 10
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets less estimated
residual value to operations over their estimated useful lives, principally on
the straight-line basis. The estimated lives used in determining depreciation
are:
Buildings 50 years
Plant and equipment 3 - 15 years
Motor vehicles 4 years
Fixtures and fittings 10 - 25 years
Leased assets are amortized over the lives of the respective leases or the
service life of the asset, whichever is shorter. Repair and maintenance costs
are charged to expenses as incurred.
The depreciation charges for the years ended February 28, 1997 and 1996 were
L.1,312,000 and L.1,469,000, respectively.
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired and is
being amortized by the straight-line method over one to fifteen years. The
amortization charges for the years ended February 28, 1997 and 1996 were
L.261,000 and L.486,000 respectively.
On an ongoing basis, management reviews the valuation and amortization of
goodwill to determine possible impairment. The recoverability of goodwill is
assessed by determining whether the amortization of goodwill over its remaining
life can be recovered through projected undiscounted future cash flows.
Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting
Standards No 109 (SFAS No 109), " Accounting for Income Taxes". Under SFAS No
109 income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Foreign Currency Translation
The reporting currency of the Company is the pound sterling. The functional
currency of the US subsidiary is the US dollar. The functional currency of the
other foreign subsidiaries is the domestic currency of that subsidiary.
The assets and liabilities of the Company's foreign subsidiaries whose
functional currency is other than the pound sterling 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 are not included in determining net
income, but are accumulated as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining net
income. Such gains and losses are not material for any period presented.
Page 8
<PAGE> 11
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at February 28, consist of the following:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
<S> <C> <C>
L. L.
Trade accounts receivable 8,624 7,359
Less allowance for doubtful accounts (140) (145)
----- -----
8,484 7,214
===== =====
NOTE D - INVENTORIES
Inventories at February 28, consist of the following:
(In Thousands)
1997 1996
L. L.
Raw materials 724 710
Work-in-progress 1,548 420
Finished Goods 193 483
----- -----
2,465 1,613
Reserve for obsolete inventory (67) (19)
----- -----
2,398 1,594
===== =====
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment at February 28, consists of the following:
(In Thousands)
1997 1996
L. L.
Land and buildings 1,977 1,983
Plant and machinery 7,505 6,441
Motor Vehicles 79 531
Fixtures and fittings 3,161 2,476
------ ------
12,722 11,431
Less accumulated depreciation (5,240) (4,303)
------ ------
7,482 7,128
====== ======
NOTE F- GOODWILL
Goodwill at February 28, consists of the following:
(In Thousands)
1997 1996
L. L.
Purchased goodwill 1,240 1,240
less accumulated amortization (747) (486)
----- -----
493 754
===== =====
</TABLE>
Page 9
<PAGE> 12
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE G - ACCRUED EXPENSES
Accrued expenses at February 28, consist of the following:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Social security and other taxes 1,207 1,516
Other 3,790 2,956
Sundry creditors 421 399
Income tax payable 862 702
----- -----
6,280 5,573
===== =====
</TABLE>
NOTE H - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Long-term obligations at February 28, consists of the following:
Secured loan notes (net of issue costs) - repayable in yearly
installments of L.375,000 (excluding interest) until November
1999. They carry interest of 8% per annum and are secured by a floating
charge over the assets of the company. 1,106 1,474
Secured loan stocks - the loans are secured by a floating charge over the assets of
the company. The interest rate is 3% over bank base rate until February 1998
and 5% over bank base rate thereafter. 960 952
------ -----
2,066 2,426
less current position (375) (375)
----- -----
1,691 2,051
===== =====
</TABLE>
Aggregate maturities of long-term obligations at February 28, 1997 are
as follows:
<TABLE>
<CAPTION>
(In Thousands)
L.
<S> <C> <C>
1998 375
1999 356
2000 300
2001 300
2002 360
-------
1,691
</TABLE>
Page 10
<PAGE> 13
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE I - INCOME TAXES
The provision for income taxes for the year ended February 28, was composed of
the following:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Current tax expense:
United Kingdom 565 692
Deferred tax expense (benefit):
United Kingdom 162 (130)
---- ----
Total provision for income taxes 727 562
==== ====
</TABLE>
Income taxes are greater than the amount of income tax determined by applying
the applicable UK statutory income tax rate to income before income taxes as a
result of the following differences:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Income tax expenses at the 33% UK statutory rate 591 374
Non-deductible amortization 86 160
Other 50 28
---- ----
727 562
==== ====
</TABLE>
Significant components of the Company's net deferred tax liabilities as of
February 28, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Deferred tax liability:
Depreciation (587) (425)
Deferred tax asset:
Net operating loss carryforward of international subsidiaries 86 125
Valuation allowance (86) (125)
---- ----
Net deferred tax liability (587) (425)
==== ====
</TABLE>
SFAS No 109 specifies that deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax assets will not be realized. As of February 28, 1997 and 1996, the
Company had deferred tax assets attributable to foreign net operating loss
carryforwards. As a majority of these carryforwards expire in five years or
less realization is considered uncertain and a valuation allowance has been
recorded.
NOTE J - BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Company has a defined contribution agreement for the benefit of its
employees. The assets of the agreement are administered by trustees in a fund
independent from those of the Company. Costs charged against profits represents
the amount of the contributions payable to the scheme in respect of the
accounting period. The amount of contributions expensed was [pound sterling]
128,000, and [pound sterling] 116,000 for the years ended February 28, 1997 and
1996 respectively.
Page 11
<PAGE> 14
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE K - PREFERRED STOCK
CUMULATIVE REDEEMABLE PREFERENCE SHARES
Dividends
The cumulative redeemable preference shares are non equity shares which
carry an entitlement to a dividend of L.0.05 per share.
Voting Rights
The cumulative redeemable preference shares carry no voting rights
unless the Company is more than three months late in paying a dividend
or redeeming shares.
Redemption rights
The cumulative redeemable preference shares are required to be redeemed
at a price of L.1.16 as follows:
<TABLE>
<CAPTION>
Number
<S> <C>
February 28, 2000 126,560
February 28, 2001 126,560
February 28, 2002 126,561
February 28, 2003 126,560
February 28, 2004 126,560
-------
632,801
=======
</TABLE>
They may also be redeemed at the behest of the Company at any time with the
consent of 95% of the shareholders.
Rights on a winding up
Cumulative redeemable preference shareholders have the right on a winding up to
receive in priority to any other class of share all arrears of dividend or
redemption together with the sum of L.1.16 per share.
"A" CUMULATIVE CONVERTIBLE PREFERENCE SHARES
Dividends
The cumulative convertible preference shares are non equity shares which carry
an entitlement to a dividend of L.0.05 per share.
Page 12
<PAGE> 15
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Voting Rights
The cumulative convertible preference shares carry no voting rights unless the
Company is more than three months late in paying a dividend.
Conversion rights
The cumulative convertible preference shares shall be converted prior to and
conditional upon any listing of the company's shares. Then the shares will be
converted into a mixture of ordinary shares and deferred shares in accordance
with a formula laid down in the Company's articles of association. The deferred
shares so created carry no rights to vote, receive income or be converted and
are redeemable at the company's behest at the sum of L.0.000001 per share.
Rights on a winding up
Cumulative convertible preference shareholders have the right on a winding up to
receive in priority to the holders of the ordinary and "A" ordinary shares all
arrears of dividend or redemption together with the sum of L.1.16 per
share.
"B" CONVERTIBLE REDEEMABLE PREFERENCE SHARES
Dividends
The convertible redeemable preference shares are non equity shares which carry
no entitlement to a dividend.
Voting Rights
The convertible redeemable preference shares carry no voting rights unless the
Company breaches its obligations with regard to its loan stocks. Then the
shareholders carry the rights to vote that they would receive if they had
converted their shares in accordance with the formula laid down in the Company's
articles of association.
Conversion rights
The convertible redeemable preference shares may be converted at the
shareholders' behest at any time after February 28, 2005. Then the shares will
be converted into a mixture of preferred ordinary shares and deferred shares in
accordance with a formula laid down in the Company's articles of association.
The deferred shares so created carry no rights to vote, receive income or be
converted and are redeemable at the Company's behest at the sum of
L.0.000001 per share.
Page 13
<PAGE> 16
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Redemption rights
The convertible redeemable preference shares may be redeemed at the behest of
the Company at any time after the loan stocks have been repaid with the consent
of 75% of its members. The Company may redeem the shares on or before February
28, 2004 at an amount per share between L.1.73 and L.5.16. After
February 28, 2004 the Company may redeem the shares at L.6.19 per share.
The convertible redeemable preference shares shall also be redeemed when the
Company becomes listed, a controlling interest is sold or the holders of the
cumulative redeemable preference shares initiate the redemption of their shares.
Rights on a winding up
The convertible redeemable preference shareholders have the right on a winding
up to receive in priority to all other classes of shares bar the holders of the
cumulative redeemable preference shares that amount which they would have
received if the shares had been redeemed on that date.
CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED ORDINARY SHARES
Dividends
The preferred ordinary shares are equity shares that carry an entitlement to a
dividend based on a percentage of the net profit, as defined in the Company's
articles of association, commencing at 5% and rising to 12.5% from March 1,
2002; or 7% of the total amount distributed or to be distributed to the holders
of the issued equity share capital in respect of that year.
Voting Rights
The preferred ordinary shares carry the right to one vote per share subject to a
maximum amount of voting rights for the class of share as a whole of 4.9% of the
votes available.
Conversion Rights
At the holders' behest or upon a listing of any of its shares, the Company must
convert all of the preferred ordinary shares into that number of shares that
represents 7% of the issued equity share capital assuming the exercise in full
of all other outstanding share options and conversions including that of the "A"
ordinary shares.
Rights on a winding up
The holders of the preferred ordinary shares carry unlimited equal rights along
with the ordinary and "A" ordinary shareholders to share in the surplus
remaining on a winding up after all the liabilities and participation rights of
other classes of shares have been satisfied.
Page 14
<PAGE> 17
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE L - GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment providing
services. Information about the Company's operations by geographic area
for the years ended February 28, is as follows:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Net revenue
United States 171 192
United Kingdom 29,035 25,904
France 6,755 3,977
Rest of the World 2,094 935
------ ------
38,055 31,008
====== ======
Income from operations
United States 7 12
United Kingdom 2,122 1,666
France 85 121
Rest of the World 116 (194)
------ ------
2,330 1,605
====== ======
Identifiable assets
United States 37 56
United Kingdom 18,021 15,852
France 2,671 2,457
Rest of the World 1,362 591
------ ------
22,091 18,956
====== ======
</TABLE>
Page 15
<PAGE> 18
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE M - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities and items of equipment under
noncancellable operating leases. The following is a schedule, by years, of
minimum rental payments under such operating leases which expire at various
dates through 2020:
<TABLE>
<CAPTION>
(In Thousands)
L.
<S> <C> <C>
1998 592
1999 590
2000 582
2001 446
Thereafter 8,516
------
10,726
======
</TABLE>
Total rent expense for the years ended February 28, 1997 and 1996 were
approximately L.593,000 and L.91,000 respectively.
CAPITAL LEASES
The Company also leases certain assets under capital leases. The related assets
and obligations have been recorded using the Company's incremental borrowing
rate at the inception of the lease. The leases, which are noncancellable, expire
at various dates through 2002. The following is a schedule of leased property
under capital leases as of February 28:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Plant and machinery 3,249 1,662
Motor Vehicles 25 356
----- -----
3,274 2,018
Less accumulated depreciation (766) (676)
----- -----
2,508 1,342
===== =====
</TABLE>
The following is a schedule, by years, of future minimum lease payments under
capital leases together with the present value of the net minimum payments as of
February 28, 1997:
<TABLE>
<CAPTION>
(In Thousands)
L.
<S> <C>
Year ended February 28,
1998 547
1999 441
2000 106
2001 100
--------
Total minimum lease payments 1,194
less amount representing interest (229)
--------
Present value of net minimum lease payments 965
========
Current portion 440
Noncurrent portion 525
--------
965
========
</TABLE>
Page 16
<PAGE> 19
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
GOVERNMENT GRANTS
The Company has received government grants principally of a revenue nature and
these grants have been credited to Income in the period in which the related
expenditure has been incurred. The grants of a capital nature are deferred and
released to the Income Statement over the lives of the assets to which they
relate. The position at February 28 is summarized below.
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
L. L.
<S> <C> <C>
Deferred portion
less than one year 82 156
more than one year 171 250
--- ---
253 406
=== ===
</TABLE>
NOTE N - MAJOR CUSTOMERS
Approximately 46% (1996 57%) of the Company's revenue is from Adobe Systems, Inc
("Adobe").
During the year ended February 28, 1997, approximately 73% (1996 70%) of the
Company's net revenues were from five (1996 - five) major customers. At February
28, 1997 accounts receivable included balances of approximately L.4,245,000
(1996 L.4,260,000) from five major customers, of which L.2,987,000
(1996 L.3,530,000) is due from Adobe.
NOTE O - STOCK OPTIONS
The Company has four share option plans accounted for under APB Opinion 25 and
related interpretations. The company's articles allow the Company to grant
options to employees for up to 130,034 equity shares. Options currently
outstanding become exercisable in three to seven years from the grant date and
expire seven years after the grant date. The options are exercisable at less
than the market value of the Company's shares on the date of the grant.
Accordingly, compensation cost has been recognized for the plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of Statement of Financial
Accounting Standard No 123, "Accounting for Stock-Based Compensation" (SFAS No
123), the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
L. L.
<S> <C> <C>
Net income As reported L.1,093,000 L.576,000
Pro forma L.1,002,000 L.416,000
Primary earnings per share As reported L.2.09 L.1.10
Pro forma L.1.92 L.0.80
Fully diluted earnings per share As reported L.1.98 L.1.08
Pro forma L.1.81 L.0.78
</TABLE>
Page 17
<PAGE> 20
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
minimum value method of which the following weighted-average assumptions used
for grants, risk-free interest rates 6.5%; and expected life of 6 years.
A summary of the status of the company's stock option plans as of February 28,
1997 and 1996, and changes during the years ending on those dates is presented
below.
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
000 000
<S> <C> <C> <C> <C>
Outstanding at beginning of year 20 L.0.10 - -
Granted 20 L.3.40 20 L.0.10
-- --
Outstanding at end of year 40 L.1.75 20 L.0.10
== ==
Options exercisable at year end - - - -
Weighted-average fair value of
options granted during the year L.132,000 L.6.60 L.130,000 L.6.50
</TABLE>
The following table summarizes information concerning options outstanding at
February 28, 1997
<TABLE>
<CAPTION>
Weighted-
Average
remaining Weighted-
Number contractual life Average
Range of Exercise Prices Outstanding (Years) Exercise Price
000
<S> <C> <C> <C>
L.0.10 23 5.7 L.0.10
L.4.00 17 6.6 L.4.00
--
40
==
</TABLE>
NOTE P - ACCOUNTING PRONOUNCEMENTS
For US GAAP purposes, the Company adopted SFAS No 121, "Accounting for the
Long-Lived Assets and for Long-Lived Assets to be Disposed of", as of April 1,
1996. The effect of adoption of SFAS No 121 was not material.
In June 1997 the Financial Accounting Standards Board issued SFAS No 130
"Reporting Comprehensive Income", and this SFAS is effective for fiscal years
beginning after December 15, 1997. The Company has considered the effects of
this statement and believes the cumulative translation adjustment is the only
component of comprehensive income as defined by this statement.
In June 1997 the Financial Accounting Standards Board issued SFAS No 131
"Disclosure about Segments of an Enterprise and Related Information" and this
is Effective for fiscal years beginning after December 15, 1997. The Company
is evaluating the disclosure impact of SFAS No 131 on its financial statements
and believes that the effect of adoption of SFAS No 131 will not be material.
In February 1997, the Financial Accounting Standards Board issued SFAS No 128
"Earnings per Share". This statement is effective for financial statements
issued for periods ending after December 15, 1997. The Company is evaluating the
disclosure impact of SFAS No 128 on its financial statements and believes that
the effect of adoption will not be material.
Page 18
<PAGE> 21
MCQUEEN INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE Q - POST BALANCE SHEET EVENTS
On April 7, 1997 the Company acquired the Media Services divisions of Rand
McNally & Company, comprising the US division, Rand McNally Media Services Inc,
and Rand McNally International Business Services BV, a Netherlands division with
an operational branch in Ireland, for approximately L.18.4 million in a cash
transaction including acquisition costs. The excess of the total acquisition
cost over the fair value of net assets acquired in the amount of L.4,173,000
after an impairment provision of L.6,400,000 is to be amortized on a straight
line basis over fifteen years. On April 7, 1997 Rand McNally Media Services Inc
changed its name to McQueen Inc and the pre-existing US subsidiary, McQueen Inc,
changed its name to McQueen International Inc. On July 29, 1997 Rand McNally
International Business Services BV changed its name to McQueen International BV.
On December 31, 1997 the business of the Company and Sykes Enterprises, Inc
("Sykes"), an information technology company providing a variety of computer
related outsourcing services to Fortune 500 firms, were merged upon the exchange
of Sykes common shares for the outstanding common and preferred shares of the
Company. The transaction was accounted for as a pooling of interest.
NOTE R - RELATED PARTY TRANSACTIONS
For the years ended February 28, 1997 and 1996, the Company paid to Glenbrae
Management Services Limited (Glenbrae) and Blackford Business Services
(Blackford) L.192,765 and L.159,649, and L.14,990 and nil respectively. A
director and a non-executive director of the Company are also a shareholder and
sole proprietor of Glenbrae and Blackford, respectively.
Page 19
<PAGE> 1
Exhibit 99.2
MCQUEEN INTERNATIONAL LIMITED
Consolidated Profit and Loss Account
For the ten month period ended December 31, 1997
<TABLE>
<CAPTION>
10 Months
ended
December 31,
1997
(L.) 000
-------------------
<S> <C>
SALES 61,221
Cost of sales 25,146
-------
Gross Profit 36,075
Operating expenses 39,565
-------
OPERATING LOSS (3,490)
Interest receivable and similar income 86
Interest payable and similar charges (1,366)
-------
Loss before tax and minority interest (4,770)
Income tax benefit 205
LOSS AFTER TAX AND BEFORE MINORITY INTEREST (4,565)
Minority interests 45
-------
NET LOSS (4,610)
=======
</TABLE>
<PAGE> 2
Exhibit 99.2
MCQUEEN INTERNATIONAL LIMITED
Consolidated Cash Flow Statement
For the ten month period ended December 31, 1997
<TABLE>
<CAPTION>
10 Months
ended
December 31,
1997
(L.) 000
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET (LOSS) (4,610)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 7,441
Changes in assets and liabilities, net of effects from acquisition
Decrease in accounts receivable 2,519
Decrease in inventories 767
Increase in accounts payable 3,123
Increase in other liabilities 63
-------
Total adjustments 13,913
-------
Net cash provided by operating activities 9,303
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,275)
Acquisition of Rand McNally Media Services (18,399)
-------
Net cash used in investing activities (20,674)
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on loan notes and capital leases (1,231)
Receipts from capital leases 372
Issuance of loan notes 19,514
Shares repurchased (1,697)
Dividends paid (187)
-------
Net cash used in financing activities 16,771
Net increase in cash and cash equivalents 5,400
Cash and cash equivalents at beginning of period (1,500)
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,900
=======
Other information:
Interest paid 1,446
Income taxes paid 864
</TABLE>
