FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-28274
SYKES ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its charter)
Florida 56-1383460
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 813-274-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for at least the past ninety days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $.01 Par Value, 21,833,818 shares as of November 13, 1996
PART I
Item 1 - Financial Statements
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 29,
1995 1996
ASSETS (Unaudited)
Current assets
Cash $ 1,752,978 $ 2,140,885
Temporary investments 849,502 18,037,559
Receivables, including
unbilled 16,744,039 28,874,106
Refundable income taxes 602,197 548,196
Prepaid expenses and other
current assets 1,047,955 2,004,851
---------- ----------
Total current assets 20,996,671 51,605,597
Property and equipment, net 24,384,987 31,428,722
Deferred income taxes 11,034 159,000
Deferred charges and other
assets 758,651 807,029
----------- -----------
$46,151,343 $84,000,348
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of
long-term debt $ 1,566,645 $ 22,659
Accounts payable 6,221,965 4,402,452
Accrued employee compensation
and benefits 5,849,096 7,045,296
Income taxes payable 186,221 2,087,842
Deferred income taxes 3,366,000 423,955
Other accrued expenses and
current liabilities 2,756,561 2,096,739
---------- ----------
Total current liabilities 19,946,488 16,078,943
Long-term debt 8,589,530 292,308
Deferred income taxes - 1,797,510
Deferred grants 6,751,782 9,939,958
Commitments and contingencies
Shareholders' equity
Common stock, $0.01 par value;
10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.01 par value,
50,000,000 shares authorized;
14,121,819 and 20,026,498 shares
issued and outstanding 141,218 200,265
Additional paid-in capital 645,437 45,964,725
Retained earnings 10,008,015 9,659,448
Accumulated foreign currency
translation adjustments 68,873 67,191
---------- ----------
Total shareholders' equity 10,863,543 55,891,629
---------- ----------
$46,151,343 $84,000,348
========== ==========
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine and Three Months Ended October 1, 1995 and September 29, 1996
(Unaudited)
Nine Months Ended Three Months Ended
October 1, September 29, October 1, September 29,
1995 1996 1995 1996
Revenues $51,314,771 $81,008,314 $18,239,498 $28,541,164
---------- ---------- ---------- ----------
Operating expenses
Direct salaries and related costs 31,036,531 45,535,823 10,720,903 16,094,991
General and administrative 16,682,626 25,413,533 5,729,539 8,703,953
---------- ---------- ---------- ----------
Total operating expenses 47,719,157 70,949,356 16,450,442 24,798,944
---------- ---------- ---------- ----------
Income from operations 3,595,614 10,058,958 1,789,056 3,742,220
---------- ---------- ---------- ----------
Other income (expense)
Interest income 26,727 392,807 17,226 271,790
Interest expense (497,436) (371,299) (143,732) -
Other (38,418) 68,186 (93,093) (906)
---------- ---------- ---------- ----------
Total other income (expense) (509,127) 89,694 (219,599) 270,884
---------- ---------- ---------- ----------
Income before income taxes 3,086,487 10,148,652 1,569,457 4,013,104
Provision for income taxes 1,195,969 3,993,705 622,404 1,561,000
---------- ---------- ---------- ----------
Net income before dividends 1,890,518 6,154,947 947,053 2,452,104
Preferred stock dividends - 47,343 - -
---------- ---------- ---------- ----------
Net income applicable to common
shareholders $ 1,890,518 $ 6,107,604 $ 947,053 $ 2,452,104
========== ========== ========== ==========
Pro forma income data:
Income before income taxes $ 3,086,487 $10,148,652 $ 1,569,457 $ 4,013,104
Pro forma provision for income
taxes relating to S Corporation 123,000 67,000 59,000 -
Actual provision for income taxes 1,195,969 3,993,705 622,404 1,561,000
---------- ---------- ---------- ----------
Total provision and pro forma
provision for income taxes 1,318,969 4,060,705 681,404 1,561,000
---------- ---------- ---------- ----------
Pro forma net income 1,767,518 6,087,947 888,053 2,452,104
Preferred stock dividend - 47,343 - -
---------- ---------- ---------- ----------
Pro forma net income applicable to
common shareholders $ 1,767,518 $ 6,040,604 $ 888,053 $ 2,452,104
========== ========== ========== ==========
Pro forma net income per common and
common equivalent share $ 0.10 $ 0.32 $ 0.05 $ 0.12
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding 16,873,982 19,180,394 16,873,982 21,023,434
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 1, 1995 and September 29, 1996
(Unaudited)
October 1, September 29,
1995 1996
Cash flows from operating activities:
Net income $ 1,890,518 $ 6,154,947
Depreciation and amortization 1,872,187 3,715,338
Deferred income taxes 332,698 1,151,891
Gain (loss) on disposal of property
and equipment 1,705 (4,826)
Changes in assets and liabilities:
Receivables, including unbilled (1,991,900) (10,130,067)
Refundable income taxes 278,550 54,001
Prepaid expenses and other
current assets (941,743) (956,896)
Deferred charges and other assets 138,939 (279,905)
Accounts payable 375,060 (1,819,513)
Accrued employee compensation and benefits 859,671 1,196,200
Income taxes payable (109,076) (1,352,207)
Other accrued expenses and current
liabilities 204,907 (358,284)
--------- ----------
Net cash provided by (used for) operating
activities 2,911,516 (2,629,321)
--------- ----------
Cash flows from investing activities:
Capital expenditures (4,289,299) (11,206,207)
Proceeds from sales of property
and equipment 73,568 168,435
--------- ----------
Net cash used for investing
activities (4,215,731) (11,037,772)
--------- ----------
Cash flows from financing activities:
Paydowns under revolving line of credit
agreements (18,953,000) (20,196,569)
Borrowings under revolving line of
credit agreements 20,660,005 19,781,835
Proceeds from grants 397,942 1,708,054
Proceeds from issuance of stock 26,861 39,731,599
Payment of long-term debt (709,412) (9,426,473)
Dividends paid - (353,707)
---------- ----------
Net cash provided by financing
activities 1,422,396 31,244,739
---------- ----------
Adjustment for foreign currency
translation 164,514 (1,682)
---------- ----------
Net increase in cash 282,695 17,575,964
Cash and cash equivalents at beginning
of year 2,082,142 2,602,480
---------- ----------
Cash and cash equivalents at end of period $ 2,364,837 $20,178,444
========== ==========
See accompanying notes to consolidated financial statement
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended October 1, 1995 and September 29, 1996
(Unaudited)
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month
period ended September 29, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial statements and
notes thereto as of and for the years ended December 31, 1995 included in
the Company's Prospectus dated October 31, 1996 associated with the
Company's secondary public offering.
Sykes Enterprises, Incorporated and consolidated subsidiaries (the
"Company") provide comprehensive information technology outsourcing
services including information technology support services, consisting of
technical product support, help desk services and diagnostic software
tools, and information technology development services and solutions,
consisting of software design, development, integration and implementation
and documentation, foreign language translation and localization services.
The Company's services are provided to a wide variety of industries.
At September 29, 1996, the entities comprising the consolidated Company
included:
Sykes Enterprises, Incorporated
Sykes Enterprises Incorporated Holdings B.V.
Sykes Enterprises Incorporated of Canada
Sykes Realty, Inc.
Datasvar Support AB
DiagSoft, Inc.
Unless otherwise noted, all information in this Form 10-Q has been
adjusted to retroactively reflect the three-for-two stock split in the
form of a 50% stock dividend to shareholders of record on July 18, 1996,
which was reflected on the Nasdaq National Market on July 29, 1996.
Note 1 - Temporary Investments
Temporary investments consist of investments with original maturities of
three months or less. At September 29, 1996, cash in the amount of
approximately $18,038,000 was held in tax free interest bearing
investments and approximately $136,000 was held in an interest bearing
account and pledged as collateral with respect to office space leased in
Amsterdam, The Netherlands. It is the Company's intention to continue to
maintain the Netherlands' investment throughout the term of the lease.
Note 2 - Income Taxes
In conjunction with the Company's initial public offering, the Company
changed its method of accounting for income taxes from the cash method to
the accrual method effective with the beginning of the Company's income
tax year of August 1, 1995. The corresponding adjustment established
approximately $1.2 million of current income taxes payable and
approximately $1.8 million of noncurrent deferred income taxes of
previously classified current deferred income taxes. The approximate $1.8
million balance associated with the change to the accrual method will
become due and payable over a period not to exceed three years.
Note 3 - Commitments and Contingencies
The Company from time to time is involved in legal actions arising in the
ordinary course of business. With respect to these matters, management
believes that it has adequate legal defenses and/or provided adequate
accruals for related costs such that the ultimate outcome will not have a
material adverse effect on the Company's future financial position.
Note 4 - Earnings Per Share
Primary earnings per share are based on the weighted average number of
common shares and common share equivalents outstanding during the periods
and assumes, (i) that the redeemable preferred stock was converted at the
beginning of each period, or date of issuance, if later, and (ii) that
earnings were increased for preferred dividends that would not have been
incurred had conversion taken place. Common share equivalents include,
when applicable, dilutive stock options using the treasury stock method.
Fully diluted earnings per share assumes, in addition to the above, the
additional dilutive effect of stock options.
In July 1996, the Board of Directors of the Company declared a three-for-
two stock split of the Company's common stock to be distributed on July
28, 1996 to the Company's shareholders of record at the close of business
on July 18, 1996. All applicable share and per share data have been
adjusted for the stock split. As a result of the split, 6,368,225
additional shares were issued and additional paid-in capital was reduced
by $63,682.
The numbers of shares used in the earnings per share computation are as
follows:
Nine Months Ended Three Months Ended
October 1, September 29, October 1, September 29,
1995 1996 1995 1996
Primary
Weighted average
common
outstanding 15,951,819 18,190,176 15,951,819 20,026,498
Conversion of
preferred stock 448,029 201,912 448,029 -
Stock options 474,134 788,306 474,134 996,936
---------- ---------- ---------- ----------
Total primary 16,873,982 19,180,394 16,873,982 21,023,434
Fully Diluted
Additional
dilution of
stock options - 44,639 - 38,591
---------- ---------- ---------- ----------
Total fully
diluted 16,873,982 19,225,033 16,873,982 21,062,025
========== ========== ========== ==========
Fully diluted per share data is not shown since the effect would be
antidilutive.
Note 5 - Acquisitions and Mergers
On July 16, 1996, the Company acquired Datasvar Support AB ("Datasvar") of
Stockholm, Sweden in exchange for 246,819 shares of the Company's common
stock as adjusted for the three-for-two stock split. The Company
accounted for the acquisition utilizing the pooling-of-interests method of
accounting. Datasvar operates two information technology call centers in
Sweden serving the Scandinavian region. Datasvar employs 97 employees and
had 1995 revenues of approximately $5.3 million and after-tax earnings of
approximately $1.0 million.
On August 30, 1996, the Company acquired all of the stock of DiagSoft,
Inc. ("DiagSoft") in exchange for 675,000 shares of the Company's common
stock. The Company accounted for the acquisition utilizing the pooling-
of-interests method of accounting. Diagsoft develops and markets
diagnostic software applications which will enhance the Company's
technology support service. DiagSoft employs 24 employees and had 1995
revenues of approximately $6.2 million and after-tax loss of approximately
$112,000.
Note 6 - Subsequent Events
On November 1, 1996, the Company completed the sale of 1,553,320 shares of
common stock, $0.01 par value, in a secondary public offering. The
proceeds will be used to open additional information technology call
centers, make additional capital expenditures and for working capital and
general corporate purposes, including possible acquisitions.
Item - 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Management considers liquidity to be the Company's ability to
generate adequate cash to meet its short and long-term business
needs. The principal internal source of such cash is the
Company's operations while the primary external sources are the
issuance of equity securities and credit borrowings.
In May 1996, the Company received proceeds, net of offering
expenses, of $39.7 million from the sale of approximately 3.6
million shares of common stock in its initial public offering
(adjusted to reflect the retroactive effect of the three-for-two
stock split in the form of a 50% stock dividend to shareholders
of record on July 18, 1996). The Company used a portion of these
proceeds and approximately $1.7 million of grants received
associated with the opening of two technical call centers, to
repay all amounts outstanding under its bank borrowing
agreements, fund operating activities and to acquire
approximately $11.2 million of capital expenditures. The capital
expenditures, which were comprised primarily of computer and
telephone equipment and furniture, were purchased pursuant to the
continued growth within the technical support business and the
associated increase in call volume capacity within the United
States and Europe. The Company has completed construction of its
sixth domestic call center and anticipates that the seventh U.S.
call center will become operational during the fourth quarter of
1996. Pursuant to contractual terms, the Company will receive a
package of incentives associated with this seventh center
consistent with those previously obtained. As a result of the
continued increase in demand for the Company's consolidated
services and the added capacity to be realized from the
additional call centers, it is anticipated that capital
acquisitions will approximate $17 million during 1996.
On November 6, 1996, the Company received proceeds, net of
offering expenses, in excess of $67 million from the sale of
approximately 1.6 million shares of common stock pursuant to a
secondary offering. The Company intends to utilize these
proceeds and the balance of the funds available from the initial
public offering to make additional capital expenditures
associated primarily with its technical support services as
identified above, and for working capital and general corporate
purposes, including possible acquisitions. Pending any such use,
the Company will continue to invest the balance of such funds in
short-term, investment grade securities or money market
instruments.
For the nine-month period ended September 29, 1996, the Company
had negative cash flow from operating activities of approximately
$2.6 million. This was primarily the result of an increase in
the Company's accounts receivable (which a significant portion of
this increase was collected immediately subsequent to the end of
the quarter) associated with organizational growth from increased
revenues and the establishment of new clients, and a decrease in
accounts payable, primarily in the first calendar quarter, from
the payment of uncommonly large fourth quarter 1995 purchases.
During the third quarter of 1996, the Company increased its
European technical support presence and acquired additional
sophisticated information technology capabilities to enhance its
technical support services through the acquisitions of Datasvar
Support AB and Diagsoft, Inc. ("the acquisitions"). The purchase
price for the acquisitions was approximately 922,000 shares of
the Company's common stock (as adjusted for the three-for-two
stock split), and was accounted for using the pooling-of-
interests method of accounting. The Company anticipates that the
integration of the acquisitions will require additional financial
resources, including the potential for additional capital
expenditures as projected above for the 1996 year. However, the
Company does not believe the resources required will be
significant to the overall operations of the consolidated
organization.
The Company believes that the proceeds from its offerings,
combined with available funds under its credit facilities and
cash flows from current and future operations, will be adequate
to meet its capital requirements, including any additional
resources required pursuant to the acquisitions, for the
foreseeable future.
Results of Operations
For the nine and three months ended September 29, 1996, the
Company posted consolidated revenues of $81.0 and $28.5 million,
respectively, an increase of $29.7 and $10.3 million,
respectively, from the comparable periods of the previous year.
The 1996 results represent increases of 58% and 56%,
respectively, from the 1995 comparable period information. This
growth in revenues for each period was primarily the result of a
$29.1 and $9.7 million, respectively, increase in revenues within
technical support services, and occurred primarily from the
investments in call centers and capital equipment the Company has
made and the resultant increase in call volumes from clients.
During September 1996, the Company opened its ninth information
technology call center, with four of those having commenced
operations in the last twelve months. In addition, during the
nine and three months of 1996, the Company recognized an
additional revenue increase of $3.8 and $1.3 million,
respectively, or 16% for each period, from information services
and solutions when compared to the same periods of 1995. This
increase was primarily the result of increased hours billed to
clients and growth within foreign language translation services.
These revenue increases were partially offset by a $3.2 and $0.7
million reduction in revenues from the Company's strategic
decision to phase-out other services provided during the
comparable nine and three-month period of 1995.
Direct salaries and related costs increased $14.5 and $5.4
million, respectively, or 47% and 50% respectively, for the nine
and three-month periods in 1996 from the comparable periods in
1995. As a percentage of revenues, however, direct salaries and
related costs decreased to 56% in the 1996 periods from 60% and
59%, respectively, from the nine and three-month periods in
1995. The increase in the amount of direct salaries and related
costs were attributable to the addition of personnel to support
organizational revenue growth. The decrease as a percentage of
revenues resulted from economies of scale associated with
spreading costs over a larger revenue base, and the change in the
Company's mix of business such that technical support service
revenues constitute a larger percentage of the Company's
consolidated revenues when compared to comparable 1995 results.
General and administrative expenses increased $8.7 and $3.0
million, or 52%, for the nine and three-month 1996 periods from
their respective periods in 1995. As a percentage of revenues,
however, general and administrative expenses decreased to 31% and
30% for the nine and three-month periods of 1996, from 33% and
31%, respectively, for the comparable periods of 1995. The
increase in the amount of general and administrative expenses are
primarily attributable to the addition of management, sales and
administrative personnel to support the Company's growth, and the
increase in depreciation and equipment expense associated with
facility and capital equipment expenditures incurred primarily in
connection with the technical support call centers. The decrease
as a percentage of revenues resulted from economies of scale
associated with spreading costs over a larger revenue base.
Interest income increased in the nine and three-month periods of
1996 from the income producing investments realized pursuant to
the balance of funds from the Company's initial public offering,
and which also accounts for the reduction in interest expense in
the 1996 periods. The increase in other income, or decrease in
other expense for the nine and three-month period in 1996
resulted primarily from the recognition of favorable foreign
currency translation fluctuations from the comparable 1995
periods.
The provision for income taxes as a percentage of income before
income taxes increased during the nine-month period of 1996 and
decreased during the three-month 1996 period when contrasted to
the comparable 1995 periods. The nine-month 1996 results reflect
an increase in the tax provision as a percentage of income before
income taxes primarily due to the impacts of nondeductible
expenses associated with one of the Company's acquisitions,
partially offset by the realization of tax-exempt interest
income. During the three-month 1996 period, the provision for
income taxes as a percentage of income before income taxes
decreased as a result of tax-exempt interest income and the
recognition of nondeductible expenses as a lower percentage of a
larger income before income tax base as compared to 1995.
PART II - OTHER INFORMATION
Item 6 - Exhibit and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this Report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K, dated July 31, 1996, was filed by the
Registrant to disclose requirements under Item 2, Acquisition or
Disposition of Assets.
A report on Form 8-K, dated September 16, 1996, was filed by the
Registrant to disclose requirements under Item 2, Acquisition or
Disposition of Assets.
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 13, 1996 By: /s/Scott J. Bendert
Scott J. Bendert
Vice President-Finance
and Treasurer
(Principal Financial and
Accounting Officer)
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
(For the Nine Months Ended September 29, 1996)
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
27.1 Financial Data Schedule . . . . . . . . . . . . 15