FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
---------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_________________ to ___________________
Commission File No.______________________0-28274_______________________________
SYKES ENTERPRISES, INCORPORATED __
(Exact name of Registrant as specified in its charter)
Florida 56-1383460
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 813-274-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.01 Par Value, 39,316,718 shares as of October 27, 1998.
Page 1_ of 19 Pages
The Exhibit Index Appears on Page _18_
<PAGE>
PART I
Item 1 - Financial Statements
<TABLE>
<CAPTION>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1997 1998
------------- ------------
(Unaudited)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.......................................... $ 70,523,067 $ 21,151,355
Restricted cash.................................................... - 10,704,871
Receivables........................................................ 68,520,471 109,269,666
Prepaid expenses and other current assets.......................... 11,377,920 17,672,663
---------- ------------
Total current assets........................................... 150,421,458 158,798,555
Property and equipment, net.......................................... 71,282,183 85,458,587
Marketable securities................................................ 7,800,002 600,158
Investment in joint venture.......................................... 2,285,142 -
Goodwill............................................................. 7,286,631 55,930,437
Deferred charges and other assets.................................... 2,588,049 13,641,979
--------- ----------
$ 241,663,465 $ 314,429,716
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt............................. $ 2,989,271 $ 2,480,879
Accounts payable................................................... 19,905,671 27,665,594
Income tax payable................................................. 2,725,177 8,519,402
Accrued employee compensation and benefits......................... 10,035,233 21,462,077
Customer deposits.................................................. - 10,608,169
Other accrued expenses and current liabilities..................... 6,449,650 10,183,637
------------ ------------
Total current liabilities..................................... 42,105,002 80,919,758
Long-term debt....................................................... 33,312,597 78,158,376
Deferred income taxes................................................ 4,374,963 34,257
Deferred grants...................................................... 14,083,691 13,015,149
Other long-term liabilities.......................................... -
Total liabilities............................................. 93,876,253 174,729,318
----------- ------------
Commitments and contingencies (Note 4)
Shareholders' equity
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding...................... - -
Common stock, $0.01 par value; 200,000,000 shares authorized;
39,057,626 and 39,316,718 shares issued and outstanding........... 390,576 393,167
Additional paid-in capital......................................... 133,579,200 134,583,670
Retained earnings.................................................. 17,106,620 12,968,220
Unrealized loss on securities, net of taxes........................ (734,518) (6,934,362)
Accumulated foreign currency translation adjustments............... (2,554,666) (1,310,297)
------------ -----------
Total shareholders' equity..................................... 147,787,212 139,700,398
------------ -----------
$ 241,663,465 $ 314,429,716
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
September 30, September 28, September 30, September 28,
1997 1998 1997 1998
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues......................................$ 225,623,212 $ 297,720,508 $ 79,802,369 $ 107,759,287
------------- ------------- ------------- ------------
Operating expenses
Direct salaries and related costs............ 140,085,086 184,266,680 50,827,606 65,919,752
General and administrative................... 63,132,956 77,666,223 21,607,052 28,399,809
Impairment of long-lived assets.............. 10,400,000 - - -
Acquired in-process research
and development............................. - 18,618,907 - 18,618,907
------------- ------------- ------------- ------------
Total operating expenses.................... 213,618,042 280,551,810 72,434,658 112,938,468
------------- ------------- ------------- ------------
Income (loss) from operations................. 12,005,170 17,168,698 7,367,711 (5,179,181)
Other income (expense)
Interest income (expense), net............... 657,388 (78,221) 145,591 (338,190)
Net loss from joint venture.................. - (8,097,380) - (102,231)
Other........................................ 20,455 (66,496) (61,590) (36,735)
------------- -------------- ------------- ------------
Total other income (expense)............... 677,843 (8,242,097) 84,001 (477,156)
------------- -------------- ------------- ------------
Income(loss)before income taxes............... 12,683,013 8,926,601 7,451,712 (5,656,337)
Provision for income taxes.................... 8,343,719 13,065,000 2,702,028 4,923,000
------------- -------------- ------------- ------------
Net income (loss).............................$ 4,339,294 $ (4,138,399) $ 4,749,684 $(10,579,337)
=============== ============== ============= ============
Basic net income (loss) per share.............$ 0.11 $ (0.11) $ 0.12 $ (0.27)
============== ============= ============ =============
Diluted net income (loss) per share...........$ 0.11 $ (0.11) $ 0.12 $ (0.27)
============== ============= ============ =============
Shares outstanding
Basic........................................ 38,909,220 39,154,989 38,960,167 39,274,973
Diluted...................................... 40,245,462 39,154,989 40,326,278 39,274,973
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 28, 1997 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
-------------- -------------
Cash flows from operating activities
<S> <C> <C>
Net income (loss)..................................................... $ 4,339,294 $ (4,138,399)
Depreciation and amortization......................................... 8,549,464 12,747,752
Acquired in-process research and development.......................... - 26,661,407
Deferred income taxes................................................. 27,914 (390,071)
(Gain) loss on disposal of property and equipment..................... 146,121 (328,771)
Changes in assets and liabilities - net of business
acquisition
Receivables...................................................... (9,803,700) (31,637,624)
Prepaid expenses and other current assets........................ 3,053,323 (4,975,064)
Deferred charges and other assets................................ (404,243) (6,788,445)
Accounts payable................................................. 3,292,783 5,063,495
Income tax payable............................................... 2,810,730 5,488,959
Accrued employee compensation and benefits (433,338) 10,328,310
Other accrued expenses and current liabilities................... (5,170,606) 1,977,562
Other long-term liabilities...................................... - (124,294)
-------------- --------------
Net cash provided by operating activities...................... 6,407,742 13,884,817
-------------- --------------
Cash flows from investing activities
Capital expenditures................................................ (19,625,895) (21,858,064)
Purchase of assets and assumption of liabilities of
SHPS, Incorporated, net of cash................................... - (25,931,222)
Investment in joint venture......................................... - (12,665,600)
Investment in marketable securities................................. (8,000,000) -
Acquisition of business............................................. (1,800,000) -
Proceeds from sale of marketable securities......................... - 1,000,000
Proceeds from sale of property and equipment........................ 237,193 1,267,503
------------- --------------
Net cash used for investing activities............................ (29,188,702) (58,187,383)
------------- --------------
Cash flows from financing activities
Paydowns under revolving line of credit agreements.................. (72,441,000) (7,342,355)
Borrowings under revolving line of credit agreements................ 72,441,000 85,304,463
Proceeds from grants................................................ 2,484,803 95,550
Proceeds from issuance of stock..................................... 2,403,307 1,007,060
Proceeds from issuance of long-term debt............................ 24,180,080 -
Payment of long-term debt........................................... (7,464,081) (85,378,233)
Dividends paid...................................................... (189,166) -
------------- --------------
Net cash provided by (used for) financing activities.............. 21,414,943 (6,313,515)
------------- --------------
Adjustment for foreign currency translation............................ (1,412,591) 1,244,369
-------------- --------------
Net decrease in cash and cash equivalents.............................. (2,778,608) (49,371,712)
Cash and cash equivalents - beginning.................................. 92,973,416 70,523,067
-------------- --------------
Cash and cash equivalents - ending..................................... $ 90,194,808 $ 21,151,355
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 28, 1997 and September 30, 1998
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries (the "Company")
provides integrated information technology outsourcing services including
information technology support services, information technology development
services and solutions, on-line clinical managed care services, medical protocol
products, employee benefit administration and support services, and customer
product services. The Company's services are provided to a wide variety of
industries.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month and nine-month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and notes thereto as of and for the year ended December 31, 1997 included in the
Company's Form 10-K dated December 31, 1997 as filed with the United States
Securities and Exchange Commission on March 16, 1998.
Note 1 - Acquisitions and Mergers
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.
The above transaction has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for the periods presented
have been restated to include the accounts of McQueen.
5
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Acquisitions and Mergers, continued
Separate results of operations for the period prior to the merger with McQueen
are outlined below.
Nine Months Three Months
Ended Ended
September 28, September 28,
1997 1997
------------------ ----------------
Revenue:
Sykes.................. $147,893,818 $ 49,340,938
McQueen................ 77,729,394 30,461,431
------------ ------------
Combined................ $225,623,212 $ 79,802,369
============ ============
Net income (loss):
Sykes.................. $ 13,945,187 $ 4,950,852
McQueen(1)............. (9,605,893) (201,168)
------------- -------------
Combined................ $ 4,339,294 $ 4,749,684
============= =============
Other changes in shareholders' equity:
Sykes.................. $ 1,809,432 $ (1,753,129)
McQueen................ 933,952 (149,837)
------------ --------------
Combined................ $ 2,743,384 $ (1,902,966)
============ ==============
(1)The nine month period ended September 28, 1997 includes a $10.4 million
charge associated with the impairment of a long-lived asset pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 121.
The Company had a 50% interest in a joint venture that was accounted for using
the equity method of accounting. Accordingly, the Company recorded its
proportionate share of the gains and losses of the joint venture in the
consolidated statements of operations for the first eight months of 1998.
Effective September 1, 1998 the Company acquired the remaining 50% of
outstanding common stock of SHPS, Incorporated ("SHPS") (formally known as Sykes
HealthPlan Services, Inc.) for approximately $30.6 million plus the assumption
of SHPS' debt. This purchase price was primarily financed through borrowings
under the Company's credit facility.
This acquisition was accounted for utilizing the purchase method of accounting
and accordingly, the results of operations for the one month ended September 30,
1998 have been included in the accompanying financial statements. The purchase
price has been allocated to the assets and liabilities based upon fair values at
the date of acquisition. The allocations were based on appraisals, evaluations,
estimations and other studies.
6
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 28, 1997 and September 30, 1998
(Unaudited)
Note 1 - Acquisitions and Mergers, continued
The allocation resulted in goodwill recognized of $9.9 million, representing the
excess of the purchase price over the fair value of net assets acquired, as
follows:
Goodwill........................................... $ 9,880,804
Fair value of assets acquired...................... 76,277,503
Acquired in-process research and development....... 18,618,907
Liabilities assumed................................ (76,645,932)
---------------
Cash paid, net of cash acquired.................... $ 28,131,282
===============
Pursuant to acquisitions completed by SHPS, acquired in-process technology was
initially reviewed utilizing methodologies consistent with those stated below.
Determination as a result of this analysis provided no establishment of
technological feasibility. As of the acquisition date, technological feasibility
of the in-process technology was reviewed again and has not been established.
This assessment was filed with the Securities and Exchange Commission in
conjunction with SHPS' filing of a registration statement for an initial public
offering which was subsequently postponed in July 1998. Further analysis by the
Company has indicated the technology has no alternative future use therefore,
the Company has recorded a charge for the amount of the purchase price allocated
to acquired in-process research and development of approximately $18.6 million.
This charge is reflected in the accompanying consolidated statement of
operations for both the nine and three months ended September 30, 1998.
The amount of purchase price allocated to in-process research and development
was determined by estimating the stage of development of each in-process
research and development project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 18%, which represents a premium to the Company's cost of capital. These
projections were based on management's estimate of market share and growth,
expected trends in technology and the expected timing of new product
introductions. As a part of the transaction, the Company recorded approximately
$6.1 million in capitalized software costs and rights, which will be amortized
over five years, and approximately $9.9 million in goodwill, which will be
amortized over 20 years.
The unaudited pro forma combined historical results, as if SHPS had been
acquired on January 1, 1998 are estimated to be revenues of $329.4 million, net
loss of $17.7 million, and basic and diluted loss per share were both $0.45 for
the nine months ended September 30, 1998. 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 1998, nor are they indicative of future
consolidated results.
8
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 28, 1997 and September 30, 1998
(Unaudited)
Note 2 - Marketable Securities
During May 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. In accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities", this
investment is classified as an available-for-sale security and is carried at an
aggregate market value of $0.6 million as of September 30, 1998. The Company's
cost basis in this investment is $8.0 million, and the unrealized loss of $7.4
million, net of deferred income taxes of approximately $465,000, has been
reported as a separate component of shareholders' equity.
Note 3 - Long-Term Debt
Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Syndicated credit facility, $150 million
maximum, due February 2001, interest payable
monthly at tiered levels between
75 and 175 basis points above listed LIBOR......................... $ - $78,576,200
Secured loan note, principle and interest
payable in annual installments through
November 1999, interest at 8%, 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% principle due, in
three installments during 1999, collateralized
by certain assets................................................. 26,950,400 -
Notes payable and capital leases, principle
and interest payable in monthly installments
through December 2002, interest at varying
rates up to prime plus 1%, collateralized by
certain receivables and equipment............................... 8,495,793 2,063,055
----------- ----------
36,301,868 80,639,255
Less current portion................................................ 2,989,271 2,480,879
----------- -----------
$ 33,312,597 $ 78,158,376
============ =============
</TABLE>
Future principle maturities subsequent to
September 30, 1999, are as follows:
2000 ...................... $ 383,947
2001 ...................... 124,760
2002 ...................... 77,627,924
2003 ...................... 21,745
------------
78,158,376
8
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 28, 1997 and September 30, 1998
(Unaudited)
Note 4 - Commitments and Contingencies
The Company from time to time is involved in legal actions arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs such that the ultimate outcome will not have a material adverse
effect on the Company's future financial position.
Note 5 - Comprehensive Income
Effective January 1, 1998 the Company has adopted SFAS No. 130 "Reporting
Comprehensive Income" which requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in the financial statements. The Company's total comprehensive earnings
were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
-------------------------------- -------------------------------
September 28, September 30, September 28, September 30,
1997 1998 1997 1998
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ 4,339,294 $ (4,138,399) $ 4,749,684 $ (10,579,337)
Other comprehensive income:
Change in equity due to
foreign currency
translation adjustments.............. (1,412,591) 1,244,369 (375,189) 2,768,518
Unrealized gain (loss) on securities... 2,866,667 (7,199,844) (333,333) (998,850)
-------------- --------------- ------------ --------------
Other comprehensive income
(loss) before tax...................... 1,454,076 (5,955,475) (708,522) 1,769,668
Income tax expense related to other
comprehensive income................... 523,467 (2,143,971) (255,068) 637,080
-------------- --------------- ---------- --------------
Other comprehensive income (loss),
net of tax............................. 930,609 (3,811,504) (453,454) 1,132,588
-------------- --------------- ---------- --------------
Comprehensive income (loss)............ $ 5,269,903 $ (7,949,903) $(9,446,749) $ 4,296,230
============== =============== ============ ==============
</TABLE>
9
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 28, 1997 and September 30, 1998
(Unaudited)
Note 6 - 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 the
further dilution, if not anti-dilutive, from stock options using the treasury
stock method.
The numbers of shares used in the earnings per share computation are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
-------------------------------------- -------------------------------------
September 28, September 30, September 28, September 30,
1997 1998 1997 1998
-------------------------------------- -------------------------------------
Basic:
Weighted average common
<S> <C> <C> <C> <C>
outstanding............................ 38,909,220 39,154,989 38,960,167 39,274,973
---------- ---------- ---------- ----------
Total basic....................... 38,909,220 39,154,989 38,960,167 39,274,973
Diluted:
Dilution of stock options............... 1,336,242 - 1,366,111 -
--------- ---------- --------- ----------
Total diluted........................ 40,245,462 39,154,989 40,326,278 39,274,973
========== ========== ========== ==========
</TABLE>
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the Sykes Enterprises,
Incorporated (the "Company") Consolidated Financial Statements, including the
notes thereto. 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.
Financial Condition
The Company's primary sources of liquidity are equity offerings, cash flows from
operations and available borrowings under its credit facility. The Company has
utilized these sources to make additional capital expenditures associated
primarily with its technical support services, to repay debt associated with
entities it has acquired subsequent to the public offerings, to acquire the
remaining 50% of outstanding common stock of 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 future uses of its sources of
liquidity to include the aforementioned and possible additional acquisitions.
The Company invests any excess funds in short-term, investment-grade securities
or money market instruments.
During February 1998, the Company entered into a $150.0 million syndicated
facility, which provides for multi-currency lending. This facility accrues
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, leverage and coverage ratios and capital expenditures and
acquisitions as defined by the agreement. At September 30, 1998, the Company had
borrowed $78.6 million on this credit facility.
During the nine month period ended September 30, 1998, the Company generated
approximately $13.9 million in cash, net, from operations. The Company utilized
these funds and certain of its available cash and credit facility to fund $34.0
million repayment of debt, $38.6 million of additional capitalization in and
purchase of the remaining outstanding interest in a joint venture and $21.9
million of capital expenditures. The debt repayments were associated with
assumed debt levels resulting from certain acquisitions the Company completed
during 1997. The capital equipment expenditures were predominately the result of
the Company's continued expansion, both domestically and internationally, in
providing technical product support services. The Company has recently announced
the construction of two additional call centers in Milton-Freewater, Oregon and
Ada, Oklahoma, the expansion of a facility in Charlotte, North Carolina, and the
expansion of its pan-European call center in Amsterdam, The Netherlands, and
anticipates that these new facilities will become operational during 1999.
Effective September 1, 1998, the Company acquired the remaining 50% of
outstanding common stock of SHPS, Incorporated ("SHPS") (formally known as Sykes
HealthPlan Services, Inc.) for approximately $30.6 million plus the assumption
of SHPS' debt. The purchase price was allocated based upon fair values at the
date of acquisition, and as a result the Company recorded approximately $6.1
million in capitalized software costs and rights, which will be amortized over
five years, and approximately $9.9 million in goodwill, which will be amortized
over 20 years. These allocations were based on appraisals, evaluations,
estimations and other studies.
11
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
In addition, the Company reviewed the in-process research and development
projects acquired and considered, among other factors, the stage of development
of each project at the time of acquisition, the importance of each project to
the overall development plan, and the projected incremental cash flows from the
projects when completed and any associated risks. Associated risks include the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets. As of the acquisition date, technical
feasibility of the in-process technology had not been established and the
technology was determined to have no alternative future use, therefore, the
Company recorded a non-recurring charge of approximately $18.6 million related
to the write-off of acquired in-process research and development.
The Company believes that its accessible funds under its credit facilities and
cash flows from 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.
Results of Operations
Nine Months Ended September 30, 1998, Compared to Nine Months Ended September
28,1997
For the nine months ended September 30, 1998, the Company recorded consolidated
revenues of $297.7 million, an increase of $72.1 million or 32%, from the $225.6
million of consolidated revenues for the comparable period during 1997. This
growth in revenue was primarily the result of a $54.9 million or 54% increase in
technical support services, an increase of $9.6 million from information
technology services and solutions and an increase of $7.6 million from customer
product services.
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 and the resultant increase in call volumes from clients,
and the inclusion of SHPS' revenue generated since the date of acquisition.
Subsequent to the third quarter of 1997, the Company opened two domestic IT call
centers, opened two international IT call centers and expanded its call center
in Sveg, Sweden. The increase in information technology services and solutions
revenues was attributable to an increase in the average bill rate and hours
billed to customers when compared to the comparable period in 1997. The increase
in customer product services revenue for the nine months ended September 30,
1998 is primarily associated with an acquisition completed during the second
quarter of 1997 by McQueen, which was accounted for utilizing the purchase
method of accounting.
Direct salaries and related costs increased approximately $44.2 million or 31.5%
to $184.3 million for the nine month period in 1998 from the comparable period
in 1997. As a percentage of revenues, direct salaries and related costs
decreased to approximately 61.9% in 1998 from approximately 62.1% for the
comparable period in 1997. The increase in the amount of direct salaries and
related costs was primarily 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
technical support services as a percentage of consolidated results.
12
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Nine Months Ended September 30, 1998, Compared to Nine Months Ended September
28,1997
General and administrative expenses increased approximately $14.5 million or
23.0% to $77.7 million for the nine month period in 1998 from the comparable
period in 1997. As a percentage of revenues, however, general and administrative
expenses decreased to 26.1% in 1998 from 28.0% for the comparable period in
1997. The increase in the amount of general and administrative expenses was
primarily attributable to the addition of management, sales and administrative
personnel to support the Company's growth. The decrease as a percentage of
revenues resulted from economies of scale associated with spreading costs over a
larger revenue base.
As part of the acquisition of SHPS, the Company determined that the technical
feasibility of SHPS' in-process technology had not been established and the
technology had no alternative use. Therefore, the Company recorded a charge of
approximately $18.6 million related to the write-off of the acquired in-process
research and development for the nine months ended September 30, 1998.
Interest and other expense was $8.2 million during the first nine months of
1998, inclusive of an $8.1 million net loss from joint venture, compared to
interest and other income of $0.7 million during the comparable 1997 period. The
net loss from the joint venture was attributable to acquisition-related,
in-process research and development costs associated with acquisitions completed
by the joint venture, which was recorded as other expense. Interest and other
expense, exclusive of the net loss from the joint venture, was $0.1 million or
less than 1% of revenue during the first nine months of 1998, compared to
interest and other income of $0.7 million, or also less than 1% of revenue for
the comparable period in 1997. The increase in interest and other expense for
the nine month period was primarily attributable to an increase in the Company's
debt position as a result of the acquisition of SHPS completed during 1998.
The provision for income taxes increased $4.7 million to $13.1 million for the
nine month period in 1998 from the comparable period in 1997. As a percentage of
revenue, the provision for income taxes increased to 4.4% during the 1998 period
when contrasted to approximately 3.7% for the comparable 1997 period. The
Company's marginal tax rate was 36.3% for 1998 compared to 36.1% for the
comparable 1997 period, excluding the effect of one-time charges.
Three Months Ended September 30, 1998, Compared to Three Months Ended September
28, 1997
For the three months ended September 30, 1998, the Company recorded consolidated
revenues of $107.8 million, an increase of approximately $28.0 million, or
approximately 35%, from the $79.8 million of consolidated revenues for the
comparable period during 1997. This growth in revenue was primarily the result
of $25.8 million, or 69%, increase in technical support services, an increase in
revenues of $3.6 million from information technology services and solutions,
partially offset by a decrease of $1.4 million from customer product services.
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 and the resultant increase in call volumes from clients,
and the inclusion of SHPS' revenue generated since the date of acquisition.
13
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Three Months Ended September 30, 1998, Compared to Three Months Ended September
28, 1997
Subsequent to the third quarter of 1997, the Company opened two domestic IT call
centers, opened two international IT call centers and expanded its call center
located in Sveg, Sweden. The increase in information technology services and
solutions revenues was attributable to an increase in the average bill rate and
hours billed to customers when compared to the comparable period in 1997. The
decrease in customer product services revenues was attributable to a reduction
of selective clients which were inconsistent with the Company's business
objectives.
Direct salaries and related costs increased approximately $15.1 million, or
30.0%, to $65.9 million, for the three month period in 1998 from the comparable
period in 1997. As a percentage of revenues, direct salaries and related costs
decreased to approximately 61.2% in 1998 from approximately 63.7% from the
comparable period in 1997. The increase in the dollar amount of direct salaries
and related costs was primarily 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 technical support services as a percentage of consolidated results.
General and administrative expenses increased approximately $6.8 million, or
31.4%, to $28.4 million, inclusive of a special one-time charge, for the three
month period in 1998 from the comparable period in 1997. As a percentage of
revenues, and inclusive of a special one-time charge, general and administrative
expenses decreased to 26.4% in 1998 from 27.1%, for the three month comparable
period in 1997. The increase in the amount of general and administrative
expenses was primarily attributable to the addition of management, sales and
administrative personnel to support the Company's growth. General and
administrative expenses, exclusive of $450,000 of severance costs, increased
approximately $6.3 million, or 29.4% to $27.9 million. The decrease as a
percentage of revenues resulted from economies of scale associated with
spreading costs over a large revenue base.
As part of the acquisition of SHPS, the Company determined that the technical
feasibility of SHPS' in-process technology had not been established and the
technology had no alternative use. Therefore, the Company recorded a charge of
approximately $18.6 million related to the write-off of the acquired in-process
research and development for the three months ended September 30, 1998.
Interest and other expense was $0.5 million during the three months ended
September 30, 1998 from interest and other income of $0.1 million during the
comparable 1997 period. As a percentage of revenues, interest and other expense
was less than 1% in 1998 compared to interest and other income of less than 1%
in 1997. The increase in interest and other expense for the three month period
was primarily attributable to an increase in the Company's debt position as a
result of the acquisition of SHPS completed during 1998.
The provision for income taxes increased $2.2 million, to $4.9 million, for the
three month period in 1998 from the comparable period in 1997. As a percentage
of revenue, the provision for income taxes increased to 4.6% during the 1998
period when contrasted to approximately 3.4% for the comparable 1997 period. The
Company's marginal tax rate was 36.7% for 1998 compared to 36.3% for the
comparable 1997 period, excluding the effect of one-time charges.
14
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Year 2000
The Year 2000 issue is the result of computer software programs being written
using two digits rather than four to define the applicable year. To the extent
the Company's software applications contain source codes that are unable to
appropriately interpret the calendar year 2000, some level of modification or
even possibly replacement of such applications may be necessary. During late
1997, the Company initiated the process of reviewing its existing software
programs to determine the potential exposure and began the process to determine
what resources may be needed to become Year 2000 compliant. Based on this
review, the Company has experienced very few problems related to Year 2000
testing and those identified have been fixed in the Company's day-to-day
operations.
The Company has and will continue to utilize both internal and external
resources to reprogram, or replace, and test the software for Year 2000
modifications. The Company anticipates completing the Year 2000 project no later
than June 1999, which is prior to any anticipated impact on its operating
systems. The remaining cost of the Year 2000 project is estimated at
approximately $1.2 million and is being funded through operating cash flows and
is not expected to have a material effect on the Company's results of
operations.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. In the event any third parties cannot timely provide
the Company with contents, products, services or systems that meet Year 2000
requirements, the Company's services could be materially adversely affected.
Although the Company expects its systems to be Year 2000 compliant on or before
December 31, 1999, it cannot predict the outcome or the success of its Year 2000
program, or that third party systems are or will be Year 2000 compliant, or that
the costs required to address the Year 2000 issue, or that the impact of a
failure to achieve substantial Year 2000 compliance, will not have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company has not adopted a contingency plan to address possible
risks to its systems.
15
<PAGE>
Part II - OTHER INFORMATION
Item 5 - Other Information
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended ("Rule 14a-8"), for
inclusion in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders is December 1, 1998. In addition, after February 14 , 1998, notice
to the Company of a shareholder proposal submitted otherwise than pursuant to
Rule 14a-8 will be considered untimely, and the persons named in proxies
solicited by the Board of Directors of the Company for its 1999 Annual Meeting
of Shareholders may exercise discretionary voting power with respect to any such
proposal as to which the Company receives after February 14, 1998.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this Report:
Financial Data Schedule
(b) Reports on Form 8-K
The registrant filed a Form 8-K, dated September 11, 1998,
on September 25, 1998, reporting under Item 5 the
acquisition of the remaining 50 percent of the outstanding
common stock of Sykes HealthPlan Services, Inc.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 , the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
Date: October 27, 1998 By: /s/ Scott J. Bendert
- ----------------------------- ---------------------------
Scott J. Bendert
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
(For The Nine Months Ended September 30,1998)
EXHIBIT INDEX
Exhibit Page
Number Number
27.1 Financial Data Schedule 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted from
the Company's Form 10-Q for the nine month period ended September 30, 1998 and
is qulaified in its entirety by reference to such Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,151,355
<SECURITIES> 0
<RECEIVABLES> 110,109,201
<ALLOWANCES> 839,535
<INVENTORY> 0
<CURRENT-ASSETS> 158,798,555
<PP&E> 148,399,309
<DEPRECIATION> 62,940,722
<TOTAL-ASSETS> 314,429,716
<CURRENT-LIABILITIES> 80,919,758
<BONDS> 0
0
0
<COMMON> 393,167
<OTHER-SE> 139,307,231
<TOTAL-LIABILITY-AND-EQUITY> 314,429,716
<SALES> 297,720,508
<TOTAL-REVENUES> 297,720,508
<CGS> 184,266,680
<TOTAL-COSTS> 184,266,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,221
<INCOME-PRETAX> 8,926,601
<INCOME-TAX> 13,065,000
<INCOME-CONTINUING> (4,138,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,138,399)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
