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 March 30, 1997
[ ] 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, $0.01 Par Value, 22,660,261 shares as of May 1, 1997
The Exhibit Index Appears on Page _11_
PART I
Item 1 - Financial Statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, March 30,
1996 1997
ASSETS (Unaudited)
Current assets
Cash and cash equivalents . . . $89,205,758 $90,281,388
Receivables, including unbilled 33,275,531 35,342,759
Prepaid expenses and other
current assets . . . . . . . 2,220,769 3,150,688
------------- ------------
Total current assets . . . 124,702,058 128,774,835
Property and equipment, net . . . 38,535,585 38,570,905
Deferred charges and other
assets . . . . . . . . . . . . 589,968 2,311,633
------------- ------------
$163,827,611 $169,657,373
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term
debt . . . . . . . . . . . . $ - $30,888
Accounts payable . . . . . . . 3,957,741 1,876,761
Accrued employee compensation and
benefits . . . . . . . . . . 7,100,279 9,832,086
Income taxes payable . . . . . - 2,405,158
Other accrued expenses and current
liabilities . . . . . . . . . 2,901,158 2,231,607
------------ ------------
Total current liabilities . 13,959,178 16,376,500
Long-term debt . . . . . . . . . 225,835 237,071
Deferred income taxes . . . . . . 3,236,000 3,154,000
Deferred grants . . . . . . . . . 11,669,273 11,468,230
Commitments and contingencies (Note 1)
Shareholders' equity
Preferred 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;
21,893,818 issued and
outstanding . . . . . . . . . 218,938 218,938
Additional paid-in capital . . 121,287,757 121,287,757
Retained earnings . . . . . . . 13,267,885 17,289,411
Accumulated foreign currency
translation adjustments . . . (37,255) (374,534)
------------ ------------
Total shareholders' equity 134,737,325 138,421,572
------------ ------------
$163,827,611 $169,657,373
============ ============
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1996 and March 30, 1997
(Unaudited)
1996 1997
Revenues . . . . . . . . . . . . $25,955,230 $38,245,569
------------ -----------
Operating expenses
Direct salaries and related
costs . . . . . . . . . . . . 14,841,999 21,571,773
General and administrative . . . 8,203,269 11,086,565
------------ -----------
Total operating expenses . . 23,045,268 32,658,338
------------ -----------
Income from operations . . . . . 2,909,962 5,587,231
Other income (expense)
Interest . . . . . . . . . . . (295,292) 686,769
Other . . . . . . . . . . . . . 4,144 9,527
----------- -----------
Total other income (expense) (291,148) 696,296
----------- -----------
Income before income taxes . . . 2,618,814 6,283,527
Provision for income taxes . . . 1,020,121 2,262,000
----------- -----------
Net income before dividends . . . 1,598,693 4,021,527
Preferred stock dividends . . . . 23,671 -
----------- -------------
Net income applicable to common
shareholders . . . . . . . . . $1,575,022 $4,021,527
=========== =============
Pro forma income data:
Income before income taxes . . . $2,618,814
Pro forma provision for income
taxes relating to S corporation 43,000
Actual provision for income taxes 1,020,121
-----------
Total provision and pro forma
provision for income taxes . 1,063,121
-----------
Pro forma net income applicable to
common shareholders . . . . . . 1,555,693
Preferred stock dividends . . . . 23,671
-----------
Pro forma net income applicable to
common shareholders . . . . . . $1,532,022
===========
Pro forma net income per share
(actual for 1997) . . . . . . . $0.09 $0.18
=========== ============
Pro forma weighted average common
and common equivalent shares
outstanding . . . . . . . . . . 16,873,982 22,611,319
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and March 30, 1997
(Unaudited)
1996 1997
Cash flows from operating activities:
Net income . . . . . . . . . . . $1,598,693 $4,021,527
Depreciation and amortization . 1,136,152 1,895,004
Deferred income taxes . . . . . - (82,000)
Loss (gain) on disposal of
property and equipment . . . (990) 1,700
Changes in assets and liabilities:
Receivables, including
unbilled . . . . . . . . . (4,332,844) (1,881,746)
Refundable income taxes . . . 27,854 (173,209)
Prepaid expenses and other current
assets . . . . . . . . . . (498,463) (1,030,713)
Deferred charges and other
assets . . . . . . . . . . 75,246 (153,057)
Accounts payable . . . . . . (1,048,476) (2,088,930)
Accrued employee compensation
and benefits . . . . . . . (1,020,786) 2,731,807
Income taxes payable . . . . 333,374 2,405,158
Other accrued expenses and current
liabilities . . . . . . . (75,673) (628,525)
----------- ------------
Net cash provided by (used for)
operating activities . . . (3,805,913) 5,017,016
----------- ------------
Cash flows from investing activities:
Capital expenditures . . . . . (4,675,578) (1,843,698)
Acquisition of business . . . . - (1,800,000)
Proceeds from sale of property
and equipment . . . . . . . . 140,990 3,854
------------ ------------
Net cash used for investing
activities . . . . . . . (4,534,588) (3,639,844)
------------ ------------
Cash flows from financing activities:
Paydowns under revolving line of
credit agreements . . . . . . (7,345,109) -
Borrowings under revolving line of
credit agreements . . . . . . 14,685,327 -
Proceeds from grants . . . . . . 1,976,072 43,097
Payment of long-term debt . . . (695,362) (7,360)
Dividends paid . . . . . . . . . (330,037) -
----------- -----------
Net cash provided by financing
activities . . . . . . . . 8,290,891 35,737
----------- -----------
Adjustment for foreign currency
translation . . . . . . . . . . 92,891 (337,279)
----------- -----------
Net increase in cash and cash
equivalents . . . . . . . . . . 43,281 1,075,630
Cash and cash equivalents -
beginning . . . . . . . . . . . 2,602,480 89,205,758
----------- -----------
Cash and cash equivalents -
ending . . . . . . . . . . . . . $2,645,761 $90,281,388
=========== ===========
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1996 and March 30, 1997
(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 three-month
period ended March 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and notes
thereto as of and for the year ended December 31, 1996 included in the
Company's Form 10-K dated December 31, 1996 as filed with the United
States Securities and Exchange Commission on March 31, 1997.
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.
Note 1 - 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 2 - 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 the 1996 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.
The numbers of shares used in the earnings per share computation are as
follows:
Three Months Ended
March 31, March 30,
1996 1997
Primary
Weighted average common outstanding 15,951,819 21,893,818
Conversion of preferred stock . . . 448,029 -
Stock options . . . . . . . . . . . 474,134 717,501
---------- ----------
Total primary . . . . . . . . . . . . 16,873,982 22,611,319
Fully Diluted
Additional dilution of stock options - -
---------- ----------
Total fully diluted . . . . . . . . . 16,873,982 22,611,319
========== ==========
The Company is required to adopt Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" for periods ending after
December 15, 1997. The Company has not calculated the impact, if any, SFAS
No. 128 will have on the earnings per share calculation contained in the
Company's consolidated financial statements.
Note 3 - Acquisitions
Effective January 1, 1997, the Company acquired all of the common stock of
Traffic, N.V. ("Traffic") of Brussels, Belgium, and certain other assets,
for approximately $1.8 million in cash. Traffic specializes in foreign
language translation and multi-media documentation development. The
transaction was accounted for under the purchase method of accounting and
pro forma information for the comparable three month period is not
presented, as the operating results are not material to the Company's
consolidated operations.
Note 4 - Stock Options
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock
Based Compensation," but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock option plans.
Therefore, no compensation expense has been recognized for stock options
granted under its plans for the periods presented. If the Company had
elected to recognize compensation expense for stock options based on the
fair value at grant date, consistent with the method prescribed by SFAS
No. 123, net income and earnings per share, for the three months ended
March 30, 1997, would have been reduced by approximately $731,000 and
$0.03, respectively. The effect of SFAS No. 123 would not have any
reduction of net income or earnings per share for the three months ended
March 31, 1996. The pro forma amounts were determined using the Black
Scholes valuation model with the following key assumptions: (i) a discount
rate of 6%; (ii) a volatility factor initially based upon the average
trading price since the Company's common stock has traded on the Nasdaq
National Market; (iii) no dividend yield; and (iv) an average expected
option life of approximately 3.5 years.
Note 5 - Subsequent Event
Effective March 31, 1997 the Company acquired Info Systems of N.C., Inc.
("ISI") for approximately 766,000 shares of the Company's common stock.
ISI is a provider of information management solutions for the
manufacturing, distribution and retail industries. The transaction will
be accounted for under the pooling-of-interests method of accounting.
Pro forma unaudited information for the periods are presented in the chart
that follows:
Three Months Ended
March 31, March 30,
1996 1997
($ in thousands except
per share data)
Revenues . . . . . . . . . . . . . . $ 31,228 $ 45,268
Net income . . . . . . . . . . . . . $ 1,324 $ 4,067
Net income per share . . . . . . . . $ 0.08 $ 0.18
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the Sykes Enterprises,
Incorporated Consolidated Financial Statements, including the notes
thereto. The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Future events and the
Company's actual results could differ materially from the results
reflected in these forward-looking statements, as a result of certain of
the factors set forth below and elsewhere in this analysis.
Financial Condition
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 source is the issuance of equity securities and
credit borrowings.
During the three month period ended March 30, 1997, the Company generated
approximately $5 million in cash, net, from operations, which increased
the Company's cash position, and funded the purchase of approximately $1.9
million of capital equipment and $1.8 million to acquire a company as
discussed further below. 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 recently announced commencement
of construction of its eighth domestic call center (eleventh total) and
anticipates this new facility will become operational during the third
quarter of 1997. Pursuant to contractual terms, the Company will receive
a package of incentives associated with this center consistent with those
previously obtained. As a continued result of the increased demand for
the Company's services, it is estimated that 1997 capital expenditures
will approximate $18 million, which includes two additional technical call
centers (which would bring the Company's total to thirteen) anticipated to
be constructed later in the year.
Effective January 1, 1997, the Company acquired all of the common stock of
Traffic N.V. ("Traffic") of Brussels, Belgium and certain other assets,
for $1.8 million in cash. Traffic specializes in foreign language
translation and multi-media documentation development. The transaction
was accounted for under the purchase method of accounting. Pro forma
information for the comparable 1996 period is not presented as the
operating results are not material to the Company's consolidated
operations. In addition, subsequent to the end of the quarter, the
Company completed its acquisition of Info Systems of North Carolina, Inc.
for a purchase price of approximately 766,000 shares of common stock.
This acquisition increased the Company's sophisticated information
technology capabilities and provides further enhancement of the industries
and customer base in which SEi markets its technical support services.
The acquisition 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
1997 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 its cash position, combined with cash flows from
current and future operations and available funds under its credit
facilities, will be adequate to meet its capital requirements for the
foreseeable future.
Results of Operations
For the three months ended March 30, 1997, the Company posted consolidated
revenues of $38.2 million, an increase of approximately $12.2 million, or
47%, from the $26 million of the comparable period of the previous year.
This growth in revenues was the result of an approximate $10.9 million
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 1996, the Company opened three new call centers that were fully
operational and provided additional revenues throughout the 1997 quarter.
In addition, during the three months of 1997, the Company recognized
revenue increases of approximately $1.3 million in information services
and solutions when compared to the first quarter of 1996. This increase
was primarily the result of increased hours and an increase in average
rates billed to clients.
Direct salaries and related costs increased approximately $6.7 million to
$21.6 million, or 45%, in the three month period in 1997, from $14.8
million in the comparable period in 1996. As a percentage of revenues,
however, direct salaries and related costs decreased to approximately 56%
in the 1997 quarter from approximately 57% from the same quarter in 1996.
The increase in the amount of direct salaries and related costs was
directly attributable to the addition of personnel to support revenue
growth. The decrease as a percentage of revenues resulted from economies
of scale associated with spreading costs over a larger revenue base.
General and administrative expenses increased approximately $2.8 million
to $11.1 million, or 35%, in the 1997 period, from $8.2 million during the
same period in 1996. The increase in the amount of general and
administrative expenses was primarily attributable to the addition of
management, sales and administrative personnel to support the Company's
growth, and the increase in depreciation expense associated with facility
and capital equipment expenditures incurred primarily in connection with
the technical support call centers.
Interest and other income increased to $0.7 million during the first
quarter of 1997 from interest and other expense of $0.3 million during the
comparable 1996 period. As a percentage of revenues, interest and other
income was approximately 2% in 1997 from interest and other expense of 1%
in 1996. The increase was attributable to growth in the Company's cash
position as a result of public offerings completed subsequent to the first
quarter of 1996. During 1996, the Company repaid all amounts outstanding
under bank borrowing arrangements and invested the remaining net proceeds
of the offerings in short term investment grade securities and money
market instruments.
The provision for income taxes increased to $2.3 million in the first
quarter of 1997 from $1.1 million in 1996, however, as a percentage of
income before income taxes, decreased to 36% during the 1997 period when
contrasted to approximately 41% for the comparable 1996 period. This
reduction in the Company's effective tax rate is due to the recognition of
tax-exempt interest income earned and nondeductible expenses as a lower
percentage of a larger income before income tax base in 1997 as compared
to 1996.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this Report:
2.6 Stock Purchase Agreement dated March 28, 1997 among Sykes
Enterprises, Incorporated, Sykes Holdings of Belgium,
B.V.B.A., Cycle B.V.B.A., and Michael McMahon.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended March 30, 1997.
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: May 8, 1997 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 Three Months Ended March 30, 1997)
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
2.6 Stock Purchase Agreement dated March 28, 1997
among Sykes Enterprises, Incorporated, Sykes
Holdings of Belgium, B.V.B.A., Cycle B.V.B.A.
and Michael McMahon. . . . . . . . . . . . . . . .
27.1 Financial Data Schedule. . . . . . . . . . . . . .