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 June 29, 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, 34,929,874 shares as of July 30, 1997
PART I
Item 1 - Financial Statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 29,
1996 1997
ASSETS
Current assets
Cash and cash equivalents . . . . . . $89,651,848 $83,211,456
Receivables, including unbilled . . . 40,547,601 45,864,758
Prepaid expenses and other current
assets . . . . . . . . . . . . . . 2,241,213 3,475,730
----------- -----------
Total current assets . . . . . . . . 132,440,662 132,551,944
Property and equipment, net . . . . . . 40,598,225 42,234,407
Marketable securities . . . . . . . . . - 11,200,000
Deferred charges and other assets . . . 929,223 2,329,413
----------- -----------
$173,968,110 $188,315,764
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt $1,514,199 $246,662
Accounts payable . . . . . . . . . . . 5,696,603 8,472,972
Accrued employee compensation and
benefits . . . . . . . . . . . . . 9,523,951 9,794,756
Other accrued expenses and current
liabilities . . . . . . . . . . . 4,488,417 3,698,462
----------- -----------
Total current liabilities . . . . . . 21,223,170 22,212,852
Long-term debt . . . . . . . . . . . . 1,251,079 602,321
Deferred income taxes . . . . . . . . . 3,910,000 5,523,357
Deferred grants . . . . . . . . . . . . 11,669,273 11,483,870
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;
200,000,000 shares authorized;
34,740,392 and 34,929,874 issued
and outstanding . . . . . . . . . 347,404 349,299
Additional paid-in capital . . . . . . 124,829,417 127,004,905
Retained earnings . . . . . . . . . . 10,769,679 19,731,485
Accumulated foreign currency
translation adjustments . . . . . (31,912) (552,325)
Unrealized gain on securities, net of
taxes . . . . . . . . . . . . . . - 1,960,000
----------- -----------
Total shareholders' equity . . . . . 135,914,588 148,493,364
----------- -----------
$173,968,110 $188,315,764
=========== ===========
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Six and Three Months Ended June 30, 1996 and June 29, 1997
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 29, June 30, June 29,
1996 1997 1996 1997
Revenues . . . . . . . . . . . . . $66,723,824 $95,134,724 $33,846,602 $48,492,158
---------- ---------- ---------- ----------
Operating expenses
Direct salaries and related costs 39,837,206 55,052,489 20,351,301 27,855,487
General and administrative . . . . 21,166,667 27,803,156 10,564,077 14,046,901
---------- ---------- ---------- ----------
Total operating expenses . . . . 61,003,873 82,855,645 30,915,378 41,902,388
---------- ---------- ---------- ----------
Income from operations . . . . . . 5,719,951 12,279,079 2,931,224 6,589,770
Other income (expense)
Interest . . . . . . . . . . . . . (387,610) 1,474,637 (27,363) 826,486
Other . . . . . . . . . . . . . . 101,725 74,090 94,544 50,345
---------- ---------- ---------- ----------
Total other income (expense) . . (285,885) 1,548,727 67,181 876,831
---------- ---------- ---------- ----------
Income before income taxes . . . . 5,434,066 13,827,806 2,998,405 7,466,601
Provision for income taxes . . . . 2,020,027 4,866,000 1,138,691 2,573,000
---------- ---------- ---------- ----------
Net income before dividends . . . . 3,414,039 8,961,806 1,859,714 4,893,601
Preferred stock dividends . . . . . 47,342 - 23,671 -
---------- ---------- ---------- ----------
Net income applicable to common
shareholders . . . . . . . . . $3,366,697 $8,961,806 $1,836,043 $4,893,601
---------- ---------- ---------- ----------
Pro forma income data:
Income before income taxes . . . . $5,434,066 $2,998,405
Pro forma provision for income taxes
relating to S corporation . . 67,000 24,000
Actual provision for income taxes . 2,020,027 1,138,691
----------
Total provision and pro forma
provision for income taxes . . 2,087,027 1,162,691
---------- ----------
Pro forma net income applicable to
common shareholders . . . . . 3,347,039 1,835,714
Preferred stock dividends . . . . . 47,342 23,671
---------- ----------
Pro forma net income applicable to
common shareholders . . . . . $3,299,697 $1,812,043
=========== ===========
Pro forma net income per share
(actual for 1997) . . . . . . $0.11 $0.25 $0.06 $0.14
===== ===== ===== =====
Pro forma weighted average common
and common equivalent shares
outstanding . . . . . . . . . 29,359,472 35,898,086 31,508,304 35,979,530
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and June 29, 1997
(Unaudited)
1996 1997
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . $3,366,697 $8,961,806
Depreciation and amortization . . . . . . . . 2,687,947 4,440,223
Deferred income taxes . . . . . . . . . . . . - (49,000)
Gain on disposal of property and equipment . . (6,590) (88,972)
Changes in assets and liabilities
Receivables, including unbilled . . . . . . . (5,513,372) (4,889,045)
Prepaid expenses and other current assets . . (179,950) (1,234,516)
Deferred charges and other assets . . . . . . (439,712) (9,320)
Accounts payable . . . . . . . . . . . . . . (2,537,863) 2,776,369
Accrued employee compensation and benefits . 341,447 270,805
Other accrued expenses and current
liabilities . . . . . . . . . . . . . . . 2,191,421 (789,956)
--------- ---------
Net cash provided by (used for) operating
activities . . . . . . . . . . . . . . . . (89,975) 9,388,394
--------- ---------
Cash flows from investing activities
Capital expenditures . . . . . . . . . . . . . (6,993,604) (6,084,958)
Investment in marketable securities . . . . . - (8,000,000)
Acquisition of business . . . . . . . . . . . - (1,800,000)
Proceeds from sale of property and equipment . 146,590 161,727
---------- -----------
Net cash used for investing activities . . . (6,847,014) (15,723,231)
---------- -----------
Cash flows from financing activities
Paydowns under revolving line of credit (83,486,569) (72,441,000)
agreements . . . . . . . . . . . . . . . .
Borrowings under revolving line of credit 84,063,833 72,441,000
agreements . . . . . . . . . . . . . . . .
Proceeds from issuance of stock . . . . . . . 39,338,944 2,127,710
Proceeds from grants . . . . . . . . . . . . . 1,957,376 201,613
Payment of long-term debt . . . . . . . . . . (9,379,061) (1,916,295)
Dividends paid . . . . . . . . . . . . . . . . (306,364) -
---------- ----------
Net cash provided by financing activities . 32,188,159 413,028
---------- ----------
Adjustment for foreign currency translation . . (85,559) (518,583)
---------- ----------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 25,165,611 (6,440,392)
Cash and cash equivalents - beginning . . . . . 2,631,136 89,651,848
---------- ----------
Cash and cash equivalents - ending . . . . . . $27,796,747 $83,211,456
========== ==========
See accompanying notes to consolidated financial statements
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1996 and June 29, 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 six month
period ended June 29, 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.
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 May 19, 1997,
which was reflected on the Nasdaq National Market on May 29, 1997.
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:
Six Months Ended Three Months Ended
June 30, June 29, June 30, June 29,
1996 1997 1996 1997
Primary
Weighted
average common
outstanding....... 27,807,687 34,791,338 29,787,981 34,842,285
Conversion of
preferred stock... 1,025,988 - 236,559 -
Stock options...... 454,302 1,091,450 1,340,774 1,106,649
---------- ---------- ---------- ----------
Total primary....... 29,287,977 35,882,788 31,365,314 35,948,934
Fully Diluted
Additional
dilution of
stock options...... 71,495 15,298 142,990 30,596
---------- ---------- ---------- ----------
Total fully
diluted............ 29,359,472 35,898,086 31,508,304 35,979,530
========== ========== ========== ==========
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 and Mergers
On March 31, 1997, the Company acquired Info Systems of North Carolina,
Inc. ("Info Systems") in exchange for approximately 1.1 million 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. Info Systems is engaged in the design,
development, licensing and support of information management solutions to
the retail, manufacturing and distribution industries. Info Systems
employs 160 employees and had 1996 revenues of approximately $25.2 million
and an after-tax loss of approximately $2.0 million.
On June 16, 1997 the Company acquired all of the stock of Telcare
Gesellschaft fur Telekommunikations-Mehrwertdieste mbH ("Telcare") of
Wilhelmshaven, Germany, in exchange for 750,000 shares of the Company's
common stock. The Company accounted for the acquisition utilizing the
pooling-of-interests method of accounting. Telcare operates an
information technology call center and provides technical product support
and service to numerous industries in Germany, and expands the Company's
presence in Europe. Telcare employs 160 employees and had 1996 revenues
of approximately $6.4 million and after-tax earnings of approximately
$282,000.
The above transactions have been accounted for as pooling-of-interests
and, accordingly, the consolidated financial statements for the periods
presented have been restated to include the accounts of Info Systems and
Telcare.
Separate results of operations for the periods prior to the acquisition of
Telcare and Info Systems are outlined below:
Three Months Ended
March 31, March 30,
1996 1997
Net sales
Sykes Enterprises,
Incorporated . . . . . . . . . 25,955,230 38,245,569
Telcare . . . . . . . . . . . . 1,649,397 1,404,904
Info Systems . . . . . . . . . . 5,272,375 7,022,451
--------- ----------
Combined . . . . . . . . . . . 32,877,002 46,672,924
--------- ----------
Net income
Sykes Enterprises, Incorporated 1,598,693 4,021,527
Telcare . . . . . . . . . . . . 253,279 42,589
Info Systems . . . . . . . . . . (254,466) 46,186
--------- ----------
Combined . . . . . . . . . . . 1,597,506 4,110,302
--------- ----------
Other changes in shareholders'
equity
Sykes Enterprises, Incorporated 156,989 296,639
Telcare . . . . . . . . . . . . - -
Info Systems . . . . . . . . . . 110,892 -
--------- ----------
Combined . . . . . . . . . . . . 267,881 296,639
========= ==========
Note 4 - Purchase of Marketable Securities
On May 8, 1997, the Company purchased approximately 1.066 million shares
of SystemSoft Corp. common stock in conjunction with a strategic
technology exchange agreement between the parties. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", the investment is
classified as available-for-sale securities and is carried at market value
of $11.2 million as of June 29, 1997. The cost basis in the investment is
$8 million, and the unrealized gain of $3.2 million, net of deferred
income taxes of approximately $1.2 million, is reported as a separate
component of shareholders' equity.
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 within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 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 herein.
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 six month period ended June 29, 1997, the Company generated
approximately $9.4 million in cash, net, from operations, and
approximately $2.1 million from the exercise of stock options which
primarily funded the purchase of approximately $6.1 million of capital
equipment, $8 million associated with the technology exchange agreement
further detailed below, and $3.7 million used for the purchase price and
debt repayment associated with acquisitions completed during this time
period. 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. Subsequent to the end of the second quarter, the Company
completed construction of its eighth domestic call center (twelfth total)
which 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 $19 million.
During the second quarter of 1997, the Company enhanced its sophisticated
information technology capabilities and further increased its European
technical support service capabilities through the acquisitions of Info
Systems of N. C., Inc. ("Info Systems") and Telcare Gesellschaft fur
Telekommunikations-Mehrwertdieste mbh ("Telcare"), ("the acquisitions").
The purchase price for the acquisitions was approximately 1.9 million
shares of common stock (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 May 19, 1997), and was accounted for using the
pooling-of-interests method of accounting. Info Systems is engaged in the
design, development, licensing and support of information management
solutions for the retail, manufacturing and distribution sectors, and
provides further expansion of the industries and customer base in which
the Company markets and leverages its technical support services.
Telcare provides value-added technical support and service capacity
through its call center located in Germany highlighting the Company's
continued focus on key strategic objectives, specifically to pursue
additional expansion within Europe. The Company anticipates the
integration of the acquisitions will require additional financial
resources, including the potential for additional capital expenditures for
the 1997 year. However, the Company does not believe the resources
required will be significant to the overall operations of the consolidated
organization.
In addition, during the period ended June 29, 1997, the Company entered
into a technology exchange agreement with SystemSoft Corp. ("SystemSoft")
to integrate SystemSoft's connectivity, software diagnostic, communication
and remote control technologies to its hardware diagnostic and
sophisticated telephone support capabilities, which will bring the
Company's remote access solution to the marketplace sooner than originally
anticipated. Pursuant to this agreement, the Company also purchased in
excess of one million newly issued shares of SystemSoft common stock for
$8 million. It is the Company's intention to hold the stock for
investment and the agreement contains certain restrictions, including a
holding period existing to September 5, 1997 before a request can be made
for registration under the Securities Act, associated with its sale.
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 six and three months ended June 29, 1997, the Company posted
consolidated revenues of $95.1 and $48.5 million, respectively, an
increase of $28.4 and $14.6 million, respectively, from the comparable
periods of the previous year. The 1997 results represent increases of 43%
from the 1996 comparable period information. This growth in revenues for
each period was primarily the result of a $19.8 and $9.2 million,
respectively, or 54% and 49%, respectively, increase in revenues within
technical support services, and occurred primarily from the continued
investment in call centers and capital equipment the Company has made and
the resultant increase in call volumes from clients. During calendar
1996, the Company opened three new call centers that were fully
operational throughout the 1997 periods. In addition, during the six and
three months of 1997, the Company recognized an additional revenue
increase of $8.4 and $5.2 million, respectively, or 29% and 33%,
respectively, from information services and solutions when compared to the
same periods of 1996. This growth was primarily the result of increased
hours at an increased average bill rate, and increased revenues provided
through its retail services.
Direct salaries and related costs increased $15.2 and $7.5 million,
respectively, to $55.1 and $27.9 million, respectively, for the six and
three month periods in 1997 from the comparable periods in 1996. This
represents an increase of 38% and 37%, respectively, however, as a
percentage of revenues, direct salaries and related costs decreased to 58%
and 57%, respectively, for the six and three month periods in 1997 from
60% during the comparable periods in 1996. The increase in the amount of
direct salaries and related costs was 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 $6.6 million and $3.5
million, or 31% and 33%, respectively, to $27.8 and $14.0 million,
respectively, for the six and three month periods in 1997 from the
comparable periods in 1996. However, as a percentage of revenues, general
and administrative expenses decreased to 29% for the 1997 periods from 32%
and 31%, respectively, for the six and three month comparable periods 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 $1.5 and $0.9 million,
respectively, during the six and three month periods in 1997, from
interest and other expense of $0.3 million for the six month comparable
1996 period and interest and other income of $0.1 million for the three
month comparable 1996 period. As a percentage of revenues, interest and
other income was 2% for the 1997 periods from interest and other expense
or income of less than 1% during the 1996 periods. The increase was
attributable to growth in the Company's cash position as a result of
public offerings completed during 1996 and cash flows from operations
during 1997. During 1996, the Company repaid all amounts outstanding
under bank borrowing arrangements and subsequently has invested the
remaining net proceeds of the offerings in short term investment grade
securities and money market instruments.
The provision for income taxes increased $2.8 and $1.4 million,
respectively, to $4.9 and $2.6 million, respectively, for the six and
three month periods in 1997 from the comparable periods in 1996. As a
percentage of income before income taxes, the provision for income taxes
decreased to 35% during the 1997 periods when contrasted to 38% and 39%,
respectively, for the comparable 1996 periods. This reduction in the
Company's effective tax rate is due to the recognition of tax-exempt
interest income earned, the tax benefit realized from operating loss
carryforwards from a foreign subsidiary 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:
2.7 Common Stock Purchase Agreement dated May 6, 1997 by and
between Sykes Enterprises, Incorporated and SystemSoft
Corporation
2.8 Joint Integration, Marketing and Distribution Agreement
dated April 30, 1997 by and between Sykes Enterprises,
Incorporated and SystemSoft Corporation
2.9 Merger Agreement dated as of January 10, 1997 among Sykes
Enterprises, Incorporated, InfoSystems of North Carolina,
Inc. and ISNC Acquisition Co. (incorporated by reference
to Appendix A to Sykes Enterprises, Incorporated's
Registration Statement on S-4 (Reg. No. 333-20465))
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 June 29, 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: August 13, 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
2.7 Common Stock Purchase Agreement dated May 6, 1997 by
and between Sykes Enterprises, Incorporated and
SystemSoft Corporation . . . . . . . . . . . . . . .
2.8 Joint Integration, Marketing and Distribution Agreement
dated April 30, 1997 by and between Sykes Enterprises,
Incorporated and SystemSoft Corporation. . . . . . .
2.9 Merger Agreement dated as of January 10, 1997 among
Sykes Enterprises, Incorporated, InfoSystems of North
Carolina, Inc. and ISNC Acquisition Co. (incorporated
by reference to Appendix A to Sykes Enterprises,
Incorporated's Registration Statement on S-4 (Reg. No.
333-20465)). . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule. . . . . . . . . . . . . . .