FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
[ ] 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
-------------------------------
(Exaction name of Registrant as specified in its charter)
Florida 56-1383460
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
---------------------------------------------------
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
Number of shares of registrant's common stock outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
Common stock, $0.01 Par Value, 42,364,994 shares as of November 9, 1999
Page 1 of 18
The Exhibit Index Appears on Page 17
<PAGE>
PART I
Item 1 - Financial Statements
<TABLE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1998 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $ 36,348,863 $ 32,044,116
Restricted cash......................................... 11,090,890 15,086,325
Receivables............................................. 113,840,262 152,023,769
Prepaid expenses and other current assets............... 15,861,742 18,131,158
------------ ------------
Total current assets.................................. 177,141,757 217,285,368
Property and equipment, net............................... 99,176,512 126,888,346
Marketable securities..................................... 199,875 199,875
Intangible assets, net.................................... 75,132,011 75,959,242
Deferred charges and other assets......................... 13,484,146 17,274,096
------------ ------------
$ 365,134,301 $ 437,606,927
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt.................. $ 3,983,239 $ 1,413,284
Accounts payable........................................ 30,086,549 32,942,750
Income taxes payable.................................... 10,549,623 21,108,794
Accrued employee compensation and benefits.............. 19,144,242 22,936,662
Customer deposits....................................... 10,978,868 11,719,943
Other accrued expenses and current liabilities.......... 17,194,752 22,246,615
------------ ------------
Total current liabilities............................. 91,937,273 112,368,048
Long-term debt............................................ 75,448,202 79,716,697
Deferred grants........................................... 15,434,676 21,249,091
Deferred revenue.......................................... 14,707,773 19,462,831
Other long-term liabilities............................... 2,668,895 1,721,141
------------ ------------
Total liabilities..................................... 200,196,819 234,517,808
Commitments and contingencies
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; 41,451,905 and 42,329,887 issued and
outstanding........................................... 414,519 423,299
Additional paid-in capital.............................. 136,199,748 140,571,509
Retained earnings....................................... 29,730,975 65,356,213
Accumulated other comprehensive income (loss)........... (1,407,760) (3,261,902)
------------ ------------
Total shareholders' equity............................ 164,937,482 203,089,119
------------ ------------
$ 365,134,301 $ 437,606,927
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine and Three Months Ended September 30, 1998 and 1999
(Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------------------- ---------------------------------------------
1998 1999 1998 1999
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues.................... $ 327,070,503 $ 443,452,337 $ 118,315,536 $ 160,966,807
------------ ------------ ------------ ------------
Operating expenses
Direct salaries and
related costs........... 202,734,291 268,907,291 72,806,063 96,722,468
General and
administrative.......... 86,423,209 113,962,045 31,314,963 40,134,415
Acquired in-process
research and development 14,468,907 - 14,468,907 -
------------ ------------ ------------ ------------
Total operating expenses 303,626,407 382,869,336 118,589,933 136,856,883
------------ ------------ ------------ ------------
Income (loss)from
operations............. 23,444,096 60,583,001 (274,397) 24,109,924
Other income (expense)
Interest, net............. (147,349) (2,588,002) (366,361) (1,052,748)
Net loss from
joint venture........... (3,947,380) - (102,231) -
Other..................... (60,143) 162,958 (35,558) 65,877
------------ ------------ ------------ ------------
Total other expense..... (4,154,872) (2,425,044) (504,150) (986,871)
------------ ------------ ------------ ------------
Income (loss) before income
taxes................... 19,289,224 58,157,957 (778,547) 23,123,053
Provision for income taxes.. 14,196,831 22,532,719 5,332,715 8,974,624
------------ ------------ ------------ ------------
Net income (loss)........... $ 5,092,393 $ 35,625,238 $ (6,111,262) $ 14,148,429
============ ============ ============ ============
Net income (loss) per share
Basic..................... $ 0.12 $ 0.85 $ (0.15) $ 0.33
============ ============ ============ ============
Diluted................... $ 0.12 $ 0.83 $ (0.15) $ 0.33
============ ============ ============ ============
Shares outstanding
Basic..................... 41,216,989 41,940,706 41,336,973 42,280,529
Diluted................... 42,218,851 42,984,543 41,336,973 43,032,429
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 41,119,626 $ 411,196 $ 133,592,337 $ 22,151,352 $(3,594,665) $ 152,560,220
Issuance of common stock 259,092 2,591 987,289 - - 989,880
Tax effect of non-qualified
exercise of stock options - - 1,412,814 - - 1,412,814
Distributions - - - (698,374) - (698,374)
Net income - - - 5,092,393 - 5,092,393
Unrealized loss on securities - - - - (6,199,844) (6,199,844)
Foreign currency translation
adjustment - - - - 1,079,415 1,079,415
------------
Comprehensive income (loss) (28,036)
------------
-------------------------------------------------------------------------------------------------
Balance at September 30, 1998 41,378,718 413,787 135,992,440 26,545,371 (8,715,094) 154,236,504
(unaudited)
Issuance of common stock 73,187 732 86,122 - - 86,854
Tax-effect of non-qualified
exercise of stock options - - 121,186 - - 121,186
Distributions - - - (2) - (2)
Net income - - - 3,185,606 - 3,185,606
Unrealized loss on securities - - - - (400,283) (400,283)
Recognition of write-down on
marketable securities - - - - 7,334,645 7,334,645
Foreign currency translation
adjustment - - - - 372,972 372,972
------------
Comprehensive income 10,492,940
------------
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 41,451,905 414,519 136,199,748 29,730,975 (1,407,760) 164,937,482
Issuance of common stock 877,982 8,780 4,371,761 - - 4,380,541
Net income - - - 35,625,238 - 35,625,238
Foreign currency translation
adjustment - - - - (1,854,142) (1,854,142)
------------
Comprehensive income 33,771,096
------------
-------------------------------------------------------------------------------------------------
Balance at September 30, 1999
(unaudited) 42,329,887 $423,299 $ 140,571,509 $ 65,356,213 $(3,261,902) $ 203,089,119
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1999
(Unaudited)
<CAPTION>
1998 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 5,092,393 $ 35,625,238
Depreciation and amortization........................... 13,289,563 25,801,708
Acquired in-process research and development cost....... 14,468,907 -
Deferred income taxes................................... (390,071) (3,068,216)
Gain on disposal of property and equipment.............. (328,771) -
Changes in assets and liabilities
Receivables............................................ (32,827,498) (39,265,073)
Prepaid expenses and other current assets.............. (5,003,659) (2,559,345)
Intangible assets...................................... - (11,381)
Deferred charges and other assets...................... (1,274,854) (2,457,948)
Accounts payable....................................... 5,092,502 2,733,837
Income taxes payable................................... 8,024,413 10,375,234
Accrued employee compensation and benefits............. 10,927,303 3,239,448
Customer deposits, net of restricted cash.............. - (3,254,360)
Other accrued expenses and current liabilities......... 4,595,175 3,051,862
Deferred revenue....................................... 2,850,659 4,755,058
Other long-term liabilities............................ (124,296) (947,756)
------------ ------------
Net cash provided by operating activities............. 24,391,766 34,018,306
------------ ------------
Cash flows from investing activities
Capital expenditures.................................... (22,893,857) (43,793,711)
Acquisition of businesses............................... (28,131,282) (5,846,289)
Investment in joint venture............................. (10,723,040) -
Proceeds from sale of marketable securities............. 1,000,000 -
Proceeds from sale of property and equipment............ 1,267,503 193,672
------------ ------------
Net cash used for investing activities................ (59,480,676) (49,446,328)
------------ ------------
Cash flows from financing activities
Paydowns under revolving line of credit agreements...... (7,342,355) (54,500,000)
Borrowings under revolving line of credit agreements.... 85,304,463 59,000,000
Proceeds from issuance of stock......................... 2,404,860 4,080,541
Proceeds from issuance of long-term debt................ - 903,656
Proceeds from grants.................................... 95,550 7,198,335
Payments of long-term debt.............................. (87,370,298) (3,705,115)
Distributions........................................... (698,374) -
------------ ------------
Net cash provided by (used for) financing activities.. (7,606,154) 12,977,417
------------ ------------
Adjustments for foreign currency translation.............. 1,079,415 (1,854,142)
Net decrease in cash and cash equivalents................. (41,615,649) (4,304,747)
Cash and cash equivalents - beginning..................... 75,308,505 36,348,863
------------ ------------
Cash and cash equivalents - ending........................ $ 33,692,856 $ 32,044,116
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1998 and 1999
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries (the "Company")
provides vertically 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 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
nine and three-month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and notes thereto as of and for the year ended December 31, 1998 included in the
Company's Form 10-K dated December 31, 1998 as filed with the United States
Securities and Exchange Commission ("SEC") on March 29, 1999.
Note 1 - Acquisitions and Mergers
Effective September 1, 1998, the Company acquired the remaining 50% of
outstanding common stock of SHPS, Incorporated ("SHPS") for approximately $28.1
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 using the purchase method of accounting and,
accordingly, the results of operations for the period September 1, 1998 to
September 30, 1998 and for the nine and three months ended September 30, 1999,
have been included in the accompanying financial statements. The purchase price
has been allocated to the assets and liabilities of SHPS based upon fair values
at the date of acquisition. The allocations were based on appraisals,
evaluations, estimations and other studies.
On November 27, 1998, the Company acquired all of the stock of TAS GmbH Nord
Telemarketing und Vertriebsberatung ("TAS III") of Hannover, Germany, in
exchange for 587,000 shares of the Company's common stock. The Company accounted
for the acquisition utilizing the pooling-of-interests method of accounting. TAS
III provides technical call center support and customer care services, database
development and consulting services to customers in Germany.
On December 29, 1998, the Company acquired all of the stock of Oracle Service
Networks Corporation ("Oracle") in exchange for 1,475,000 shares of the
Company's common stock. The Company accounted for the acquisition utilizing the
pooling-of-interests method of accounting. Oracle provides call center support
and customer care services to various customers in North America, as well as
demand management services for the Canadian provincial health care system.
On August 20, 1999, the Company acquired all of the common stock of
CompuHelpline, Inc., d/b/a PC Answer for approximately $340,000 of cash and
Company stock. PC Answer was engaged in developing, marketing and selling
prepaid technical computer support cards and services under the trademark names
of PC Answer and MAC Answer. The transaction was accounted for under the
purchase method of accounting with resulting goodwill being
6
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1998 and 1999
(Unaudited)
Note 1 - Acquisitions and Mergers, continued
amortized over a ten-year life. Pro forma information is not presented as the
operating results are not material to the Company's consolidated operations.
Effective August 31, 1999, the Company acquired all the common stock of Acer
Servicios De Informacion Sociedad Anonima ("AIS") of San Jose, Costa Rica
for $6.0 million in cash. AIS operates an information technology call center and
provides technical support and services to customers in North America and
Central America. The transaction was accounted for under the purchase method of
accounting with resulting goodwill being amortized over a ten-year life. Pro
forma information is not presented as the operating results are not material to
the Company's consolidated operations.
The above transactions, excluding SHPS, PC Answer and AIS, 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 TAS III and Oracle. Separate results of operations for the period
prior to the mergers with TAS III and Oracle are outlined below.
<TABLE>
<CAPTION>
Nine months Three months
ended ended
September 30, September 30,
1998 1998
------------- -------------
<S> <C> <C>
Revenues:
Sykes.................................................... $ 297,720,508 $ 107,759,287
TAS III.................................................. 6,407,228 2,842,440
Oracle................................................... 22,942,767 7,713,809
------------ ------------
Combined ................................................. $ 327,070,503 $ 118,315,536
============ ============
Net income (loss):
Sykes (1)................................................ $ 4,161,601 $ (6,429,337)
TAS III.................................................. 297,971 156,641
Oracle................................................... 632,821 161,434
------------ ------------
Combined ................................................. $ 5,092,393 $ (6,111,262)
============ ============
Other changes in shareholders' equity:
Sykes.................................................... $ (4,649,994) $ (1,132,923)
TAS III ................................................. 382,580 382,580
Oracle................................................... (1,245,908) (894,640)
------------ ------------
Combined.................................................. $ (5,513,322) (1,644,983)
============ ============
</TABLE>
(1) The Company has restated its financial statements for both the three and
nine-month periods ended September 30, 1998, respectively, to reflect the
methodology as set forth in a September 15, 1998 letter from the SEC Staff
to the AICPA regarding acquired in-process research and development charges.
This letter set forth the SEC's views regarding the valuation methodology to be
used in allocating a portion of the purchase price to acquired in-process
research and development at the date of acquisition. As a result of the revised
valuation, the Company's financial statements for the nine months ended
September 30, 1998 have been restated to reduce the amount of acquired
in-process research and development charges incurred by SHPS, and the resulting
impact on the Company's proportionate share of the adjustment.
7
<PAGE>
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1998 and 1999
(Unaudited)
Note 2 - 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 3 - Accumulated Other Comprehensive Income
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 130 "Reporting Comprehensive Income" which requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in the financial statements. The
components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Accumulated
Foreign Other
Currency Comprehensive
Translation Income
----------- -------------
<S> <C> <C>
Balance at December 31, 1998.............................. $ (1,407,760) $ (1,407,760)
Foreign currency translation adjustment................... (1,854,142) (1,854,142)
----------- -----------
Balance at September 30, 1999 (unaudited)................. $ (3,261,902) $ (3,261,902)
=========== ===========
</TABLE>
Earnings associated with the Company's investment in its foreign subsidiaries
are considered to be permanently invested and no provision for United States
federal and state income taxes on those earnings or translation adjustments has
been provided.
Note 4 - Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding during the periods. Diluted earnings per share includes the
weighted average number of common shares outstanding during the respective
periods and the further dilutive effect, if any, from stock options 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 30, September 30,
------------------------------------- -------------------------------------
1998 1999 1998 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Basic:
Weighted average common outstanding... 41,216,989 41,940,706 41,336,973 42,280,529
---------- ---------- ---------- ----------
Total basic. shares outstanding..... 41,216,989 41,940,706 41,336,973 42,280,529
Diluted:
Dilution of stock options............. 1,001,862 1,043,837 - 751,900
---------- --------- ---------- ----------
Total diluted. shares outstanding... 42,218,851 42,984,543 41,336,973 43,032,429
========== ========== ========== ==========
</TABLE>
8
<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") December 31, 1998 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, 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 the nine-month period ended September 30, 1999, the Company generated
approximately $34.0 million in cash from operations. The Company utilized these
funds and certain of its available cash and credit facility to fund
approximately $43.8 million of capital expenditures. The capital expenditures
were predominately the result of facility and capital equipment expenditures
incurred in connection with the integration and expansion of the Company's
technical support and e-commerce services.
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, 1999, Compared to Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999, the Company recorded consolidated
revenues of $443.5 million, an increase of $116.4 million or 35.6%, from the
$327.1 million of consolidated revenues for the comparable period during 1998.
This growth in revenue was the result of a $145.2 million or 77.4% increase in
technical support services, an increase of $4.3 million from customer product
services, offset by a decrease of $33.2 million from information technology
services and solutions.
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 for the entire nine months ended
September 30, 1999. The new IT call centers were required as a result of
continued growth of technical support services from both e-commerce and
traditional telephone support customers.
9
<PAGE>
SYKES ENTERPRISES, INCORPORATED
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended September 30, 1999, Compared to Nine Months Ended
September 30, 1998, continued
Subsequent to the first nine months of 1998, the Company opened four domestic
and one international IT call centers, acquired an international IT call center,
and expanded its call center in Sveg, Sweden. The increase in customer product
services revenue for the nine months ended September 30, 1999 was primarily
attributable to the Company's e-commerce initiatives. The decrease in
information technology services and solutions revenues was attributable to a
decrease in license fees and royalties associated with the Company's technology
applications, a decline in the number of hours billed to customers for
consulting services partially offset by an increase in the average bill rate,
and to a decline in language translation and localization services, when
compared to the comparable period in 1998.
Direct salaries and related costs increased approximately $66.2 million or 32.7%
to $268.9 million for the nine-month period in 1999 from the comparable period
in 1998. As a percentage of revenues, however, direct salaries and related costs
decreased to approximately 60.6% in 1999 from approximately 62.0% for the
comparable period in 1998. 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 and e-commerce services as a percentage of consolidated
results.
General and administrative expenses increased approximately $27.6 million or
31.9% to $114.0 million for the nine-month period in 1999 from the comparable
period in 1998. As a percentage of revenues, however, general and administrative
expenses decreased to 25.7% in 1999 from 26.4% for the comparable period in
1998. The increase in the amount of general and administrative expenses was
primarily attributable to an increase in depreciation expenses associated with
facility and capital equipment expenditures incurred in connection with the
integration and expansion of the Company's technical support and e-commerce
services, and an increase in amortization expense associated with the goodwill
incurred as part of the SHPS acquisition. The decrease in general and
administrative expenses as a percentage of revenues resulted from economies
of scale associated with spreading costs over a larger revenue base.
As part of the original ownership and subsequent acquisition of the remaining
outstanding shares of SHPS, the Company determined that the technical
feasibility of SHPS' in-process technology had not been established and a
portion of the technology had no alternative use. Therefore, the Company
recorded a charge of approximately $14.5 million related to the write-off of the
acquired in-process research and development during the quarter ended September
30, 1998.
Interest and other expense was $2.4 million during the first nine months of
1999, compared to $4.2 million during the comparable 1998 period, inclusive of
a $3.9 million net loss from joint venture. 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. The increase in interest and other expense for the
nine-month period exclusive of the net loss from joint venture was primarily
attributable to an increase in the Company's debt position as a result of the
acquisition of SHPS completed during 1998.
10
<PAGE>
SYKES ENTERPRISES, INCORPORATED
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended September 30, 1999, Compared to Nine Months Ended
September 30, 1998, continued
The provision for income taxes increased $8.3 million to $22.5 million for the
nine-month period in 1999 from the comparable period in 1998. As a percentage of
revenue, the provision for income taxes increased to 5.1% during the 1999 period
when contrasted to approximately 4.3% for the comparable 1998 period. The
increase was attributable to the increase of income before income taxes and to
an increase in income before income taxes as a percentage of revenue. The
Company's effective tax rate was 38.7% for 1999 compared to 37.1% for the
comparable 1998 period, excluding the effect of one-time charges, primarily as a
result of non-deductible expenses which consisted primarily of goodwill
amortization.
Three Months Ended September 30, 1999, Compared to Three Months Ended
September 30, 1998
For the three months ended September 30, 1999, the Company recorded consolidated
revenues of $161.0 million, an increase of $42.7 million or 36.1%, from the
$118.3 million of consolidated revenues for the comparable period during 1998.
This growth in revenue was the result of a $49.5 million or 66.9% increase in
technical support services, and an increase of $2.4 million from customer
product services, offset by a decrease of $9.2 million from information
technology services and solutions.
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 for the entire third quarter of
1999. Subsequent to the third quarter of 1998, the Company opened four domestic
and one international IT call centers, acquired an international IT call center,
and expanded its call center in Sveg, Sweden. The increase in customer product
services revenue for the three months ended September 30, 1999 was primarily
attributable to the Company's e-commerce initiatives. The decrease in informa-
tion technology services and solutions revenues was attributable to a decrease
in license fees and royalties associated with the Company's technology applica-
tions, a decline in the number of hours billed to customers for consulting
services partially offset by an increase in the average bill rate, and to a
decline in language translation and localization services, when compared to the
comparable period in 1998.
Direct salaries and related costs increased approximately $23.9 million or 32.8%
to $96.7 million for the three-month period in 1999 from the comparable period
in 1998. As a percentage of revenues, however, direct salaries and related costs
decreased to approximately 60.1 % in 1999 from approximately 61.5% for the
comparable period in 1998. 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 and e-commerce services as a percentage of consolidated
results.
General and administrative expenses increased approximately $8.8 million or
28.1% to $40.1 million for the three-month period in 1999 from the comparable
period in 1998. As a percentage of revenues, however, general and administrative
expenses decreased to 24.9%
11
<PAGE>
SYKES ENTERPRISES, INCORPORATED
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended September 30, 1999, Compared to Three Months Ended
September 30, 1998, continued
in 1999 from 26.5% for the comparable period in 1998. The increase in the amount
of general and administrative expenses was primarily attributable to an increase
in depreciation expenses associated with facility and capital equipment
expenditures incurred in connection with the integration and expansion of the
Company' technical support and e-commerce services, an increase in amortization
expense associated with the goodwill incurred as part of the SHPS acquisition
and to a lesser extent, the addition of sales and administrative personnel to
support the Company's growth. The decrease in general and administrative
expenses as a percentage of revenues resulted from economies of scale associated
with spreading costs over a larger revenue base.
As part of the original ownership and subsequent acquisition of the remaining
outstanding shares of SHPS, the Company determined that the technical
feasibility of SHPS' in-process technology had not been established and a
portion of the technology had no alternative use. Therefore, the Company
recorded a charge of approximately $14.5 million related to the write-off of the
acquired in-process research and development during the quarter ended September
30, 1998.
Interest and other expense was $1.0 million during the three-month period of
1999, compared to interest and other expense of $0.5 million during the
comparable 1998 period. 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 $3.7 million to $9.0 million for the
three-month period in 1999 from the comparable period in 1998. As a percentage
of revenue, the provision for income taxes increased to 5.6% during the 1999
period when contrasted to approximately 4.5% for the comparable 1998 period.
The increase was attributable to the increase of income before income taxes and
to an increase in income before income taxes as a percentage of revenue. The
Company's effective tax rate was 38.8% for the quarter ended September 30, 1999
compared to 37.6% for the comparable 1998 period, primarily as a result of
non-deductible expenses which consisted primarily of goodwill amortization.
Quantitative and Qualitative Disclosure
The Company's earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. Movements in foreign currency exchange rates
may affect the Company's competitive position, as exchange rate changes may
affect business practices and/or pricing strategies of non-United States based
competitors. Under its current policy, the Company does not use foreign exchange
derivative instruments to manage its exposure to changes in foreign currency
exchange rates.
Year 2000
Introduction
The Year 2000 issue is the result of some computer software programs being
written using two digits rather than four to define the applicable year. As a
result of this design decision, some of these systems could fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. To the
extent the Company's software applications contain source codes that are unable
to appropriately interpret the calendar
12
<PAGE>
SYKES ENTERPRISES, INCORPORATED
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Year 2000 continued
year 2000, some level of modification or even possibly replacement of such
applications was necessary.
Description of Areas of Impact and Risk
During late 1997, the Company initiated the process of reviewing its existing
software programs to determine the potential exposure and amount of resources
that was 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 resolved in the Company's day-to-day operations.
The Company 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. The
Company continues to solicit, receive and renew responses to surveys sent to
those third parties determined to be material to the operations of the Company
to determine their Year 2000 readiness. For those critical third parties that
have failed to respond to the Company's survey, the Company has pursued
alternative means of obtaining Y2K readiness information and is conducting
reviews of publicly available information published by such third parties.
The Company completed its Year 2000 testing and modifications during September
1999 and continues to monitor its internal systems and suppliers to ensure
ongoing compliance.
Cost of Project
The total cost of the Year 2000 project is estimated at approximately $1.2
million and is being funded through operating cash flows. To date, the Company
has incurred and expensed approximately $1.0 million related to this project.
Such cost is not expected to have a material effect on the Company's results of
operations.
The remaining costs to become Year 2000 compliant and the date on which the
Company believes it will complete all 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
assurance 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, availability of corrective software provided
by external suppliers, the ability to locate and correct all relevant computer
codes and similar uncertainties.
Most Likely Consequences of Year 2000 Problems
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Commission stated that public companies must disclose the
most likely worst case Year 2000 scenario. Although it is not possible to assess
the likelihood of any of the
13
<PAGE>
SYKES ENTERPRISES, INCORPORATED
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Year 2000 continued
following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical and similar supplies serving the
Company; widespread disruption of the services provided by common communica-
tions' carriers; similar disruption to the means and modes of transportation for
the Company and its employees, suppliers, and customers; significant disruption
to the Company's ability to gain access to, and remain working in, office
buildings and other facilities; the failure of substantial numbers of the
Company's customers' and its suppliers' critical computer hardware and software
systems, and the failure of outside entities' systems, including systems related
to banking and finance.
Contingency Plan
The company has substantially completed developing contingency plans to be
implemented if its efforts to identify and correct Year 2000 Problems affecting
its internal systems are not effective. The Company's contingency plans were
substantially complete as of September 30, 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected equip-
ment or software, short-to-medium-term use of alternate sites, equipment and
software, increased work hours for Company personnel or use of contract
personnel. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
14
<PAGE>
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 27.1......Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the three months ended
September 30, 1999.
15
<PAGE>
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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: November 10, 1999 By: /s/ Scott J. Bendert
- ----------------------------- -----------------------------------------
Scott J. Bendert
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE>
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
EXHIBIT INDEX
-------------
Exhibit Page
Number Number
------- ------
27.1 Financial Data Schedule 18
17
<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, 1999 and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,769,983
<SECURITIES> 0
<RECEIVABLES> 152,927,116
<ALLOWANCES> 903,347
<INVENTORY> 0
<CURRENT-ASSETS> 217,011,235
<PP&E> 222,145,261
<DEPRECIATION> 95,256,915
<TOTAL-ASSETS> 437,606,927
<CURRENT-LIABILITIES> 112,368,048
<BONDS> 0
0
0
<COMMON> 423,299
<OTHER-SE> 202,665,820
<TOTAL-LIABILITY-AND-EQUITY> 437,606,927
<SALES> 443,452,337
<TOTAL-REVENUES> 443,452,337
<CGS> 0
<TOTAL-COSTS> 382,869,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,588,002
<INCOME-PRETAX> 58,157,957
<INCOME-TAX> 22,532,719
<INCOME-CONTINUING> 35,625,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,625,238
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.83
</TABLE>
