FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to __________________ Commission File No. 0-28274 SYKES ENTERPRISES, INCORPORATED ------------------------------- (Exaction name of Registrant as specified in its charter) Florida 56-1383460 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 North Tampa Street, Suite 3900, Tampa, FL 33602 --------------------------------------------------- Registrant's telephone number, including area code: (813) 274-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No Number of shares of registrant's common stock outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.01 Par Value, 42,364,994 shares as of November 9, 1999 Page 1 of 18 The Exhibit Index Appears on Page 17 PART I Item 1 - Financial Statements SYKES ENTERPRISES, INCORPORATED CONSOLIDATED BALANCE SHEETS December 31, September 30, 1998 1999 -------------- --------------- (Unaudited) ASSETS Current assets Cash and cash equivalents............................... $ 36,348,863 $ 32,044,116 Restricted cash......................................... 11,090,890 15,086,325 Receivables............................................. 113,840,262 152,023,769 Prepaid expenses and other current assets............... 15,861,742 18,131,158 ------------ ------------ Total current assets.................................. 177,141,757 217,285,368 Property and equipment, net............................... 99,176,512 126,888,346 Marketable securities..................................... 199,875 199,875 Intangible assets, net.................................... 75,132,011 75,959,242 Deferred charges and other assets......................... 13,484,146 17,274,096 ------------ ------------ $ 365,134,301 $ 437,606,927 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current installments of long-term debt.................. $ 3,983,239 $ 1,413,284 Accounts payable........................................ 30,086,549 32,942,750 Income taxes payable.................................... 10,549,623 21,108,794 Accrued employee compensation and benefits.............. 19,144,242 22,936,662 Customer deposits....................................... 10,978,868 11,719,943 Other accrued expenses and current liabilities.......... 17,194,752 22,246,615 ------------ ------------ Total current liabilities............................. 91,937,273 112,368,048 Long-term debt............................................ 75,448,202 79,716,697 Deferred grants........................................... 15,434,676 21,249,091 Deferred revenue.......................................... 14,707,773 19,462,831 Other long-term liabilities............................... 2,668,895 1,721,141 ------------ ------------ Total liabilities..................................... 200,196,819 234,517,808 Commitments and contingencies Shareholders' equity Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding.......... - - Common stock, $0.01 par value, 200,000,000 shares authorized; 41,451,905 and 42,329,887 issued and outstanding........................................... 414,519 423,299 Additional paid-in capital.............................. 136,199,748 140,571,509 Retained earnings....................................... 29,730,975 65,356,213 Accumulated other comprehensive income (loss)........... (1,407,760) (3,261,902) ------------ ------------ Total shareholders' equity............................ 164,937,482 203,089,119 ------------ ------------ $ 365,134,301 $ 437,606,927 ============ ============ See accompanying notes to consolidated financial statements. 2 SYKES ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS Nine and Three Months Ended September 30, 1998 and 1999 (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, --------------------------------------------- --------------------------------------------- 1998 1999 1998 1999 --------------------- --------------------- --------------------- --------------------- Revenues.................... $ 327,070,503 $ 443,452,337 $ 118,315,536 $ 160,966,807 ------------ ------------ ------------ ------------ Operating expenses Direct salaries and related costs........... 202,734,291 268,907,291 72,806,063 96,722,468 General and administrative.......... 86,423,209 113,962,045 31,314,963 40,134,415 Acquired in-process research and development 14,468,907 - 14,468,907 - ------------ ------------ ------------ ------------ Total operating expenses 303,626,407 382,869,336 118,589,933 136,856,883 ------------ ------------ ------------ ------------ Income (loss)from operations............. 23,444,096 60,583,001 (274,397) 24,109,924 Other income (expense) Interest, net............. (147,349) (2,588,002) (366,361) (1,052,748) Net loss from joint venture........... (3,947,380) - (102,231) - Other..................... (60,143) 162,958 (35,558) 65,877 ------------ ------------ ------------ ------------ Total other expense..... (4,154,872) (2,425,044) (504,150) (986,871) ------------ ------------ ------------ ------------ Income (loss) before income taxes................... 19,289,224 58,157,957 (778,547) 23,123,053 Provision for income taxes.. 14,196,831 22,532,719 5,332,715 8,974,624 ------------ ------------ ------------ ------------ Net income (loss)........... $ 5,092,393 $ 35,625,238 $ (6,111,262) $ 14,148,429 ============ ============ ============ ============ Net income (loss) per share Basic..................... $ 0.12 $ 0.85 $ (0.15) $ 0.33 ============ ============ ============ ============ Diluted................... $ 0.12 $ 0.83 $ (0.15) $ 0.33 ============ ============ ============ ============ Shares outstanding Basic..................... 41,216,989 41,940,706 41,336,973 42,280,529 Diluted................... 42,218,851 42,984,543 41,336,973 43,032,429 See accompanying notes to consolidated financial statements. 3 SYKES ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Accumulated Common Common Additional Other Stock Stock Paid-in Retained Comprehensive Shares Amount Capital Earnings Income Total ------------------------------------------------------------------------------------------------- Balance at January 1, 1998 41,119,626 $ 411,196 $ 133,592,337 $ 22,151,352 $(3,594,665) $ 152,560,220 Issuance of common stock 259,092 2,591 987,289 - - 989,880 Tax effect of non-qualified exercise of stock options - - 1,412,814 - - 1,412,814 Distributions - - - (698,374) - (698,374) Net income - - - 5,092,393 - 5,092,393 Unrealized loss on securities - - - - (6,199,844) (6,199,844) Foreign currency translation adjustment - - - - 1,079,415 1,079,415 ------------ Comprehensive income (loss) (28,036) ------------ ------------------------------------------------------------------------------------------------- Balance at September 30, 1998 41,378,718 413,787 135,992,440 26,545,371 (8,715,094) 154,236,504 (unaudited) Issuance of common stock 73,187 732 86,122 - - 86,854 Tax-effect of non-qualified exercise of stock options - - 121,186 - - 121,186 Distributions - - - (2) - (2) Net income - - - 3,185,606 - 3,185,606 Unrealized loss on securities - - - - (400,283) (400,283) Recognition of write-down on marketable securities - - - - 7,334,645 7,334,645 Foreign currency translation adjustment - - - - 372,972 372,972 ------------ Comprehensive income 10,492,940 ------------ ------------------------------------------------------------------------------------------------- Balance at December 31, 1998 41,451,905 414,519 136,199,748 29,730,975 (1,407,760) 164,937,482 Issuance of common stock 877,982 8,780 4,371,761 - - 4,380,541 Net income - - - 35,625,238 - 35,625,238 Foreign currency translation adjustment - - - - (1,854,142) (1,854,142) ------------ Comprehensive income 33,771,096 ------------ ------------------------------------------------------------------------------------------------- Balance at September 30, 1999 (unaudited) 42,329,887 $423,299 $ 140,571,509 $ 65,356,213 $(3,261,902) $ 203,089,119 ================================================================================================= See accompanying notes to consolidated financial statements. 4 SYKES ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1998 and 1999 (Unaudited) 1998 1999 --------------- ------------- Cash flows from operating activities Net income.............................................. $ 5,092,393 $ 35,625,238 Depreciation and amortization........................... 13,289,563 25,801,708 Acquired in-process research and development cost....... 14,468,907 - Deferred income taxes................................... (390,071) (3,068,216) Gain on disposal of property and equipment.............. (328,771) - Changes in assets and liabilities Receivables............................................ (32,827,498) (39,265,073) Prepaid expenses and other current assets.............. (5,003,659) (2,559,345) Intangible assets...................................... - (11,381) Deferred charges and other assets...................... (1,274,854) (2,457,948) Accounts payable....................................... 5,092,502 2,733,837 Income taxes payable................................... 8,024,413 10,375,234 Accrued employee compensation and benefits............. 10,927,303 3,239,448 Customer deposits, net of restricted cash.............. - (3,254,360) Other accrued expenses and current liabilities......... 4,595,175 3,051,862 Deferred revenue....................................... 2,850,659 4,755,058 Other long-term liabilities............................ (124,296) (947,756) ------------ ------------ Net cash provided by operating activities............. 24,391,766 34,018,306 ------------ ------------ Cash flows from investing activities Capital expenditures.................................... (22,893,857) (43,793,711) Acquisition of businesses............................... (28,131,282) (5,846,289) Investment in joint venture............................. (10,723,040) - Proceeds from sale of marketable securities............. 1,000,000 - Proceeds from sale of property and equipment............ 1,267,503 193,672 ------------ ------------ Net cash used for investing activities................ (59,480,676) (49,446,328) ------------ ------------ Cash flows from financing activities Paydowns under revolving line of credit agreements...... (7,342,355) (54,500,000) Borrowings under revolving line of credit agreements.... 85,304,463 59,000,000 Proceeds from issuance of stock......................... 2,404,860 4,080,541 Proceeds from issuance of long-term debt................ - 903,656 Proceeds from grants.................................... 95,550 7,198,335 Payments of long-term debt.............................. (87,370,298) (3,705,115) Distributions........................................... (698,374) - ------------ ------------ Net cash provided by (used for) financing activities.. (7,606,154) 12,977,417 ------------ ------------ Adjustments for foreign currency translation.............. 1,079,415 (1,854,142) Net decrease in cash and cash equivalents................. (41,615,649) (4,304,747) Cash and cash equivalents - beginning..................... 75,308,505 36,348,863 ------------ ------------ Cash and cash equivalents - ending........................ $ 33,692,856 $ 32,044,116 ============ ============ See accompanying notes to consolidated financial statements. 5 SYKES ENTERPRISES, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1998 and 1999 (Unaudited) Sykes Enterprises, Incorporated and consolidated subsidiaries (the "Company") provides vertically integrated information technology outsourcing services including information technology support services, information technology development services and solutions, on-line clinical managed care services, medical protocol products, employee benefit administration and support services, and customer product services. The Company's services are provided to a wide variety of industries. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine and three-month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and notes thereto as of and for the year ended December 31, 1998 included in the Company's Form 10-K dated December 31, 1998 as filed with the United States Securities and Exchange Commission ("SEC") on March 29, 1999. Note 1 - Acquisitions and Mergers Effective September 1, 1998, the Company acquired the remaining 50% of outstanding common stock of SHPS, Incorporated ("SHPS") for approximately $28.1 million plus the assumption of SHPS' debt. This purchase price was primarily financed through borrowings under the Company's credit facility. This acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations for the period September 1, 1998 to September 30, 1998 and for the nine and three months ended September 30, 1999, have been included in the accompanying financial statements. The purchase price has been allocated to the assets and liabilities of SHPS based upon fair values at the date of acquisition. The allocations were based on appraisals, evaluations, estimations and other studies. On November 27, 1998, the Company acquired all of the stock of TAS GmbH Nord Telemarketing und Vertriebsberatung ("TAS III") of Hannover, Germany, in exchange for 587,000 shares of the Company's common stock. The Company accounted for the acquisition utilizing the pooling-of-interests method of accounting. TAS III provides technical call center support and customer care services, database development and consulting services to customers in Germany. On December 29, 1998, the Company acquired all of the stock of Oracle Service Networks Corporation ("Oracle") in exchange for 1,475,000 shares of the Company's common stock. The Company accounted for the acquisition utilizing the pooling-of-interests method of accounting. Oracle provides call center support and customer care services to various customers in North America, as well as demand management services for the Canadian provincial health care system. On August 20, 1999, the Company acquired all of the common stock of CompuHelpline, Inc., d/b/a PC Answer for approximately $340,000 of cash and Company stock. PC Answer was engaged in developing, marketing and selling prepaid technical computer support cards and services under the trademark names of PC Answer and MAC Answer. The transaction was accounted for under the purchase method of accounting with resulting goodwill being 6 SYKES ENTERPRISES, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1998 and 1999 (Unaudited) Note 1 - Acquisitions and Mergers, continued amortized over a ten-year life. Pro forma information is not presented as the operating results are not material to the Company's consolidated operations. Effective August 31, 1999, the Company acquired all the common stock of Acer Servicios De Informacion Sociedad Anonima ("AIS") of San Jose, Costa Rica for $6.0 million in cash. AIS operates an information technology call center and provides technical support and services to customers in North America and Central America. The transaction was accounted for under the purchase method of accounting with resulting goodwill being amortized over a ten-year life. Pro forma information is not presented as the operating results are not material to the Company's consolidated operations. The above transactions, excluding SHPS, PC Answer and AIS, have been accounted for as pooling-of-interests and, accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of TAS III and Oracle. Separate results of operations for the period prior to the mergers with TAS III and Oracle are outlined below. Nine months Three months ended ended September 30, September 30, 1998 1998 ------------- ------------- Revenues: Sykes.................................................... $ 297,720,508 $ 107,759,287 TAS III.................................................. 6,407,228 2,842,440 Oracle................................................... 22,942,767 7,713,809 ------------ ------------ Combined ................................................. $ 327,070,503 $ 118,315,536 ============ ============ Net income (loss): Sykes (1)................................................ $ 4,161,601 $ (6,429,337) TAS III.................................................. 297,971 156,641 Oracle................................................... 632,821 161,434 ------------ ------------ Combined ................................................. $ 5,092,393 $ (6,111,262) ============ ============ Other changes in shareholders' equity: Sykes.................................................... $ (4,649,994) $ (1,132,923) TAS III ................................................. 382,580 382,580 Oracle................................................... (1,245,908) (894,640) ------------ ------------ Combined.................................................. $ (5,513,322) (1,644,983) ============ ============ (1) The Company has restated its financial statements for both the three and nine-month periods ended September 30, 1998, respectively, to reflect the methodology as set forth in a September 15, 1998 letter from the SEC Staff to the AICPA regarding acquired in-process research and development charges. This letter set forth the SEC's views regarding the valuation methodology to be used in allocating a portion of the purchase price to acquired in-process research and development at the date of acquisition. As a result of the revised valuation, the Company's financial statements for the nine months ended September 30, 1998 have been restated to reduce the amount of acquired in-process research and development charges incurred by SHPS, and the resulting impact on the Company's proportionate share of the adjustment. 7 SYKES ENTERPRISES, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1998 and 1999 (Unaudited) Note 2 - Commitments and Contingencies The Company from time to time is involved in legal actions arising in the ordinary course of business. With respect to these matters, management believes that it has adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company's future financial position. Note 3 - Accumulated Other Comprehensive Income Effective January 1, 1998 the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" which requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in the financial statements. The components of other comprehensive income are as follows: Accumulated Foreign Other Currency Comprehensive Translation Income ----------- ------------- Balance at December 31, 1998.............................. $ (1,407,760) $ (1,407,760) Foreign currency translation adjustment................... (1,854,142) (1,854,142) ----------- ----------- Balance at September 30, 1999 (unaudited)................. $ (3,261,902) $ (3,261,902) =========== =========== Earnings associated with the Company's investment in its foreign subsidiaries are considered to be permanently invested and no provision for United States federal and state income taxes on those earnings or translation adjustments has been provided. Note 4 - Earnings Per Share Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock options using the treasury stock method. The numbers of shares used in the earnings per share computation are as follows: Nine Months Ended Three Months Ended September 30, September 30, ------------------------------------- ------------------------------------- 1998 1999 1998 1999 ----------------- ----------------- ----------------- ----------------- Basic: Weighted average common outstanding... 41,216,989 41,940,706 41,336,973 42,280,529 ---------- ---------- ---------- ---------- Total basic. shares outstanding..... 41,216,989 41,940,706 41,336,973 42,280,529 Diluted: Dilution of stock options............. 1,001,862 1,043,837 - 751,900 ---------- --------- ---------- ---------- Total diluted. shares outstanding... 42,218,851 42,984,543 41,336,973 43,032,429 ========== ========== ========== ========== 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following should be read in conjunction with the Sykes Enterprises, Incorporated (the "Company") December 31, 1998 Consolidated Financial Statements, including the notes thereto. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from the results reflected in these forward-looking statements as a result of certain of the factors set forth below and elsewhere in this analysis. Financial Condition The Company's primary sources of liquidity are equity offerings, cash flows from operations and available borrowings under its credit facility. The Company has utilized these sources to make additional capital expenditures associated primarily with its technical support services, to repay debt associated with entities it has acquired, and for working capital and general corporate purposes. In addition, the Company intends future uses of its sources of liquidity to include the aforementioned and possible additional acquisitions. The Company invests any excess funds in short-term, investment-grade securities or money market instruments. During the nine-month period ended September 30, 1999, the Company generated approximately $34.0 million in cash from operations. The Company utilized these funds and certain of its available cash and credit facility to fund approximately $43.8 million of capital expenditures. The capital expenditures were predominately the result of facility and capital equipment expenditures incurred in connection with the integration and expansion of the Company's technical support and e-commerce services. The Company believes that its accessible funds under its credit facilities and cash flows from operations will be adequate to meet its continued expansion objectives, anticipated levels of capital expenditures and debt repayment requirements, including those that may be required pursuant to the integration of its acquisitions, for the foreseeable future. Results of Operations Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 For the nine months ended September 30, 1999, the Company recorded consolidated revenues of $443.5 million, an increase of $116.4 million or 35.6%, from the $327.1 million of consolidated revenues for the comparable period during 1998. This growth in revenue was the result of a $145.2 million or 77.4% increase in technical support services, an increase of $4.3 million from customer product services, offset by a decrease of $33.2 million from information technology services and solutions. The increase in information technology support services revenues was primarily attributable to an increase in the number of IT call centers providing services throughout the period and the resultant increase in call volumes from clients, and the inclusion of SHPS' revenue generated for the entire nine months ended September 30, 1999. The new IT call centers were required as a result of continued growth of technical support services from both e-commerce and traditional telephone support customers. 9 SYKES ENTERPRISES, INCORPORATED Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998, continued Subsequent to the first nine months of 1998, the Company opened four domestic and one international IT call centers, acquired an international IT call center, and expanded its call center in Sveg, Sweden. The increase in customer product services revenue for the nine months ended September 30, 1999 was primarily attributable to the Company's e-commerce initiatives. The decrease in information technology services and solutions revenues was attributable to a decrease in license fees and royalties associated with the Company's technology applications, a decline in the number of hours billed to customers for consulting services partially offset by an increase in the average bill rate, and to a decline in language translation and localization services, when compared to the comparable period in 1998. Direct salaries and related costs increased approximately $66.2 million or 32.7% to $268.9 million for the nine-month period in 1999 from the comparable period in 1998. As a percentage of revenues, however, direct salaries and related costs decreased to approximately 60.6% in 1999 from approximately 62.0% for the comparable period in 1998. The increase in the amount of direct salaries and related costs was primarily attributable to the addition of personnel to support revenue growth. The decrease as a percentage of revenues resulted from economies of scale associated with spreading costs over a larger revenue base and the continued change in the Company's mix of business reflecting the growth of technical support and e-commerce services as a percentage of consolidated results. General and administrative expenses increased approximately $27.6 million or 31.9% to $114.0 million for the nine-month period in 1999 from the comparable period in 1998. As a percentage of revenues, however, general and administrative expenses decreased to 25.7% in 1999 from 26.4% for the comparable period in 1998. The increase in the amount of general and administrative expenses was primarily attributable to an increase in depreciation expenses associated with facility and capital equipment expenditures incurred in connection with the integration and expansion of the Company's technical support and e-commerce services, and an increase in amortization expense associated with the goodwill incurred as part of the SHPS acquisition. The decrease in general and administrative expenses as a percentage of revenues resulted from economies of scale associated with spreading costs over a larger revenue base. As part of the original ownership and subsequent acquisition of the remaining outstanding shares of SHPS, the Company determined that the technical feasibility of SHPS' in-process technology had not been established and a portion of the technology had no alternative use. Therefore, the Company recorded a charge of approximately $14.5 million related to the write-off of the acquired in-process research and development during the quarter ended September 30, 1998. Interest and other expense was $2.4 million during the first nine months of 1999, compared to $4.2 million during the comparable 1998 period, inclusive of a $3.9 million net loss from joint venture. The net loss from the joint venture was attributable to acquisition-related in-process research and development costs associated with acquisitions completed by the joint venture, which was recorded as other expense. The increase in interest and other expense for the nine-month period exclusive of the net loss from joint venture was primarily attributable to an increase in the Company's debt position as a result of the acquisition of SHPS completed during 1998. 10 SYKES ENTERPRISES, INCORPORATED Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998, continued The provision for income taxes increased $8.3 million to $22.5 million for the nine-month period in 1999 from the comparable period in 1998. As a percentage of revenue, the provision for income taxes increased to 5.1% during the 1999 period when contrasted to approximately 4.3% for the comparable 1998 period. The increase was attributable to the increase of income before income taxes and to an increase in income before income taxes as a percentage of revenue. The Company's effective tax rate was 38.7% for 1999 compared to 37.1% for the comparable 1998 period, excluding the effect of one-time charges, primarily as a result of non-deductible expenses which consisted primarily of goodwill amortization. Three Months Ended September 30, 1999, Compared to Three Months Ended September 30, 1998 For the three months ended September 30, 1999, the Company recorded consolidated revenues of $161.0 million, an increase of $42.7 million or 36.1%, from the $118.3 million of consolidated revenues for the comparable period during 1998. This growth in revenue was the result of a $49.5 million or 66.9% increase in technical support services, and an increase of $2.4 million from customer product services, offset by a decrease of $9.2 million from information technology services and solutions. The increase in information technology support services revenues was primarily attributable to an increase in the number of IT call centers providing services throughout the period and the resultant increase in call volumes from clients, and the inclusion of SHPS' revenue generated for the entire third quarter of 1999. Subsequent to the third quarter of 1998, the Company opened four domestic and one international IT call centers, acquired an international IT call center, and expanded its call center in Sveg, Sweden. The increase in customer product services revenue for the three months ended September 30, 1999 was primarily attributable to the Company's e-commerce initiatives. The decrease in informa- tion technology services and solutions revenues was attributable to a decrease in license fees and royalties associated with the Company's technology applica- tions, a decline in the number of hours billed to customers for consulting services partially offset by an increase in the average bill rate, and to a decline in language translation and localization services, when compared to the comparable period in 1998. Direct salaries and related costs increased approximately $23.9 million or 32.8% to $96.7 million for the three-month period in 1999 from the comparable period in 1998. As a percentage of revenues, however, direct salaries and related costs decreased to approximately 60.1 % in 1999 from approximately 61.5% for the comparable period in 1998. The increase in the amount of direct salaries and related costs was primarily attributable to the addition of personnel to support revenue growth. The decrease as a percentage of revenues resulted from economies of scale associated with spreading costs over a larger revenue base and the continued change in the Company's mix of business reflecting the growth of technical support and e-commerce services as a percentage of consolidated results. General and administrative expenses increased approximately $8.8 million or 28.1% to $40.1 million for the three-month period in 1999 from the comparable period in 1998. As a percentage of revenues, however, general and administrative expenses decreased to 24.9% 11 SYKES ENTERPRISES, INCORPORATED Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1999, Compared to Three Months Ended September 30, 1998, continued in 1999 from 26.5% for the comparable period in 1998. The increase in the amount of general and administrative expenses was primarily attributable to an increase in depreciation expenses associated with facility and capital equipment expenditures incurred in connection with the integration and expansion of the Company' technical support and e-commerce services, an increase in amortization expense associated with the goodwill incurred as part of the SHPS acquisition and to a lesser extent, the addition of sales and administrative personnel to support the Company's growth. The decrease in general and administrative expenses as a percentage of revenues resulted from economies of scale associated with spreading costs over a larger revenue base. As part of the original ownership and subsequent acquisition of the remaining outstanding shares of SHPS, the Company determined that the technical feasibility of SHPS' in-process technology had not been established and a portion of the technology had no alternative use. Therefore, the Company recorded a charge of approximately $14.5 million related to the write-off of the acquired in-process research and development during the quarter ended September 30, 1998. Interest and other expense was $1.0 million during the three-month period of 1999, compared to interest and other expense of $0.5 million during the comparable 1998 period. The increase in interest and other expense for the three-month period was primarily attributable to an increase in the Company's debt position as a result of the acquisition of SHPS completed during 1998. The provision for income taxes increased $3.7 million to $9.0 million for the three-month period in 1999 from the comparable period in 1998. As a percentage of revenue, the provision for income taxes increased to 5.6% during the 1999 period when contrasted to approximately 4.5% for the comparable 1998 period. The increase was attributable to the increase of income before income taxes and to an increase in income before income taxes as a percentage of revenue. The Company's effective tax rate was 38.8% for the quarter ended September 30, 1999 compared to 37.6% for the comparable 1998 period, primarily as a result of non-deductible expenses which consisted primarily of goodwill amortization. Quantitative and Qualitative Disclosure The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Movements in foreign currency exchange rates may affect the Company's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-United States based competitors. Under its current policy, the Company does not use foreign exchange derivative instruments to manage its exposure to changes in foreign currency exchange rates. Year 2000 Introduction The Year 2000 issue is the result of some computer software programs being written using two digits rather than four to define the applicable year. As a result of this design decision, some of these systems could fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. To the extent the Company's software applications contain source codes that are unable to appropriately interpret the calendar 12 SYKES ENTERPRISES, INCORPORATED Management's Discussion and Analysis of Financial Condition and Results of Operations Year 2000 continued year 2000, some level of modification or even possibly replacement of such applications was necessary. Description of Areas of Impact and Risk During late 1997, the Company initiated the process of reviewing its existing software programs to determine the potential exposure and amount of resources that was needed to become Year 2000 compliant. Based on this review, the Company has experienced very few problems related to Year 2000 testing and those identified have been resolved in the Company's day-to-day operations. The Company initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. In the event any third parties cannot timely provide the Company with contents, products, services or systems that meet Year 2000 requirements, the Company's services could be materially adversely affected. The Company continues to solicit, receive and renew responses to surveys sent to those third parties determined to be material to the operations of the Company to determine their Year 2000 readiness. For those critical third parties that have failed to respond to the Company's survey, the Company has pursued alternative means of obtaining Y2K readiness information and is conducting reviews of publicly available information published by such third parties. The Company completed its Year 2000 testing and modifications during September 1999 and continues to monitor its internal systems and suppliers to ensure ongoing compliance. Cost of Project The total cost of the Year 2000 project is estimated at approximately $1.2 million and is being funded through operating cash flows. To date, the Company has incurred and expensed approximately $1.0 million related to this project. Such cost is not expected to have a material effect on the Company's results of operations. The remaining costs to become Year 2000 compliant and the date on which the Company believes it will complete all Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, availability of corrective software provided by external suppliers, the ability to locate and correct all relevant computer codes and similar uncertainties. Most Likely Consequences of Year 2000 Problems In a recent Securities and Exchange Commission release regarding Year 2000 disclosure, the Commission stated that public companies must disclose the most likely worst case Year 2000 scenario. Although it is not possible to assess the likelihood of any of the 13 SYKES ENTERPRISES, INCORPORATED Management's Discussion and Analysis of Financial Condition and Results of Operations Year 2000 continued following events, each must be included in a consideration of worst case scenarios: widespread failure of electrical and similar supplies serving the Company; widespread disruption of the services provided by common communica- tions' carriers; similar disruption to the means and modes of transportation for the Company and its employees, suppliers, and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of the Company's customers' and its suppliers' critical computer hardware and software systems, and the failure of outside entities' systems, including systems related to banking and finance. Contingency Plan The company has substantially completed developing contingency plans to be implemented if its efforts to identify and correct Year 2000 Problems affecting its internal systems are not effective. The Company's contingency plans were substantially complete as of September 30, 1999. Depending on the systems affected, these plans could include accelerated replacement of affected equip- ment or software, short-to-medium-term use of alternate sites, equipment and software, increased work hours for Company personnel or use of contract personnel. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations. 14 SYKES ENTERPRISES, INCORPORATED FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 Part II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K Exhibit 27.1......Financial Data Schedule (b) Reports on Form 8-K No reports were filed on Form 8-K during the three months ended September 30, 1999. 15 SYKES ENTERPRISES, INCORPORATED FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYKES ENTERPRISES, INCORPORATED (Registrant) Date: November 10, 1999 By: /s/ Scott J. Bendert - ----------------------------- ----------------------------------------- Scott J. Bendert Senior Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 16 SYKES ENTERPRISES, INCORPORATED FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 EXHIBIT INDEX ------------- Exhibit Page Number Number ------- ------ 27.1 Financial Data Schedule 18 17