1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000March 31, 2001.
[ ] 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 (IRS Employer
Identification No.)
incorporation or organization) Identification No.)
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 16, 2000,May 4, 2001, there were 40,460,27339,832,794 shares of common
stock outstanding.
Page 1 of 4239
The Exhibit Index Appears on Page 1921
2
PART I
ITEM 1 - FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS' REVIEW REPORTREPORT.
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MARCH 31, DECEMBER 31,
SEPTEMBER 30,
19992001 2000
------------- ---------------------- ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .................................................................. $ 31,001,35427,432 $ 26,919,935
Restricted cash30,141
Receivables ............................................. 15,108,523 --
Receivables ................................................. 126,476,947 133,791,236119,571 135,609
Prepaid expenses and other current assets ................... 15,252,307 11,307,914
------------- -------------............... 17,298 17,679
--------- ---------
Total current assets ...................................... 187,839,131 172,019,085.................................. 164,301 183,429
Property and equipment, net ................................... 134,755,878 156,894,718
Marketable securities ......................................... 199,875 --............................... 150,822 151,842
Intangible assets, net ........................................ 76,830,977 14,042,327.................................... 8,226 8,861
Deferred charges and other assets ............................. 19,769,980 21,450,033
------------- -------------......................... 14,525 13,212
--------- ---------
$ 419,395,841337,874 $ 364,406,163
============= =============357,344
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt ........................................ $ 3,236,45157 $ 66,653100
Accounts payable ............................................ 37,409,955 31,394,386........................................ 24,143 34,636
Income taxes payable ........................................ 932,158 1,554,341.................................... 4,877 5,502
Accrued employee compensation and benefits .................. 24,205,591 25,184,833
Customer deposits ........................................... 11,820,739 --.............. 29,751 32,746
Other accrued expenses and current liabilities .............. 17,159,191 16,893,496
------------- -------------.......... 17,817 17,481
--------- ---------
Total current liabilities ................................. 94,764,085 75,093,709............................. 76,645 90,465
Long-term debt ................................................ 80,052,717 20,170,577............................................ 1,960 8,759
Deferred grants ............................................... 21,198,709 26,985,733........................................... 29,688 30,143
Deferred revenue .............................................. 26,593,100 32,297,296.......................................... 31,808 31,072
Other long-term liabilities ................................... 1,400,466 1,680,798
------------- -------------5 8
--------- ---------
Total liabilities ......................................... 224,009,077 156,228,113
------------- -------------
Commitments and contingencies..................................... 140,106 160,447
--------- ---------
Contingencies
Shareholders' equity
Preferred stock, $0.01 par value, 10,000,00010,000 shares
authorized; no shares issued and outstanding ........................ -- --
Common stock, $0.01 par value, 200,000,000200,000 shares authorized;
42,734,28443,116 and 43,050,27343,084 issued .......................... 427,343 430,503.............................. 431 431
Additional paid-in capital .................................. 155,022,390 158,044,747.............................. 159,855 159,696
Retained earnings ........................................... 45,797,226 104,718,868....................................... 96,458 91,435
Accumulated other comprehensive income ...................... (5,860,195) (17,109,567)
------------- -------------
195,386,764 246,084,551(loss) ........... (18,393) (14,082)
--------- ---------
238,351 237,480
Treasury stock at cost; 2,500,0002,981 shares (none in 1999)...... -- (37,906,501)
------------- -------------.................... (40,583) (40,583)
--------- ---------
Total shareholders' equity ................................ 195,386,764 208,178,050
------------- -------------............................ 197,768 196,897
--------- ---------
$ 419,395,841337,874 $ 364,406,163
============= =============357,344
========= =========
See accompanying notes to condensed consolidated financial statements.
2
3
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE ANDINCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2001 AND MARCH 31, 2000
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1999(in thousands, except for per share data) 2001 2000
1999 2000
------------- ------------- ------------- -------------
(Restated)--------- ---------
Revenues ..................................................................................................... $ 413,308,705140,421 $ 454,749,028 $ 140,966,807 $ 137,570,344
------------- ------------- ------------- -------------162,710
--------- ---------
Operating expensesexpenses:
Direct salaries and related costs ..... 264,707,291 289,071,026 92,522,468 88,254,290.......................................... 88,712 101,871
General and administrative ............ 114,393,523 144,428,243 40,350,154 52,124,522
Compensation expense associated with
exercise of options ................. -- 7,835,679 -- --
Restructuring and other charges ....... -- 9,640,000 -- --
------------- ------------- ------------- -------------................................................. 43,247 46,914
--------- ---------
Total operating expenses ............ 379,100,814 450,974,948 132,872,622 140,378,812
------------- ------------- ------------- -------------................................................. 131,959 148,785
--------- ---------
Income (loss) from operations ........... 34,207,891 3,774,080 8,094,185 (2,808,468)....................................................... 8,462 13,925
--------- ---------
Other income (expense):
Interest, net ......................... (2,588,002) (2,703,615) (1,052,748) (378,511)
Gain on sale of equity interest in SHPS -- 84,036,465 -- --.............................................................. 20 (1,236)
Other ................................. 162,958 (927,637) 65,877 (1,056,104)
------------- ------------- ------------- -------------...................................................................... (380) (1)
--------- ---------
Total other income (expense) ........ (2,425,044) 80,405,213 (986,871) (1,434,615)
------------- ------------- ------------- -------------............................................. (360) (1,237)
--------- ---------
Income (loss) before provision for income taxes ................................. 31,782,847 84,179,293 7,107,314 (4,243,083)and cumulative
effect of change in accounting principle ................................... 8,102 12,688
Provision for income taxes .............. 12,309,535 25,257,651 2,760,517 (1,569,940)
------------- ------------- ------------- -------------................................................... 3,079 4,923
--------- ---------
Income before cumulative effect of change in accounting principle ............ 5,023 7,765
Cumulative effect of change in accounting principle, net of income
taxes of $1.3 million ...................................................... -- (2,068)
--------- ---------
Net income (loss) .......................................................................................... $ 19,473,3125,023 $ 58,921,642 $ 4,346,797 $ (2,673,143)
============= ============= ============= =============5,697
========= =========
Net income (loss) per basic share:
Income before cumulative effect of change in accounting principle .......... $ 0.13 $ 0.18
Cumulative effect of change in accounting principle ........................ -- (0.05)
--------- ---------
Net income per basic share Basic ................................................................................ $ 0.460.13 $ 1.410.13
========= =========
Total weighted average basic shares .......................................... 40,137 42,606
========= =========
Net income per diluted share:
Income before cumulative effect of change in accounting principle .......... $ 0.100.12 $ (0.06)
============= ============= ============= =============
Diluted ...............................0.18
Cumulative effect of change in accounting principle ........................ -- (0.05)
--------- ---------
Net income per diluted share............................................. $ 0.450.12 $ 1.40 $ 0.10 $ (0.06)
============= ============= ============= =============
Weighted0.13
========= =========
Total weighted average diluted shares outstanding
Basic ................................. 41,940,706 41,909,739 42,280,529 41,133,885
Diluted ............................... 42,984,543 41,996,844 43,032,429 41,133,885........................................ 40,251 42,902
========= =========
See accompanying notes to condensed consolidated financial statements.
3
4
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000, NINE MONTHS ENDED DECEMBER 31, 2000 AND
THREE MONTHS ENDED MARCH 31, 2001
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Comprehensive Treasury
(in thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
------------------ ------ -------- ------------ -------------------- ------------- ------------ --------------------- ---------
Balance at January 1, 1999, restated ....... 41,451,905 $414,519 $136,199,7482000 42,734 $427 $155,023 $ 23,894,81545,797 $ (1,407,760)(5,860) $ -- $ 159,101,322195,387
Issuance of common stock ................ 877,982 8,780 4,371,761275 3 2,195 -- -- -- 4,380,541
Net income, restated ....2,198
Purchase of treasury stock -- -- -- 19,473,312 -- -- 19,473,312(16,199) (16,199)
Net Income for the three months
ended March 31, 2000 -- -- -- 5,697 -- -- 5,697
Foreign currency translation
adjustment -- -- -- -- (1,854,142)(3,975) -- (1,854,142)
-------------(3,975)
---------
Comprehensive income ....1,722
------- ---- -------- -------- -------- -------- ---------
Balance at March 31, 2000
(unaudited) 43,009 430 157,218 51,494 (9,835) (16,199) 183,108
Issuance of common stock 75 1 1,013 -- -- -- 1,014
Purchase of treasury stock -- -- -- -- -- -- 17,619,170
----------- -------- ------------ ------------ ------------ ------------ -------------
Balance at September 30,
1999 (unaudited) ..... 42,329,887 423,299 140,571,509 43,368,127 (3,261,902) -- 181,101,033
Issuance of common stock 404,397 4,044 6,999,558 -- -- -- 7,003,602(24,384) (24,384)
Tax-effect of non-
qualifiednon-qualified
exercise of stock options ..... -- -- 7,451,3231,465 -- -- -- 7,451,3231,465
Net income ..............Income for the nine months
ended December 31, 2000 -- -- -- 2,429,09939,941 -- -- 2,429,09939,941
Foreign currency translation
adjustment -- -- -- -- (2,598,293)(4,247) -- (2,598,293)
-------------(4,247)
---------
Comprehensive income (loss) ........ -- -- -- -- -- -- (169,194)
-----------35,694
------- ---- -------- ------------ ------------ ------------ ------------ --------------------- -------- -------- ---------
Balance at December 31, 1999, restated ....... 42,734,284 427,343 155,022,390 45,797,226 (5,860,195) -- 195,386,7642000 43,084 431 159,696 91,435 (14,082) (40,583) 196,897
Issuance of common stock 315,989 3,160 3,022,35732 -- 159 -- -- -- 3,025,517
Purchase of treasury
stock ................159
Net Income for the three months
ended March 31, 2001 -- -- -- 5,023 -- -- (37,906,501) (37,906,501)
Net income .............. -- -- -- 58,921,642 -- -- 58,921,6425,023
Foreign currency translation
adjustment -- -- -- -- (11,249,372)(4,311) -- (11,249,372)
-------------(4,311)
---------
Comprehensive income .... -- -- -- -- -- -- 47,672,270
-----------712
------- ---- -------- ------------ ------------ ------------ ------------ --------------------- -------- -------- ---------
Balance at September 30,
2000March 31, 2001
(unaudited) ..... 43,050,273 $430,503 $158,044,747 $104,718,868 $(17,109,567) $(37,906,501)43,116 $431 $159,855 $ 208,178,050
===========96,458 $(18,393) $(40,583) $ 197,768
======= ==== ======== ============ ============ ============ ============ ===================== ======== ======== =========
See accompanying notes to condensed consolidated financial statements.
4
5
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINETHREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2001 AND MARCH 31, 2000
(Unaudited)
1999(in thousands) 2001 2000
------------ -------------
(Restated)-------- --------
Cash flows from operating activitiesactivities:
Net income ............................................................................................ $ 19,473,3125,023 $ 58,921,6425,697
Depreciation and amortization ............................. 25,801,708 28,353,855......................... 8,924 9,383
Cumulative effect of accounting change, net of tax .... -- 2,068
Deferred income taxes ..................................... (1,281,282) (1,018,557)
Gain on sale of equity interest in SHPS, Incorporated ..... -- (84,036,465)
Loss on sale of marketable securities ..................... -- 199,874tax benefit ........................... (41) (2,101)
Loss on disposal of property and equipment ............................ 217 -- 400,000
Changes in assets and liabilitiesliabilities:
Receivables ............................................. (8,721,242) (28,818,852)......................................... 16,809 (18,352)
Prepaid expenses and other current assets ............... (2,559,345) 2,469,549
Intangible assets ....................................... (11,381) 1,184,511........... 367 (1,189)
Deferred charges and other assets ....................... (2,426,292) 396,566................... (1,212) 4,252
Accounts payable ........................................ 2,733,837 (8,107,529).................................... (10,493) (8,888)
Income taxes payable .................................... (1,634,884) 2,861,435................................ (1,396) (1,330)
Accrued employee compensation and benefits .............. 3,239,448 4,182,803.......... (2,995) 1,113
Customer deposits, net of restricted cash ............... (3,254,360) 10,921,326........... -- 5,973
Other accrued expenses and current liabilities .......... (1,013,234) 663,113
Restructuring and other charges reserve ................. -- 1,417,987...... 336 2,856
Deferred revenue ........................................ 4,554,859 6,038,471.................................... 736 19,467
Other long-term liabilities ............................. (882,838) (1,393,344)
------------ -------------......................... (3) 177
-------- --------
Net cash provided by (used for) operating activities .... 34,018,306 (5,363,615)
------------ -------------........... 16,272 19,126
-------- --------
Cash flows from investing activitiesactivities:
Capital expenditures ...................................... (43,793,711) (55,331,475)
Acquisition of businesses ................................. (5,846,289) --
Proceeds from sale of equity interest in SHPS, Incorporated -- 159,775,966.................................. (8,145) (19,635)
Proceeds from sale of property and equipment .............. 193,672.......... 8 --
------------ --------------------- --------
Net cash provided by (used for)used for investing activities ... (49,446,328) 104,444,491
------------ -------------............. (8,137) (19,635)
-------- --------
Cash flows from financing activitiesactivities:
Paydowns under revolving line of credit agreements ........ (54,500,000) (153,014,294).... (17,367) (18,545)
Borrowings under revolving line of credit agreements ...... 59,000,000 90,672,339.. 10,559 31,540
Payments of long-term debt ................................ (3,705,115) (1,077,262)
Borrowings under long-term debt ........................... 903,656 367,278............................ (34) --
Proceeds from issuance of stock ........................... 4,080,541 3,025,517....................... 159 2,198
Purchase of treasury stock ............................ -- (16,199)
Proceeds from grants ...................................... 7,198,335 6,020,000
Purchases of treasury stock ............................... -- (37,906,501)
------------ -------------.................................. 150 2,021
-------- --------
Net cash provided by (used for) financing activities ... 12,977,417 (91,912,923)
------------ -------------(6,533) 1,015
-------- --------
Adjustments for foreign currency translation ................. (1,854,142) (11,249,372)
------------ -------------............. (4,311) (3,975)
-------- --------
Net decrease in cash and cash equivalents .................... (4,304,747) (4,081,419)................ (2,709) (3,469)
Cash and cash equivalents - beginning ........................ 36,348,863 31,001,354
------------ -------------.................... 30,141 31,001
-------- --------
Cash and cash equivalents - ending .................................................. $ 32,044,11627,432 $ 26,919,935
============ =============27,532
======== ========
See accompanying notes to condensed consolidated financial statements.
5
6
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINETHREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2001 AND SEPTEMBER 30,MARCH 31, 2000
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries ("Sykes" or the
"Company") provides vertically integrated technology-based businessoutsourced customer management solutions and services.
Sykes' Business Solutions group provides professional services in e-Commerce,e-commerce,
and Customer Relationship Managementcustomer relationship management (CRM) with a focus on business strategy
development, solution implementation,project management, business process redesign, change management,
knowledge management, education, training and web design, development and
education, localization and program management.development. Sykes' Business
Services group provides value-added customer supportcare outsourcing includingservices with emphasis on
technical support and customer service, distribution and fulfillment.service. These services are delivered through
multiple communication channels encompassing phone, e-mail, web e-mail and telephony
support.chat. Sykes' Business Solutions and Business Services combination offers
clients value-added end-to-end solutions. The Company's
services are provided to customers on a worldwide basis throughout a wide variety of industries.
On October 30, 2000, Sykes announcedprimarily within the
completion of a comprehensive review
of its software revenue recognition accounting practices for all significant
software licensing arrangementstechnology, communications and service contracts with respect to the years
ended December 31, 1998 and 1999, and for the nine months ended September 30,
2000. As a result of the review, Sykes determined that the accounting for eight
clients' contracts required revision. Sykes determined that the revenue that
had been recognized should have been recognized either as payments came due,
upon completion of allfinancial services required under the arrangements or upon
satisfaction of any contingency. Accordingly, the financial statements for the
years ended December 31, 1998 and 1999, and certain interim periods have been
restated.
The effects of the restatement on the Company's consolidated statements of
operations for the nine months ended September 30, 1999 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------------
AS REPORTED AS RESTATED
------------ ------------
Revenues ..................... $411,452,337 $413,308,705
Operating income ............. $ 32,351,523 $ 34,207,891
Net income ................... $ 18,335,358 $ 19,473,312
Net income per share - basic . $ 0.44 $ 0.46
Net income per share - diluted $ 0.43 $ 0.45
markets.
NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
The accompanying unaudited condensed consolidated financial statements as restated, have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principlesprinciples") 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 only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine and three-month periodsperiod ended September 30, 2000March 31, 2001 are not
necessarily indicative of the results that may be expected for any future
quarters or the year ending December 31, 2000.2001. For further information, refer to
the restated consolidated financial statements and notes thereto as of and for the years
ended December 31, 19982000 and 1999, included in the Company's Form 10-K/A10-K for the
year ended December 31, 19992000 as filed with the United States Securities and
Exchange Commission ("SEC") on November 20,March 27, 2001, which were audited by the
Company's predecessor independent accountants.
ACCOUNTING CHANGE FOR REVENUE RECOGNITION - During the fourth quarter of 2000,
the Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
Securities and Exchange Commission. Based on criteria established by SAB 101,
adopted retroactive to January 1, 2000, the Company modified its accounting
treatment for the recognition of revenue as it related to two revenue sources.
First, recognition of grants in excess of building costs received for the
development of new technical and customer support centers are deferred until
the funds are released from escrow by the local or state government, which
generally coincides with completion of the construction of the facility and
training of the staff. Previously, recognition of this excess grant income as a
reduction of general and administrative costs began when the funds were placed
in escrow at the beginning of the construction of the facility. Second, revenues
that were recognized as services were performed and as the related fees became
collectible under agreements between the Company and its customers are
deferred until either a final contract or purchase order has been fully
executed.
The cumulative effect of change on prior years resulted in a charge to income of
$2.1 million (net of income taxes of $1.3 million), or $0.05 per diluted share,
which is included in income for the three months ended March 31, 2000. The
effect of these changes for the three months ended March 31, 2000 was to
increase income before cumulative effect of the change in accounting principle
by $1.1 million or $0.02 per diluted share.
6
7
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINETHREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2001 AND SEPTEMBER 30,MARCH 31, 2000
(Unaudited)
NOTE 1 - ACQUISITIONSBASIS OF PRESENTATION AND DISPOSITIONS
On August 20, 1999,RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The following unaudited table summarizes the amounts included in the cumulative
effect adjustment as of January 1, 2000 that the Company acquired allrecognized in 2000 for
each of the common stockthree-month periods ended (in thousands):
Increase (Decrease)
(Unaudited)
----------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------- ----- ----- -----
Revenues ......................... $ 1,499 $ -- $ -- $ --
Operating expenses ............... (342) (184) (373) (315)
------- ----- ----- -----
Income before provision for income
taxes.......................... 1,841 184 373 315
Provision for income taxes ....... 713 71 144 122
------- ----- ----- -----
Net Income ....................... $ 1,128 $ 113 $ 229 $ 193
======= ===== ===== =====
DEFERRED GRANTS - Recognition of CompuHelpline, Inc., (d/b/income associated with grants for land and the
acquisition of buildings, property and equipment is deferred until the grants
are released from escrow and recognized as a PC Answer) for approximately $340,000 consisting of
$40,000 of cashreduction to general and
11,594 sharesadministrative costs over the corresponding useful lives of the Company's common stock. PC Answer was
engaged in developing, marketing and selling prepaid technical computer support
cards and services underrelated assets.
Any excess amounts over the trademark names of PC Answer and MAC Answer. 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 of PC Answer are not material to the
Company's consolidated operations.
On August 31, 1999, the Company acquired allcost of the common stockbuilding are, only after the grants are
released from escrow, recognized as a reduction of Acer
Servicios de Informacion Sociedad Anonima ("AIS")certain operational expenses
as training costs are incurred at each specific support center. Proceeds from
cash grants are released from escrow upon completion and occupancy of Heredia, Costa Rica for
$6.0 millionthe
building. Amortization of the deferred grants that is included in cash. AIS operated an information technology call center that
provided 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 of AIS are not
material to the Company's consolidated operations.
On October 12, 1999, the Company acquired the AnswerExpress Support Suite for
$2.5 million in cash. 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 of
AnswerExpress are not material to the Company's consolidated operations.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS,
Incorporated ("SHPS") for approximately $165.5 million cash. The cash proceeds
reflected in the Statement of Cash Flows for the nine months ended September 30,
2000 is net of approximately $0.7 million used to retire other debt and
approximately $5.0 million of cash recorded on SHPS' balance sheet on the date
of sale. The sale of SHPS resulted in a gain for financial accounting purposes
of approximately $84.0 million ($59.9 million net of taxes). The Consolidated
Statement of Operations for the nine months ended September 30, 2000 includes
the results of SHPS through June 30, 2000, its disposition date. SHPS generated
revenue and net income (loss) exclusive of compensation expense associated with
the exercise of options during 2000, of $35.7 million and $0.2 million for the
nine months ended September 30, 2000 compared to $53.4 million and $1.0 million
for the nine months ended September 30, 1999 and $17.9 million and less than
$0.1 million for the
three months ended March 31, 2001 and 2000 was $0.6 million and $0.6 million,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS No. 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS No. 133 effective January 1, 2001. The
adoption of SFAS No. 133 had no impact on the financial position, results of
operations, or cash flows of the Company.
In September 30, 1999.2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which is effective for transfers after March 31, 2001. It is
effective for disclosures about securitizations and collateral transactions and
for recognition and reclassification of collateral for fiscal years ending after
December 15, 2000. SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of the provisions of SFAS No. 125 without reconsideration. The Company
has not yet evaluated the potential impact of SFAS No. 140 on its results of
operations.
NOTE 2 - CREDIT FACILITY
On May 2, 2000, the Company amended and restated its existing syndicated credit
facility with a syndicate of lenders (the "Amended Credit Facility"). Pursuant
to the terms of the Amended Credit Facility, the amount of the Company's
revolving credit facility was maintained at $150.0 million. The $150.0 million
Amended Credit Facility includes a $10.0 million swingline loan to be used for
working capital purposes. In addition, the Company amended and restated its
$15.0 million multi-currency credit facility that provides for multi-currency
lending. Borrowings under the Amended Credit Facility bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Eurodollar rate plus an applicable margin of up to 1.75%.
Borrowings under the $10.0 million swingline loan bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Quoted Rate for swingline loans. Borrowings under the $15.0
million multi-currency facility bear interest, at the Company's option, at (a)
the lender's base rate plus an applicable margin of up to .25% or (b) a quoted
Euro rate for swingline loans. The Company paid aggregate financing fees of
approximately $0.3 million, which have been deferred and are being amortized
over the term of the Amended Credit Agreement. In addition, a commitment fee up
to .375% will be charged on the unused portion of the Amended Credit Facility on
a quarterly basis. The Amended Credit Facility matures on February 28, 2003, and
the multi-currency facility matures on February 28, 2002.
7
8
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 2 - CREDIT FACILITY (continued)
Borrowings under the Amended Credit Facility are guaranteed by certain of the
Company's subsidiaries as evidenced by a pledge of 66% of the respective
subsidiary's common stock. Under the terms of the Amended Credit Facility, the
Company is required to maintain certain financial ratios and other financial and
non-financial conditions. The Amended Credit Facility prohibits, without the
consent of the syndicated lenders, the Company from incurring additional
indebtedness, limits certain investments, advances or loans and restricts
substantial asset sales, capital expenditures and cash dividends.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company is aware of threesixteen purported class action lawsuits that have been
filed against Sykes and certain of its officers alleging violations of federal
securities laws. OneAll of the actions have been consolidated into one case which
is a consolidation of previous class
actions, was filedpending in the United States District Court for the Middle District of
Florida, and the other two actions were filed separately in the United
States District Court for the Eastern District of New York.Florida. The plaintiffs of
these lawsuits purport to assert claims on behalf of a class of
purchasers of SykesSykes' common stock during part of 1999 andthe period from July 27, 1998 through
September 18, 2000. The actions claimconsolidated action claims violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Among other things, the actions allegeconsolidated action alleges that during
2000, 1999, and 2000,1998, the Company and certain of its officers made materially
false statements concerning the Company's financial condition and its future
prospects. The complaintsconsolidated complaint also claimclaims that
7
8
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Unaudited)
NOTE 2 - CONTINGENCIES (continued)
certain of the Company's quarterly financial statements during 1999 and 1998
were not prepared in accordance with generally accepted accounting principles.
The actions seekconsolidated action seeks compensatory and other damages, and costs and
expenses associated with the litigation. The Company believes these claims are
without merit and intends to defend the actions vigorously.
The Company is also aware of a lawsuit filefiled by Kyrus Corporation ("Kyrus") that asserts functionality
issues associated with software that Kyrus had licensed from the Company. At the
time of the software license, the Company and Kyrus entered into an agreement
which provided for a return of a portion of the convertible preferred stock
transferred to the Company in consideration of the license in the event that
revenues generated by Kyrus from the software did not reach agreed upon levels.
In this lawsuit, Kyrus claims that revenues from the software did not meet the
minimum levels agreed upon and that Kyrus is therefore entitled to a return of
the convertible preferred stock having a fair value of $4.5 million at the time
of the software license. The Company has not recorded the convertible preferred
stock subject to the contingency in the accompanying Condensed Consolidated
Balance Sheets as of March 31, 2001 and December 31, 2000. Therefore, in the
event the Company is required to return the preferred stock to Kyrus, the return
will not impact the Company's financial position or results of operations. This
litigation is currently pending in the Court of Common Pleas for Greenville
County, South Carolina. This lawsuit is in the very early stages and formal
discovery has not yet begun. The Company intends to vigorously defend the actions vigorously. However,this
lawsuit.
Although the Company intends to vigorously defend these lawsuits, it cannot
predict thetheir outcome of these lawsuits or the impact that they may have on the Company. The Company
also cannot predict whether any other suits, claims, or investigations may arise
in the future based on the same claims. The outcome of any of these lawsuits or
any future lawsuits, claims, or investigations relating to the same subject
matter may have a material adverse impact on the Company's financial condition
and results of operations.
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.
During January 2000, the Company became contingently liable for a letter of
credit in the amount of $30.0 million, which guaranteed performance of a
contractual obligation. This contractual obligation and associated letter of
credit were cancelled during August 2000.
NOTE 43 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Sykes presents data in the Condensed Consolidated Statements of Changes in
Shareholders' Equity in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes rules for the reporting of comprehensive income and its components.
Total comprehensive income (loss) was approximately $17.6$0.7 million and $47.7 million for the nine months
ended September 30, 1999 and 2000, respectively, and $7.6 million and $(6.9)$1.7
million for the three months ended September 30, 1999March 31, 2001 and 2000, respectively.
8
9
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME (continued)
The components of other comprehensive income for the nine months ended September
30, 2000 relate to foreign currency translation adjustments and are as follows:
Accumulated Other
Comprehensive Income
--------------------
Balance at December 31, 1999 ................. $ (5,860,195)
Foreign currency translation adjustment ...... (11,249,372)
------------
Balance at September 30, 2000 ................ $(17,109,567)
============
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 54 - RESTRUCTURING AND OTHER CHARGES
During JuneThe Company recorded restructuring and other charges during the second and
fourth quarters of 2000 management committedtotaling $30.5 million. Related to the second quarter
restructuring and commenced implementation of a
restructuring plan (the "Restructuring Plan"), which was designed to reduce
costsother charges totaling $9.6 million, the Company consolidated
several European and improve operating efficiencies. Significant activities of the
Restructuring Plan include the (1) consolidation of certain of the Company'sone U.S. distribution and fulfillment operations, (2) consolidation of certain of the
Company'scenter and closed or
consolidated six professional staffing and consulting operations, (3) elimination of
redundant property, leasehold improvements and equipment, and (4) lease
termination costs associated with vacated properties and transportation
equipment. A restructuring and other charge of approximately $9.6 million ($6.9
million after tax) was recordedservices offices. Included in the second quarter
2000 restructuring and other charges is a $3.5 million lease termination payment
related to the corporate aircraft. As a result of 2000. Thethe second quarter
restructuring, the
8
9
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Unaudited)
NOTE 4 - RESTRUCTURING AND OTHER CHARGES (continued)
Company planned to reducereduced the number of employees by 130, of which 115 were associated
with the Company's distribution and fulfillment operations and 15 were
associated with the professional staffing and consulting operations. The
consolidation of certain distribution and fulfillment sites and certain
professional consulting offices began157 during June 2000 and is expectedexpects the
remaining lease obligations related to the closed facilities to be completed by
June 1,2001.
The Company also announced, after a comprehensive review of operations, its
decision to exit certain non-core lower margin businesses to reduce costs,
improve operating efficiencies and focus on its core competencies of technical
support, customer service and consulting solutions. As a result, the Company
recorded $20.9 million in restructuring and other charges during the fourth
quarter of 2000 related to the closure of its U.S. fulfillment and distribution
operations, the consolidation of its Tampa, Florida technical support center
into its Charlotte, North Carolina center and the exit of its worldwide
localization operations. Included in the fourth quarter 2000 restructuring and
other charges is a $2.4 million severance payment related to the employment
contract of the Company's former President. In connection with the fourth
quarter restructuring, the Company reduced the number of employees by 245 during
the first quarter of 2001 and expects the remaining lease obligations related to
the closed facilities to be completed by December 2001.
The major components of restructuring and other charges recorded inestablished during the
quarter
ended June 30,second and fourth quarters of 2000 as originally estimated are as follows:
DESCRIPTION
-----------
Severance and related costs ................ $1,110,000
Lease termination costs .................... 3,564,000
Write-down of property and equipment ....... 2,530,000
Write-down of intangible assets ............ 1,185,000
Other ...................................... 1,251,000
----------
$9,640,000
==========
During the third quarter of 2000, the Company has reduced the number of
employees by 100 in distribution and fulfillment and 15 in professional staffing
and consulting operations.follows (in thousands):
Restructuring Other Total
------------- -------- --------
Severance and related costs ........... $ 1,614 $ 2,360 $ 3,974
Lease termination costs ............... 1,765 3,639 5,404
Write-down of property and equipment .. 14,088 103 14,191
Write-down of intangible assets ....... 6,086 -- 6,086
Other ................................. 813 -- 813
-------- -------- --------
$ 24,366 $ 6,102 $ 30,468
======== ======== ========
A summary of the Restructuring Planrestructuring and other charges activity for the three months
ended March 31, 2001 (none for the comparable period in 2000), is as follows:follows (in
thousands):
DESCRIPTION
-----------Restructuring Other Total
------------- -------- --------
Balance established on June 30, 2000 .................remaining as of January 1, 2001 $ 9,640,0002,708 $ 2,360 $ 5,068
Reduction in workforce cash outflows ................. (766,504).. (328) (121) (449)
Lease termination cash payments ...................... (2,975,350)
Non-cash write-down of property and equipment ........ (2,235,505)
Non-cash write-down of intangible assets ............. (1,171,508)....... (201) -- (201)
Other cash outflows .................................. (1,073,146)
-----------................... (109) -- (109)
-------- -------- --------
Balance remaining at September 30, 2000 ........................March 31, 2001 ... $ 1,417,987
===========2,070 $ 2,239 $ 4,309
======== ======== ========
NOTE 5 - INCOME TAXES
The Company's effective tax rate was 38.0 percent and 38.8 percent for the three
months ended March 31, 2001 and 2000, respectively. The effective tax rate
differs from the statutory federal income tax rate primarily due to the effects
of foreign, state and local income taxes, foreign income not subject to federal
and state income taxes, non-deductible intangibles and other permanent
differences.
9
10
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINETHREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2001 AND SEPTEMBER 30,MARCH 31, 2000
(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 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:follows (in thousands):
NINE MONTHS ENDED
THREE MONTHS ENDED
----------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999--------------------
MARCH 31, MARCH 31,
2001 2000
1999 2000
---------- ---------- ---------- ---------------- ------
Basic:
Weighted average common shares outstanding ................. 41,940,706 41,909,739 42,280,529 41,133,885
---------- ---------- ---------- ----------
Total weighted average basic shares outstanding ......... 41,940,706 41,909,739 42,280,529 41,133,885........... 40,137 42,606
Diluted:
Dilutive effect of stock options ............................. 1,043,837 87,105 751,900 --
---------- ---------- ---------- ----------..................... 114 296
------ ------
Total weighted average diluted shares outstanding 40,251 42,902
====== ======
NOTE 7 - STOCK OPTIONS
The Company's 2001 Equity Incentive Plan (the "2001 Plan") was adopted by the
Company's Board of Directors on March 15, 2001 and approved by the Company's
shareholders on April 26, 2001. The 2001 Plan permits the granting of options,
stock appreciation rights and other stock-based awards to purchase up to 7.0
million shares of the Company's common stock to eligible employees and certain
non-employees, who provide services to the Company, at not less than the fair
value at the time the options, stock appreciation rights and other stock-based
awards are granted. The term of the options, stock appreciation rights and other
stock-based awards granted under the 2001 Plan cannot exceed a period of ten
years from the date of grant. No options, stock appreciation rights or other
stock-based awards are outstanding under the 2001 Plan as of March 31, 2001.
Upon adoption of the 2001 Plan, the Company terminated the 1996 Employee Stock
Option Plan, the 1997 Management Incentive Stock Option Plan and the 2000 Stock
Option Plan and the related options available for future grant under these plans
of approximately 0.7 million shares, 2.4 million shares and 2.9 million shares,
respectively. The options previously granted under these plans are not affected
and continue to be governed by their respective plans.
10
11
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Unaudited)
NOTE 8 - SEGMENT REPORTING AND MAJOR CLIENT
The Company has two reportable segments entitled Business Services and Business
Solutions. The Business Services group is comprised of the Company's technical
and customer support and distribution and fulfillment businesses. The Business
Solutions group provides professional services in e-commerce and customer
relationship management (CRM) with a focus on businesses strategy development,
project management, business process redesign, change management, knowledge
management, education, training and web development. There has been no change in
the basis of the Company's segmentation or in the measurement of segment profit
as compared with the Annual Report on Form 10-K for the year ended December 31,
2000.
Information about the Company's reportable segments for the first quarter of
2001 compared to the first quarter of 2000 is as follows (in thousands):
Business Business Consolidated
Services Solutions Other Total
-------- --------- -------- ---------
For the Three Months Ended March 31, 2001:
Revenue .................................. 42,984,543 41,996,844 43,032,429 41,133,885
========== ========== ========== ==========$130,393 $ 10,028 $ -- $ 140,421
Depreciation and amortization ............ 8,831 93 -- 8,924
Income (loss) from operations ............ $ 9,262 $ (800) $ -- $ 8,462
Other income (expense) ................... (360) (360)
Provision for income taxes ............... (3,079) (3,079)
---------
Net income ............................... $ 5,023
=========
For the Three Months Ended March 31, 2000:
Revenue .................................. $149,375(1) $13,335(2) $ -- $ 162,710
Depreciation and amortization ............ 9,175 208 -- 9,383
Income from operations ................... $ 13,395 $ 530 $ -- $ 13,925
Other income (expense) ................... (1,237) (1,237)
Provision for income taxes ............... (4,923) (4,923)
Cumulative effect of change in
accounting principle ................... (2,068) (2,068)
---------
Net income ............................... $ 5,697
=========
Business Services' revenue includes $14.2 million or 10.1% of consolidated
revenues for the three months ended March 31, 2001 and $0.2 million or
0.1% of consolidated revenues for the three months ended March 31, 2000 from
a major provider of communications services.
- --------
(1) Business Services' revenue includes $26.7 million from SHPS Incorporated, a
previously wholly owned subsidiary of the Company, which was sold in June 2000,
and U.S. fulfillment and distribution, a business in which the Company exited in
connection with the fourth quarter 2000 restructuring. The Company continues to
operate its European fulfillment and distribution business.
(2) Business Solutions' revenue includes $2.5 million from the Company's
localization operations, a business in which the Company exited in connection
with the fourth quarter 2000 restructuring.
11
12
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated
We have reviewed the accompanying condensed consolidated balance sheet of Sykes
Enterprises, Incorporated and subsidiaries (the "Company") as of September 30, 2000March 31, 2001,
and the related condensed consolidated statements of operations,income, changes in
shareholders' equity, and cash flows for the three-month and nine-month periodsperiod then ended.
These financial statements are the responsibility of the Company's management. We did not make a similar
review of the consolidated statements of operations, changes in shareholders'
equity and cash flows for the three-month and nine-month periods ended
September 30, 1999.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States which will be performed for the full year withof America, the
objective of expressingwhich is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanyingsuch condensed consolidated financial statements at September 30, 2000, and for
the three-month and nine-month periods then ended for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States the consolidated balance sheet of
Sykes
Enterprises, Incorporated as of December 31, 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended (not presented herein) and in our report dated February 7,
2000, except for Note 1 as to which the date is October 30, 2000, we expressed
an unqualified opinion on those consolidated financial statements, as restated.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
was derived.America.
/s/ ErnstDeloitte & YoungTouche LLP
Certified Public Accountants
Tampa, Florida
November 17, 2000
10April 23, 2001
12
1113
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The followingOPERATIONS.
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes included elsewhere in this report and in the
Sykes Enterprises, Incorporated (the "Company") Annual Report on Form 10-K for
the year ended December 31, 1999 Consolidated Financial
Statements, as restated, including2000 filed with the notes thereto. The followingSecurities and Exchange
Commission, which were audited by the Company's predecessor independent
accountants. Management's discussion and analysis containsmay contain forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995) that involve risksare based on current expectations, estimates, forecasts, and
uncertainties.projections about the Company, management's beliefs, and assumptions made by
management. In addition, other written or oral statements, which constitute
forward-looking statements, may be made from time to time by or on behalf of
Sykes. Words such as "may", "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates","may," "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. Similarly,
statements that describe the Company's future plans, objectives, or goals also
are forward-looking statements. Future eventsThese statements are not guarantees of future
performance and the Company's actual results
could differ materially from the results reflected in these forward-looking
statements, asare subject to a resultnumber of certain of the factors set forthrisks and uncertainties, including
those discussed below and elsewhere in this analysis.report. The Company's actual results
may differ materially from what is expressed or forecasted in such
forward-looking statements. All forward-looking statements are made as of the
date hereof, and Sykes undertakes no obligation to update any such
forward-looking statements, whether as a result of new information, future
events or otherwise.
Factors that could cause actual results to differ materially from what is
expressed or forecasted in such forward-looking statements include, but are not
limited to, customer resistanceto: the marketplace's continued receptivity to Sykes' standardized contract for future
bundled service offerings; variations in the termterms and the elements
of services offered under Sykes' standardized contract for future bundled
service offerings;
changes in applicable accounting principles; difficulties or delays in
implementing Sykes' bundled service offerings; failure to achieve sales,
marketing, and other objectives of Sykes' strategic alliance; construction
delays of new call centers; difficulties in managing growth; rapid technological
change; loss of significant customers; risks inherent in conducting business
abroad; currency fluctuations; changes in legislation; fluctuations in business
conditions and the economy; Sykes' ability to attract and retain key management
personnel; the marketplace's continued receptivity to Sykes' bundled service
offering; Sykes' ability to continue the growth of its support service
revenues through additional technical and customer support centers; Sykes'
ability to leverage its customer relationship practice; Sykes' ability to
further penetrate into vertically integrated markets; Sykes' ability to expand
itsrevenues within the global presence through strategic alliances and selective acquisitions; Sykes'
ability to expand its e-commerce service platform revenues;markets; Sykes' ability to continue to establish a
competitive advantage through sophisticated technological capabilities;
uncertainties relating to pending litigation; Sykes' dependence on key clients;
Sykes' ability to complete its restructuring plan;
the ultimate outcomeattract and retain experienced personnel; potential
difficulties in continuing to expand and manage growth; Sykes' ability to grow
through selective acquisitions and mergers; rapid technological change; Sykes'
reliance on technology and computer systems; Sykes' dependence on trend toward
outsourcing; risk of pending class action lawsuits;emergency interruption of technical and customer support
center operations; risks associated with international operations and expansion;
existence of substantial competition; dependence on senior management; control
by principal shareholder and anti-takeover considerations; volatility of stock
price may result in loss of investment; and the risk factors listed from time to
time in Sykes' registration statements and reports as filed with the Securities
Exchange Commission.
All forward-looking statements are made
as of the date hereof, and Sykes undertakes no obligation to update any such
forward-looking statements.
OVERVIEW
On June 13, 2000, the Company announced its initiatives to strategically focus
its operations into two business units entitled Business Solutions and Business
Services. Sykes' Business Solutions group, which represents approximately 10% of
the Company's consolidated revenue, provides professional services in
e-commerce, globalization and Customer Relationship Management (CRM) with a
focus on business strategy development, solution implementation, web design,
development and education, localization and program management. Sykes' Business
Services group represents approximately 90% of the Company's consolidated
revenue and is comprised of the Company's core competencies of technical and
customer support, distribution and fulfillment. These services are delivered
through multiple communication channels encompassing web, e-mail and telephony
support. The revenue comparisons below reflect the Company's strategic focus on
its operations as Business Solutions and Business Services.
RESULTS OF OPERATIONS
NINETHREE MONTHS ENDED SEPTEMBER 30, 2000MARCH 31, 2001 COMPARED TO NINETHREE MONTHS ENDED SEPTEMBER 30,
1999MARCH 31, 2000
Revenues
For the ninethree months ended September 30, 2000,March 31, 2001, the Company recorded consolidated
revenues of $454.7$140.4 million, an increasea decrease of $41.4$22.3 million or 10.0%13.7%, from the
$413.3$162.7
million of consolidated revenues for the comparable period during 1999.2000.
Exclusive of SHPS, (inIncorporated ("SHPS"), in which 93.5% of the Company's
ownership interest was sold on June 30, 2000),2000, and exclusive of U.S. fulfillment
and distribution and the Company's localization operations, from which the
Company exited in connection with the fourth quarter 2000 restructuring,
revenues increased $59.0$6.1 million or 16.4% to $419.0 million4.6% for the ninethree months ended September 30, 2000March 31,
2001, from $360.0$133.6 million for the comparable period during 1999.2000. This growth in
revenue was the result of a $39.7$6.9 million or 115.6% increase in Business Services'
revenues, exclusive of SHPS and U.S. fulfillment and distribution operations,
and a decrease of $0.8 million or 7.4% from Business Solutions' revenues,
exclusive of the Company's localization operations.
13
1214
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (CONTINUED)
10.6% increase in Business Services' revenues ($57.5 million or 17.9% exclusive
of SHPS) and an increase of $1.7 million or 4.5% from Business Solutions'
revenues.RESULTS OF OPERATIONS (continued)
Revenues (continued)
The increase in Business Services' revenues for the ninethree months ended September
30, 2000March 31,
2001 was primarily attributable to an increase in the number ofnew and expanded contracts for
technical and customer support centers providing services, throughouthighlighted by a further
diversification into the period, and the
resultant increase in e-mail requests and telephony call volumes from clients,
the licensing of the Company's diagnostic software,communications market, partially offset by a decrease
from distributionthe Company's European fulfillment and fulfillmentdistribution services revenues. The
new technical
support centers were required as a result of continued growth of technical and
customer support services from both e-commerce and telephony support services.
Subsequent to the third quarter of 1999, the Company opened three domestic and
two international technical support centers and significantly expanded an
additional four international centers. During the nine months ended September
30, 2000, the Company recognized $7.1 million of revenue associated with the
licensing of the Company's AnswerTeam(TM) diagnostic software, of which $3.5
million relates to a one-year licensing agreement that was completed during the
nine months ended September 30, 2000, and $2.4 million relates to the pro rata
recognition of revenue associated with a licensing agreement completed during
1999. The decrease in distributionEuropean fulfillment and fulfillmentdistribution services revenue for the ninethree
months ended September 30, 2000March 31, 2001 was primarily attributable to the closing of
three international and one domestic distribution and fulfillment centers as
part of the Company's restructuring plan and a client's decision to discontinue
its operations within North America.reduction in
business from a single dot.com client, who was undergoing financial
restructuring.
The increasedecrease in Business Solutions' revenues for the three months ended March
31, 2001, was attributabledue to a focus on
professional e-commerce services, including web design, development and program
management and an increasethe decline in the average bill rate chargeddemand for consulting
services. The increase in Business Solutions' revenue for the nine months ended
September 30, 2000 is partially offset by a $1.9 million reduction in revenue
associated with the saleIT staffing services from
clients who are aware of the Company's Manufacturingcurrent market environment and Distribution
operations during the second quarter of 1999.have reacted by
delaying IT projects.
Direct Salaries and Related Costs
Direct salaries and related costs increased $24.4decreased $13.2 million or 9.2%12.9% to $289.1$88.7
million for the ninethree months ended September 30, 2000,March 31, 2001, from $264.7$101.9 million in 1999.2000.
As a percentage of revenues, direct salaries and related costs decreased
slightlyincreased to
63.6%63.2% in 20002001 from 64.0%62.6% for the comparable period in 1999.2000. The increasedecrease in the
dollar amount of direct salaries and related costs was primarily attributable to
a $36.8$20.2 million increasedecrease in direct salaries and benefits to support revenue growthrelated costs associated with
SHPS, U.S. fulfillment and associated
training costs, partially offset bydistribution and the Company's localization
operations and a $19.7$2.3 million decrease in direct material costs associated
primarily with the European fulfillment and distribution services. This decrease
was partially offset by a $10.3 million increase in salaries and fulfillment services. In addition, during
the nine months ended September 30, 1999, the Company capitalized $0.6 millionbenefits due to
higher direct labor and benefit costs to support additional technical and
customer support centers and associated training costs, fluctuations in client
forecasting as a result of costs related to internally developed software with no additional costs
capitalized during the nine months ended September 30, 2000. Exclusivemarket uncertainties and shifts in client mix. As a
percentage of SHPS,revenues, direct salaries and all related costs, exclusive of SHPS,
U.S. fulfillment and distribution and the Company's localization operations,
increased $30.9 million or 13.1% to $265.9
million or 63.5% of revenue. The decrease63.3% in direct salaries2001 from 60.9% for the comparable period in 2000.
General and all related
costs as a percentage of revenue resulted from economies of scale associated
with spreading costs over a larger revenue base.Administrative
General and administrative expenses increased $30.0decreased $3.7 million or 26.3%7.8% to $144.4$43.2
million for the ninethree months ended September 30, 2000,March 31, 2001, from $114.4$46.9 million in 1999.2000.
As a percentage of revenues, general and administrative expenses increased to
31.8%30.8% in 20002001 from 27.7%28.8% for the comparable period in 1999.2000. The increasedecrease in both the
dollar amount and percentage of revenue of general and administrative expenses was primarily attributable
to an $8.1 million decrease in general and administrative expenses associated
with SHPS, U.S. fulfillment and distribution and the Company's localization
operations. This decrease was offset by a $7.7$1.7 million increase in salaries and
benefits to support the Company's organic growth, a $5.4$0.9 million increase in
telecom costs,legal and professional fees, a $3.9$0.5 million increase in lease and rent
expense,consulting and a $4.2$1.9
million increase in depreciation expensesand amortization associated with facility and
capital equipment expenditures all generally incurred in connection with both technology
infrastructure and the integration and expansion of the Company's technical and customer support
services,centers. As a $3.1 million increase in bad debt expense, and a
$5.7 million increasepercentage of legal and professional fees and other costs. Grants
received in excess of property and equipment costs are recognized as a
reduction ofrevenues, general and administrative expenses,
which were $0.9 million
higher during the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. Exclusiveexclusive of SHPS, generalU.S. fulfillment and administrative
expensesdistribution and the Company's
localization operations, increased $39.6 million or 42.2% to $133.6 million, or 31.9% of
revenue.
1230.7% in 2001 from 28.7% for the
comparable period in 2000.
14
1315
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (CONTINUED)
CompensationRESULTS OF OPERATIONS (continued)
Other Income and Expense
Other expense associated with the exercise of options was $7.8 million
for the nine months ended September 30, 2000. This charge related to payments
made to certain SHPS' option holders as part of the Company's sale of a 93.5%
ownership interest in SHPS that occurred on June 30, 2000.
The Company recorded restructuring and other charges of $9.6$0.4 million during the ninethree months ended September 30, 2000. These charges were associated with (1) the
consolidation of certain of the Company's distribution and fulfillment
operations; (2) the consolidation of certain of the Company's professional
services locations; (3) elimination of redundant property, leasehold
improvements and equipment; and (4) lease termination costs associated with
vacated properties and transportation equipment.
Interest and other expense was $3.6 million during the nine months ended
September 30, 2000,March 31, 2001,
compared to $2.4$1.2 million during the comparable 19992000 period. The increase in interest and other expense for the nine-month periodThis decrease was
attributable to $0.7a decrease of $1.3 million ofin interest expense associated with cancellation of
a contractual obligation and a $0.6 million charge associated with the
disposition of assets, partially offset by a
decrease in the Company's average outstanding debt position. The Company's
average debt balance for the nine
months ended September 30, 2000,first quarter of 2001 was $67.6$5.1 million compared to
$77.4$84.6 million for the nine months ended September 30, 1999.first quarter of 2000. The decrease in the average debt
balance is principally due to the repayment of debt from the proceeds generated
from the sale of SHPS, offset by capital expenditures and the Company's
repurchase of 2.53.0 million shares of its common stock during 2000 that are being
held as treasury shares.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPSProvision for $165.5 million cash. The sale of SHPS resulted in a gain for financial
accounting purposes of $84.0 million ($59.9 million net of taxes).Income Taxes
The provision for income taxes increased $13.0decreased $1.8 million to $25.3$3.1 million for the
ninethree months ended September 30, 2000March 31, 2001 from $12.3$4.9 million for the comparable period in
1999. The increase in the provision for income taxes was primarily
attributable to the gain associated with the sale of SHPS, partially offset by
the compensation expense associated with the exercise of options and the
restructuring and other charges that were incurred during the nine months ended
September 30, 2000. The Company's effective tax rate exclusive of the gain and
one-time charges was 39.2% for the nine months ended September 30, 2000 compared
to 38.7% for the comparable 1999 period.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
For the three months ended September 30, 2000, the Company recorded consolidated
revenues of $137.6 million, a decrease of $3.4 million or 2.4%, from the $141.0
million of consolidated revenues for the comparable period during 1999.
Exclusive of SHPS, revenues increased $14.6 million or 11.8% for the three
months ended September 30, 2000, from $123.0 million for the comparable period
during 1999. This growth in revenue was the result of a $14.1 million or 12.6%
increase in Business Services' revenues, exclusive of SHPS, and an increase of
$0.5 million or 4.5% from Business Solutions' revenues.
The increase in Business Services' revenues for the three months ended September
30, 2000 was primarily attributable to an increase in the number of technical
and customer support centers providing services throughout the period and the
resultant increase in e-mail requests and telephony call volumes from clients,
partially offset by a decrease from distribution and fulfillment services
revenues. The new technical and customer support centers were required as a
result of continued growth of technical and customer support services from both
e-commerce and traditional telephony support services. During the three months
ended September 30, 2000, the Company recognized $1.2 million of revenue
associated with the licensing of the Company's AnswerTeam(TM) diagnostic
software related to the pro rata recognition of revenue associated with a
licensing agreement completed during 1999. The decrease in distribution and
fulfillment services revenue for the three months ended September 30, 2000 was
primarily attributable to the closing of three international and one domestic
distribution and fulfillment centers as
13
14
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999 (continued)
part of the Company's restructuring plan and also a client's decision to
discontinue its operations within North America.
The increase in Business Solutions' revenues for the three months ended
September 30, 2000, was attributable to a focus on professional e-commerce
services, including web design, development and program management and, an
increase in the average bill rate charged for consulting services.
Direct salaries and related costs decreased $4.2 million or 4.6% to $88.3
million for the three months ended September 30, 2000, from $92.5 million in
1999. As a percentage of revenues, direct salaries and related costs decreased
to 64.2% in 2000 from 65.6% for the comparable period in 1999. The decrease in
the dollar amount was primarily attributable to a $6.5 million decrease indirect
material costs associated with distribution and fulfillment services, partially
offset by a $3.8 million increase in salaries and benefits to support revenue
growth and associated training costs. Exclusive of SHPS, direct salaries and all
related costs increased $6.3 million or 7.7% to $88.3 million or 64.2% of
revenue.
General and administrative expenses increased $11.8 million or 29.2% to $52.1
million for the three months ended September 30, 2000, from $40.3 million in
1999. As a percentage of revenues, general and administrative expenses increased
to 37.9% in 2000 from 28.6% for the comparable period in 1999. The increase in
the dollar amount of general and administrative expenses was primarily
attributable to a $2.2 million increase in salaries and benefits to support the
Company's organic growth, a $3.9 million increase in bad debt expenses, a $2.5
million increase in legal and professional fees, a $2.0 million increase in
telecom costs and a $1.2 million increase of other costs.
Exclusive of SHPS, general and administrative expenses increased $18.7 million
or 55.9% from $33.4 million, or 27.2% of revenue.
Interest and other expense was $1.4 million during the three months ended
September 30, 2000, compared to $1.0 million during the comparable 1999 period.
The increase in interest and other expense for the three-month period was
attributable to $0.7 million of interest expense associated with the
cancellation of a contractual obligation and a $0.6 million charge associated
with the disposition of assets, partially offset by a decrease in the Company's
average outstanding debt position. The Company's average debt balance for the
third quarter of 2000 was $15.5 million compared to $78.9 million for the third
quarter of 1999. The decrease in the average debt balance is principally due to
the repayment of debt from the proceeds generated from the sale of SHPS, offset
by capital expenditures and the Company's repurchase of 2.5 million shares of
its common stock during 2000 that are being held as treasury shares.
The provision for income taxes decreased $4.4 million to an income tax benefit
of $1.6 million for the three months ended September 30, 2000 from $2.8 million
for the comparable period in 1999. The decrease in the provision for income taxes was primarily attributable
to the loss incurred during the three months
ended September 30, 2000. The Company's effective tax rate was 37.0%decrease in income for the three months ended September 30, 2000 compared to 38.8%March 31, 2001. The
effective tax rate was 38.0 percent for the three months ended March 31, 2001
and 38.8 percent for the comparable 19992000 period. The effective tax rate differs
from the statutory federal income tax rate primarily due to the effects of
foreign, state and local income taxes, foreign income not subject to federal and
state income taxes, non-deductible intangibles and other permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows generated from
operations and from available borrowings under its credit facilities. The
Company has utilized its capital resources to make capital expenditures
associated primarily with its technical and customer support services, invest in
technology applications and tools to further develop the Company's service
offerings repurchase its shares
in the open market and for working capital and other general corporate purposes.purposes,
including the repurchase of its common stock in the open market. In addition,future
periods, the Company intends similar uses of any such funds, including possible
acquisitions.
In the first quarter of 2001, the Company generated $16.3 million in cash from
operating activities and used $2.7 million in available cash primarily to use its future sources of liquidityinvest
$8.1 million in capital expenditures and paydown $6.8 million in borrowings
under the Company's credit facilities.
Net cash flows provided by operating activities for the aforementioned itemsthree months ended March
31, 2001 was $16.3 million compared to $19.1 million for the comparable period
in 2000. The $2.8 million decrease in net cash flows provided by operating
activities was due to a decrease in net income of $0.7 million, a net decrease
in non-cash expenses of $0.3 million and a net decrease in assets and
liabilities of $1.8 million. This net decrease in assets and liabilities of $1.8
million was principally due to a decrease in deferred revenue of $18.7 million,
primarily related to revenue from diagnostic software, and a decrease in
accounts payable and other accrued accounts of $18.4 million offset by a $35.3
million decrease in receivables. This decrease in receivables included an $8.8
million decrease in SHPS' receivables, a previously wholly owned subsidiary of
the Company, which was sold in June 2000, and a $26.5 million decrease in
receivables primarily due to increased collection efforts.
Capital expenditures, which are generally funded by cash generated from
operating activities and borrowings available under its credit facilities, were
$8.1 million for possible acquisitions.
14the three months ended March 31, 2001 compared to $19.6 million
for the three months ended March 31, 2000. Capital expenditures for the first
quarter of 2001 were $11.5 million lower than the comparable period of 2000. In
the first quarter of 2001, approximately 81% of the capital
15
1516
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
During the nine months ended September 30, 2000, the Company utilized proceeds
from the sale of SHPS, grants and stock issuances to fund cash repayments of its
Amended Credit Facility, capital expenditures, common stock purchases and cash
used in operating activities. The purchase of the shares of the Company's common
stock was in connection with stock repurchase programs announced in February
2000 and July 2000, respectively. The capital expenditures were predominately the result of integrationinvesting in new and expansion of the Company'sexisting technical and
customer support centers.
Oncenters and 19% was expended for systems infrastructure. In
2001, the Company anticipates capital expenditures in the range of $45.0 million
to $50.0 million.
The primary sources of cash flows from financing activities are from borrowings
under the Company's syndicated credit facility, as amended on May 2, 2000, the Company amended and restated its existing syndicated credit
facility with
a syndicate of lenders (the "Amended Credit Facility"). Pursuant to the terms of
the Amended Credit Facility, the amount of the Company's revolving credit
facility was maintained atis $150.0 million. The $150.0 million Amended Credit Facility includes
a $10.0 million swingline loan to be used for working capital purposes. In
addition, the Company amended and restated itshas a $15.0 million multi-currency credit facility that
provides for multi-currency lending. Borrowings under the Amended Credit Facility bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Eurodollar rate plus an applicable margin of up to 1.75%.
Borrowings under the $10.0 million swingline loan bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Quoted Rate for swingline loans. Borrowings under the $15.0
million multi-currency facility bear interest, at the Company's option, at (a)
the lender's base rate plus an applicable margin of up to .25% or (b) a quoted
Euro rate for swingline loans. The Company paid aggregate financing fees of
approximately $0.3 million, which have been deferred and are being amortized
over the term of the Amended Credit Agreement. In addition, a commitment fee up
to .375% will be charged on the unused portion of the Amended Credit Facility on
a quarterly basis. The Amended Credit Facility matures on
February 28, 2003, and the multi-currency facility matures on February 28, 2002.
At September 30, 2000,March 31, 2001, the Company had approximately $145.0$27.4 million in cash and $163.0 million of
availability under its credit facilities.
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 working capital needs,debt repayment requirements, continued expansion objectives and
anticipated levels of capital expenditures and debt repayment requirements, for the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in non-U.S. currency exchange rates. The Company is exposed to non-U.S. exchange
rate fluctuations as the financial results of non-U.S. subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The cumulative translation effects for
subsidiaries using functional currencies other than the U.S. dollar are included
in accumulated other comprehensive income in shareholders' equity. Movements in
non-U.S. 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 non-U.S. exchange derivative instruments to manage its exposure to
changes in non-U.S. currency exchange rates.
The Company's exposure to interest rate risk results from its variable rate debt
outstanding under its credit facilities. At September 30, 2000,March 31, 2001, the Company had $20.2$2.0 million in debt outstanding at variable
interest rates, which is generally equal to the Eurodollar rate plus an
applicable margin. Based on the Company's level of variable rate debt during the
first ninethree months of 2000,2001, a one-point increase in the weighted average
interest rate would increase the Company's annual interest expense by
approximately $0.6$0.3 million. Under its current policy,
theThe Company doeshas not usehistorically used derivative
instruments to manage its exposure to changes in interest rates.
15
16
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPACT OF YEAR 2000
In prior periods, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. During September 1999, the Company completed its
remediation and testing of its systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
Sykes is not aware of any material problems resulting from Year 2000 issues,
either with its products and services, its internal systems, or those products
or services of third parties. Sykes will continue to monitor its critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any delayed Year 2000 matters that may arise are addressed
promptly.
FLUCTUATIONS IN QUARTERLY RESULTS
For the year ended December 31, 1999,2000, quarterly revenues as restated, as a percentage of
total annual revenues were approximately 24%27%, 24%26%, 24%23% and 28%24%, respectively,
for the first through fourth quarters of the year. The Company has experienced
and anticipates that in the future it will continue to experience variations in
quarterly revenues. The variations are due to the timing of new contracts and
renewal of existing contracts, the timing of expenses incurred to support new
business, the timing and frequency of client spending for e-commerce and
e-business activities, non-U.S. currency fluctuations, and the seasonal pattern
of technical and customer support, and fulfillment and distribution and fulfillment
services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be
measured at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for financial statements beginning in 2001. The Company is currently
studying the future effects of adopting this statement. However, due to our
limited use of derivative financial instruments, adoption of Statement No. 133
is not expected to have a significant effect on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. Sykes
believes its revenue recognition practices for software meet these
requirements. The Company is required to adopt the provisions of this Bulletin
in the fourth fiscal quarter of 2000 and is currently in the process of
assessing the impact of its adoption on other revenue sources. Further, while
Staff Accounting Bulletin No. 101 does not supersede the software industry
specific revenue recognition guidance, with which Sykes believes it is in
compliance, this bulletin in practice may change interpretations of software
recognition requirements.
16
17
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000MARCH 31, 2001
PART II - OTHER INFORMATIONINFORMATION.
ITEM 31 - LEGAL PROCEEDINGSPROCEEDINGS.
Reference is made to Part I, Item 3 "Legal Proceedings" of the Registrant's
Annual Report on Form 10-K/A10-K for the year ended December 31, 1999,2000, filed November 20, 2000.March 27,
2001. Since March 29, 2000,27, 2001, the Company has not been named as a defendant in any
action, which, to the best of the Company's knowledge, could have a material
adverse effect on the financial condition or results of operations of the
Company other than the actions described below.
A. Actions Arising under Federal Securities Laws. In February 2000,
fourteenClass Action Litigation.
The Company is aware of sixteen purported class action lawsuits werethat have been
filed in the Middle District of
Florida against the CompanySykes and certain of its officers alleging violations of federal
securities laws. In October 2000,All of the putative class action lawsuits
wereactions have been consolidated beforeinto one judgecase which
is pending in the United States District Court for the Middle District of
Florida. InThe plaintiffs purport to assert claims on behalf of a class of
purchasers of Sykes' common stock during the period from July 27, 1998 through
September 14, 2000, that court appointed co-lead
plaintiffs and their counsel. On November 3, 2000, the lead plaintiffs filed an
amended class action complaint in the Florida consolidated action. The
Company's and the other defendant's response to the amended complaint is due on
November 30,18, 2000. The complaint contains varying allegations, including that we made materially
false and misleading statements with respect to our 1999 financial statements
that were partconsolidated action claims violations of our filings with the SEC and our press releases during 1999
and 2000. The amended class action complaint alleges claims under SectionSections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Among other things, the consolidated action alleges that during
2000, 1999 and 1998, the Company and certain of its officers made materially
false statements concerning the Company's financial condition and its future
prospects. The consolidated complaint also claims that Act.
The amended class action purports to assert claims on behalfcertain of a class of
purchasers of Sykes common stockthe Company's
quarterly financial statements during 1999 and through September 18, 2000.1998 were not prepared in
accordance with generally accepted accounting principles. The amended classconsolidated
action complaint does not specifyseeks compensatory and other damages, and costs and expenses associated
with the amount of damages
sought.
In addition, two class action lawsuits were filed on September 20, 2000 in the
United States District Court for the Eastern District of New York. The
plaintiffs for the New York actions purport to assert claims on behalf of a
class of purchasers of Sykes common stock between February 7, 2000 and
September 18, 2000. The complaints for the New York actions contain
substantially similar allegations to those in the Florida action.litigation. The Company will seek to transfer the New York action to the Middle District of Floridabelieves these claims are without merit and
consolidate the New York action with the Florida consolidated action.
The Company
intends to defend the actions vigorously.
However,The Company is also aware of a lawsuit filed by Kyrus that asserts functionality
issues associated with software that Kyrus had licensed from the Company. At the
time of the software license, the Company and Kyrus entered into an agreement
which provided for a return of a portion of the convertible preferred stock
transferred to the Company in consideration of the license in the event that
revenues generated by Kyrus from the software did not reach agreed upon levels.
In this lawsuit, Kyrus claims that revenues from the software did not meet the
minimum levels agreed upon and that Kyrus is therefore entitled to a return of
the convertible preferred stock having a fair value of $4.5 million at the time
of the software license. The Company has not recorded the convertible preferred
stock subject to the contingency in the accompanying Condensed Consolidated
Balance Sheets as of March 31, 2001 and December 31, 2000. Therefore, in the
event the Company is required to return the preferred stock to Kyrus, the return
will not impact the Company's financial position or results of operations. This
litigation is currently pending in the Court of Common Pleas for Greenville
County, South Carolina. This lawsuit is in the very early stages and formal
discovery has not yet begun. The Company intends to vigorously defend this
lawsuit.
Although the Company intends to vigorously defend these lawsuits, it cannot
predict thetheir outcome of these lawsuits or the impact that they may have on the Company. The Company
also cannot predict whether any other suits, claims, or investigations may arise
in the future based on the same claims. The outcome of any of these lawsuits or
any future lawsuits, claims, or investigations relating to the same subject
matter may have a material adverse impact on the Company's liquidity, financial condition
and results of operations.
B. Kyrus.
Kyrus Corporation filed a lawsuit against Sykes concerning the license of
certain software by Sykes to Kyrus. In 1998, the Company entered into a
transaction pursuant to which Sykes granted to Kyrus a license for software
related to Sykes' former retail division and used by the retailing industry. In
exchange for the license, Sykes received preferred stock of Kyrus valued at
$10.0 million. In the suit, Kyrus asserts, in part, that the software contained
functionality problems that prevented Kyrus from successfully marketing the
software at their projected levels. Based on Kyrus' assertions, the Company was
to return up to $4.5 million of the shares of Kyrus preferred stock if Kyrus
was unable to reach certain sales volumes from the software. Kyrus' complaint
seeks a return of $4.5 million of $10.0 million in preferred stock held by the
Company and the recovery of approximately $1.6 million in charges allegedly
required to fix customer problems.Other Litigation.
The Company intends to defend the action
vigorously. The Company has tendered the defense to its insurance carrier, who
is defending the case but has reserved its rights with respect to any ultimate
claims.
C. Other Litigation. Fromfrom time to time the Company is involved in other
litigation incidentallegal actions arising in the
ordinary course of business. With respect to its business. Inthese matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs such that the opinion of management, no
litigation to which the Company currently is a party is likely toultimate outcome will not have a materiallymaterial adverse
effect on the Company's results of operations orfuture financial condition, if decided adversely to the Company.
Although the Company intends to defend these lawsuits vigorously, the Company
cannot predict the outcome of these lawsuits or the impact that these lawsuits
or any other suits, claims, or investigations relating to the same subject
matter may have on the Company's liquidity or financial condition.position.
17
18
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NoneHOLDERS.
a. The Annual Meeting of Shareholders was held on April 26, 2001.
b. The following members of the Board of Directors were elected
to serve until the 2004 Annual Meeting and until their
successors are elected and qualified:
For Against Abstained
--- ------- ---------
H. Parks Helms 36,403,399 -- 792,715
Adelaide A. (Alex) Sink 36,405,399 -- 790,715
Linda F. McClintock-Greco, M.D 36,402,199 -- 793,915
The following member of the Board of Directors, who was
appointed by the Board during 2000 to fill a vacancy, was
elected to serve until the 2002 Annual Meeting and until his
successor is elected and qualified:
For Against Abstained
--- ------- ---------
Thomas F. Skelly 36,405,647 -- 790,467
The following member of the Board of Directors, who was
appointed by the Board during 2000 to fill a vacancy, was
elected to serve until the 2003 Annual Meeting and until his
successor is elected and qualified:
For Against Abstained
--- ------- ---------
William J. Meurer 36,405,647 -- 790,467
The following members of the Board of Directors whose term of
office as a director continued after the meeting:
John H. Sykes Ernest J. Milani
Furman P. Bodenheimer, Jr. Iain A. Macdonald
Gordon H. Loetz
c. The following matters were voted upon at the Annual Meeting of
shareholders:
The proposal to approve the adoption of the Company's 2001
Equity Incentive Plan was approved as follows:
For Against Abstained
--- ------- ---------
19,923,966 8,266,562 48,761
The proposal to ratify Deloitte & Touche as the principal
independent public accountants for the year 2001 was approved
as follows:
For Against Abstained
--- ------- ---------
36,758,134 394,531 43,449
d. Not applicable.
ITEM 5 - OTHER INFORMATION
NoneINFORMATION.
None.
18
19
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K8-K.
(a) Exhibits
The following documents are filed as an exhibit to this Report:
10.12 Amended and Restated 1996 Non-Employee Director Stock Option
Plan
10.32 2001 Equity Incentive Plan
15 Letter re:regarding unaudited interim financial information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a formcurrent report on Form 8-K, dated September 18, 2000,March 14, 2001,
with the Commission on September
22, 2000, reporting under Item 5March 21, 2001, which announced the engagement of
Deloitte & Touche LLP as its revised earnings forecastprincipal accountant to audit the consolidated
financial statements of the Registrant for the second halfyear ended December 31, 2001 and
the dismissal of 2000, changes to its strategic alliance with Perot
Systems, and a restatementErnst &Young LLP, effective upon the completion of priorthe audit of
the Registrant's consolidated financial results.
17statements for the year ended December
31, 2000.
19
1820
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000MARCH 31, 2001
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 17, 2000May 7, 2001 By: /s/ W. Michael Kipphut
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W. Michael Kipphut
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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1921
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000MARCH 31, 2001
EXHIBIT INDEX
Exhibit
Number
- -------
10.26 Employment Agreement dated July 31, 2000 between James E.
Lamar and Sykes Enterprises, Incorporated.
10.27 Employment Separation Agreement dated as of September 20, 2000
between Dale W. Saville and Sykes Enterprises, Incorporated.
10.28 Employment Separation Agreement dated as of September 22, 2000
between Scott J. Bendert and Sykes Enterprises, Incorporated.
15 Letter re:
Exhibit
Number
------
10.12 Amended and Restated 1996 Non-Employee Director Stock Option
Plan
10.32 2001 Equity Incentive Plan
15 Letter regarding unaudited interim financial information
27.1 Financial Data Schedule
19
21