1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
_____________________________________ to ___________________________________
Commission File No. 0-28274
--------------------------------------------------------
SYKES ENTERPRISES, INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 56-1383460
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
---------------------------------------------------
Registrant's telephone number, including area code: (813) 274-1000
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 16, 2000, there were 40,460,273 shares
of common stock outstanding.
Page 1 of 42
The Exhibit Index Appears on Page 19
2
PART I
ITEM 1 - FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS' REVIEW REPORT
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ................................... $ 31,001,354 $ 26,919,935
Restricted cash ............................................. 15,108,523 --
Receivables ................................................. 126,476,947 133,791,236
Prepaid expenses and other current assets ................... 15,252,307 11,307,914
------------- -------------
Total current assets ...................................... 187,839,131 172,019,085
Property and equipment, net ................................... 134,755,878 156,894,718
Marketable securities ......................................... 199,875 --
Intangible assets, net ........................................ 76,830,977 14,042,327
Deferred charges and other assets ............................. 19,769,980 21,450,033
------------- -------------
$ 419,395,841 $ 364,406,163
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt ...................... $ 3,236,451 $ 66,653
Accounts payable ............................................ 37,409,955 31,394,386
Income taxes payable ........................................ 932,158 1,554,341
Accrued employee compensation and benefits .................. 24,205,591 25,184,833
Customer deposits ........................................... 11,820,739 --
Other accrued expenses and current liabilities .............. 17,159,191 16,893,496
------------- -------------
Total current liabilities ................................. 94,764,085 75,093,709
Long-term debt ................................................ 80,052,717 20,170,577
Deferred grants ............................................... 21,198,709 26,985,733
Deferred revenue .............................................. 26,593,100 32,297,296
Other long-term liabilities ................................... 1,400,466 1,680,798
------------- -------------
Total liabilities ......................................... 224,009,077 156,228,113
------------- -------------
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;
42,734,284 and 43,050,273 issued .......................... 427,343 430,503
Additional paid-in capital .................................. 155,022,390 158,044,747
Retained earnings ........................................... 45,797,226 104,718,868
Accumulated other comprehensive income ...................... (5,860,195) (17,109,567)
------------- -------------
195,386,764 246,084,551
Treasury stock at cost; 2,500,000 shares (none in 1999)...... -- (37,906,501)
------------- -------------
Total shareholders' equity ................................ 195,386,764 208,178,050
------------- -------------
$ 419,395,841 $ 364,406,163
============= =============
See accompanying notes to consolidated financial statements.
2
3
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
(Restated)
Revenues ................................ $ 413,308,705 $ 454,749,028 $ 140,966,807 $ 137,570,344
------------- ------------- ------------- -------------
Operating expenses
Direct salaries and related costs ..... 264,707,291 289,071,026 92,522,468 88,254,290
General and administrative ............ 114,393,523 144,428,243 40,350,154 52,124,522
Compensation expense associated with
exercise of options ................. -- 7,835,679 -- --
Restructuring and other charges ....... -- 9,640,000 -- --
------------- ------------- ------------- -------------
Total operating expenses ............ 379,100,814 450,974,948 132,872,622 140,378,812
------------- ------------- ------------- -------------
Income (loss) from operations ........... 34,207,891 3,774,080 8,094,185 (2,808,468)
Other income (expense)
Interest, net ......................... (2,588,002) (2,703,615) (1,052,748) (378,511)
Gain on sale of equity interest in SHPS -- 84,036,465 -- --
Other ................................. 162,958 (927,637) 65,877 (1,056,104)
------------- ------------- ------------- -------------
Total other income (expense) ........ (2,425,044) 80,405,213 (986,871) (1,434,615)
------------- ------------- ------------- -------------
Income (loss) before provision for income
taxes ................................. 31,782,847 84,179,293 7,107,314 (4,243,083)
Provision for income taxes .............. 12,309,535 25,257,651 2,760,517 (1,569,940)
------------- ------------- ------------- -------------
Net income (loss) ....................... $ 19,473,312 $ 58,921,642 $ 4,346,797 $ (2,673,143)
============= ============= ============= =============
Net income (loss) per share
Basic ................................. $ 0.46 $ 1.41 $ 0.10 $ (0.06)
============= ============= ============= =============
Diluted ............................... $ 0.45 $ 1.40 $ 0.10 $ (0.06)
============= ============= ============= =============
Weighted average shares outstanding
Basic ................................. 41,940,706 41,909,739 42,280,529 41,133,885
Diluted ............................... 42,984,543 41,996,844 43,032,429 41,133,885
See accompanying notes to consolidated financial statements.
3
4
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Income Stock Total
----------- -------- ------------ ------------ ------------- ------------ -------------
Balance at January 1,
1999, restated ....... 41,451,905 $414,519 $136,199,748 $ 23,894,815 $ (1,407,760) $ -- $ 159,101,322
Issuance of common
stock ................ 877,982 8,780 4,371,761 -- -- -- 4,380,541
Net income, restated .... -- -- -- 19,473,312 -- -- 19,473,312
Foreign currency
translation adjustment -- -- -- -- (1,854,142) -- (1,854,142)
-------------
Comprehensive income .... -- -- -- -- -- -- 17,619,170
----------- -------- ------------ ------------ ------------ ------------ -------------
Balance at September 30,
1999 (unaudited) ..... 42,329,887 423,299 140,571,509 43,368,127 (3,261,902) -- 181,101,033
Issuance of common stock 404,397 4,044 6,999,558 -- -- -- 7,003,602
Tax-effect of non-
qualified exercise
of stock options ..... -- -- 7,451,323 -- -- -- 7,451,323
Net income .............. -- -- -- 2,429,099 -- -- 2,429,099
Foreign currency
translation adjustment -- -- -- -- (2,598,293) -- (2,598,293)
-------------
Comprehensive
income (loss) ........ -- -- -- -- -- -- (169,194)
----------- -------- ------------ ------------ ------------ ------------ -------------
Balance at December 31,
1999, restated ....... 42,734,284 427,343 155,022,390 45,797,226 (5,860,195) -- 195,386,764
Issuance of common stock 315,989 3,160 3,022,357 -- -- -- 3,025,517
Purchase of treasury
stock ................ -- -- -- -- -- (37,906,501) (37,906,501)
Net income .............. -- -- -- 58,921,642 -- -- 58,921,642
Foreign currency
translation adjustment -- -- -- -- (11,249,372) -- (11,249,372)
-------------
Comprehensive income .... -- -- -- -- -- -- 47,672,270
----------- -------- ------------ ------------ ------------ ------------ -------------
Balance at September 30,
2000 (unaudited) ..... 43,050,273 $430,503 $158,044,747 $104,718,868 $(17,109,567) $(37,906,501) $ 208,178,050
=========== ======== ============ ============ ============ ============ =============
See accompanying notes to consolidated financial statements.
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5
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
1999 2000
------------ -------------
(Restated)
Cash flows from operating activities
Net income ................................................ $ 19,473,312 $ 58,921,642
Depreciation and amortization ............................. 25,801,708 28,353,855
Deferred income taxes ..................................... (1,281,282) (1,018,557)
Gain on sale of equity interest in SHPS, Incorporated ..... -- (84,036,465)
Loss on sale of marketable securities ..................... -- 199,874
Loss on disposal of property and equipment ................ -- 400,000
Changes in assets and liabilities
Receivables ............................................. (8,721,242) (28,818,852)
Prepaid expenses and other current assets ............... (2,559,345) 2,469,549
Intangible assets ....................................... (11,381) 1,184,511
Deferred charges and other assets ....................... (2,426,292) 396,566
Accounts payable ........................................ 2,733,837 (8,107,529)
Income taxes payable .................................... (1,634,884) 2,861,435
Accrued employee compensation and benefits .............. 3,239,448 4,182,803
Customer deposits, net of restricted cash ............... (3,254,360) 10,921,326
Other accrued expenses and current liabilities .......... (1,013,234) 663,113
Restructuring and other charges reserve ................. -- 1,417,987
Deferred revenue ........................................ 4,554,859 6,038,471
Other long-term liabilities ............................. (882,838) (1,393,344)
------------ -------------
Net cash provided by (used for) operating activities .... 34,018,306 (5,363,615)
------------ -------------
Cash flows from investing activities
Capital expenditures ...................................... (43,793,711) (55,331,475)
Acquisition of businesses ................................. (5,846,289) --
Proceeds from sale of equity interest in SHPS, Incorporated -- 159,775,966
Proceeds from sale of property and equipment .............. 193,672 --
------------ -------------
Net cash provided by (used for) investing activities ... (49,446,328) 104,444,491
------------ -------------
Cash flows from financing activities
Paydowns under revolving line of credit agreements ........ (54,500,000) (153,014,294)
Borrowings under revolving line of credit agreements ...... 59,000,000 90,672,339
Payments of long-term debt ................................ (3,705,115) (1,077,262)
Borrowings under long-term debt ........................... 903,656 367,278
Proceeds from issuance of stock ........................... 4,080,541 3,025,517
Proceeds from grants ...................................... 7,198,335 6,020,000
Purchases of treasury stock ............................... -- (37,906,501)
------------ -------------
Net cash provided by (used for) financing activities ... 12,977,417 (91,912,923)
------------ -------------
Adjustments for foreign currency translation ................. (1,854,142) (11,249,372)
------------ -------------
Net decrease in cash and cash equivalents .................... (4,304,747) (4,081,419)
Cash and cash equivalents - beginning ........................ 36,348,863 31,001,354
------------ -------------
Cash and cash equivalents - ending ........................... $ 32,044,116 $ 26,919,935
============ =============
See accompanying notes to consolidated financial statements.
5
6
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries ("Sykes" or the
"Company") provides vertically integrated technology-based business solutions
and services. Sykes' Business Solutions group provides professional services in
e-Commerce, and Customer Relationship Management (CRM) with a focus on business
strategy development, solution implementation, web design, development and
education, localization and program management. Sykes' Business Services group
provides value-added customer support outsourcing including technical support,
customer service, distribution and fulfillment. These services are delivered
through multiple communication channels encompassing web, e-mail and telephony
support. Sykes' Business Solutions and Business Services combination offers
clients value-added end-to-end solutions. The Company's services are provided to
customers on a worldwide basis throughout a wide variety of industries.
On October 30, 2000, Sykes announced the completion of a comprehensive review
of its software revenue recognition accounting practices for all significant
software licensing arrangements and service contracts with respect to the years
ended December 31, 1998 and 1999, and for the nine months ended September 30,
2000. As a result of the review, Sykes determined that the accounting for eight
clients' contracts required revision. Sykes determined that the revenue that
had been recognized should have been recognized either as payments came due,
upon completion of all services required under the arrangements or upon
satisfaction of any contingency. Accordingly, the financial statements for the
years ended December 31, 1998 and 1999, and certain interim periods have been
restated.
The effects of the restatement on the Company's consolidated statements of
operations for the nine months ended September 30, 1999 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------------
AS REPORTED AS RESTATED
------------ ------------
Revenues ..................... $411,452,337 $413,308,705
Operating income ............. $ 32,351,523 $ 34,207,891
Net income ................... $ 18,335,358 $ 19,473,312
Net income per share - basic . $ 0.44 $ 0.46
Net income per share - diluted $ 0.43 $ 0.45
The accompanying unaudited consolidated financial statements, as restated, 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, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the restated
consolidated financial statements and notes thereto as of and for the years
ended December 31, 1998 and 1999, included in the Company's Form 10-K/A for the
year ended December 31, 1999 as filed with the United States Securities and
Exchange Commission ("SEC") on November 20, 2000.
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7
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 1 - ACQUISITIONS AND DISPOSITIONS
On August 20, 1999, the Company acquired all of the common stock of
CompuHelpline, Inc., (d/b/a PC Answer) for approximately $340,000 consisting of
$40,000 of cash and 11,594 shares of the Company's common 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 amortized over a ten-year life. Pro forma information
is not presented as the operating results of PC Answer are not material to the
Company's consolidated operations.
On August 31, 1999, the Company acquired all of the common stock of Acer
Servicios de Informacion Sociedad Anonima ("AIS") of Heredia, Costa Rica for
$6.0 million in cash. AIS operated an information technology call center that
provided technical support and services to customers in North America and
Central America. The transaction was accounted for under the purchase method of
accounting with resulting goodwill being amortized over a ten-year life. Pro
forma information is not presented as the operating results of AIS are not
material to the Company's consolidated operations.
On October 12, 1999, the Company acquired the AnswerExpress Support Suite for
$2.5 million in cash. The transaction was accounted for under the purchase
method of accounting with resulting goodwill being amortized over a ten-year
life. Pro forma information is not presented as the operating results of
AnswerExpress are not material to the Company's consolidated operations.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS,
Incorporated ("SHPS") for approximately $165.5 million cash. The cash proceeds
reflected in the Statement of Cash Flows for the nine months ended September 30,
2000 is net of approximately $0.7 million used to retire other debt and
approximately $5.0 million of cash recorded on SHPS' balance sheet on the date
of sale. The sale of SHPS resulted in a gain for financial accounting purposes
of approximately $84.0 million ($59.9 million net of taxes). The Consolidated
Statement of Operations for the nine months ended September 30, 2000 includes
the results of SHPS through June 30, 2000, its disposition date. SHPS generated
revenue and net income (loss) exclusive of compensation expense associated with
the exercise of options during 2000, of $35.7 million and $0.2 million for the
nine months ended September 30, 2000 compared to $53.4 million and $1.0 million
for the nine months ended September 30, 1999 and $17.9 million and less than
$0.1 million for the three months ended September 30, 1999.
NOTE 2 - CREDIT FACILITY
On May 2, 2000, the Company amended and restated its existing syndicated credit
facility with a syndicate of lenders (the "Amended Credit Facility"). Pursuant
to the terms of the Amended Credit Facility, the amount of the Company's
revolving credit facility was maintained at $150.0 million. The $150.0 million
Amended Credit Facility includes a $10.0 million swingline loan to be used for
working capital purposes. In addition, the Company amended and restated its
$15.0 million multi-currency credit facility that provides for multi-currency
lending. Borrowings under the Amended Credit Facility bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Eurodollar rate plus an applicable margin of up to 1.75%.
Borrowings under the $10.0 million swingline loan bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Quoted Rate for swingline loans. Borrowings under the $15.0
million multi-currency facility bear interest, at the Company's option, at (a)
the lender's base rate plus an applicable margin of up to .25% or (b) a quoted
Euro rate for swingline loans. The Company paid aggregate financing fees of
approximately $0.3 million, which have been deferred and are being amortized
over the term of the Amended Credit Agreement. In addition, a commitment fee up
to .375% will be charged on the unused portion of the Amended Credit Facility on
a quarterly basis. The Amended Credit Facility matures on February 28, 2003, and
the multi-currency facility matures on February 28, 2002.
7
8
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 2 - CREDIT FACILITY (continued)
Borrowings under the Amended Credit Facility are guaranteed by certain of the
Company's subsidiaries as evidenced by a pledge of 66% of the respective
subsidiary's common stock. Under the terms of the Amended Credit Facility, the
Company is required to maintain certain financial ratios and other financial and
non-financial conditions. The Amended Credit Facility prohibits, without the
consent of the syndicated lenders, the Company from incurring additional
indebtedness, limits certain investments, advances or loans and restricts
substantial asset sales, capital expenditures and cash dividends.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company is aware of three purported class action lawsuits that have been
filed against Sykes and certain of its officers alleging violations of federal
securities laws. One of the actions, which is a consolidation of previous class
actions, was filed in the United States District Court for the Middle District
of Florida, and the other two actions were filed separately in the United
States District Court for the Eastern District of New York. The plaintiffs of
these lawsuits purport to assert claims on behalf of a class of purchasers of
Sykes common stock during part of 1999 and through September 18, 2000. The
actions claim violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. Among other things, the
actions allege that during 1999 and 2000, the Company and certain of its
officers made materially false statements concerning the Company's financial
condition and its future prospects. The complaints also claim that certain of
the Company's quarterly financial statements during 1999 were not prepared in
accordance with generally accepted accounting principles. The actions seek
compensatory and other damages, and costs and expenses associated with the
litigation.
The Company is aware of a lawsuit file by Kyrus Corporation ("Kyrus") that
asserts functionality issues associated with software that Kyrus had licensed
from the Company. This litigation is currently pending in the Court of Common
Pleas for Greenville County, South Carolina.
The Company intends to defend the actions vigorously. However, the Company
cannot predict the outcome of these lawsuits or the impact that they may have on
the Company. The Company also cannot predict whether any other suits, claims, or
investigations may arise in the future based on the same claims. The outcome of
these lawsuits or any future lawsuits, claims, or investigations relating to the
same subject matter may have a material adverse impact on the Company's
financial condition and results of operations.
The Company from time to time is involved in legal actions arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs such that the ultimate outcome will not have a material adverse
effect on the Company's future financial position.
During January 2000, the Company became contingently liable for a letter of
credit in the amount of $30.0 million, which guaranteed performance of a
contractual obligation. This contractual obligation and associated letter of
credit were cancelled during August 2000.
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Sykes presents data in the Consolidated Statements of Changes in Shareholders'
Equity in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes rules for the
reporting of comprehensive income and its components. Total comprehensive income
(loss) was approximately $17.6 million and $47.7 million for the nine months
ended September 30, 1999 and 2000, respectively, and $7.6 million and $(6.9)
million for the three months ended September 30, 1999 and 2000, respectively.
8
9
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME (continued)
The components of other comprehensive income for the nine months ended September
30, 2000 relate to foreign currency translation adjustments and are as follows:
Accumulated Other
Comprehensive Income
--------------------
Balance at December 31, 1999 ................. $ (5,860,195)
Foreign currency translation adjustment ...... (11,249,372)
------------
Balance at September 30, 2000 ................ $(17,109,567)
============
Earnings associated with the Company's investment in its foreign subsidiaries
are considered permanently invested and no provision for United States federal
and state income taxes on those earnings or translation adjustments has been
provided.
NOTE 5 - RESTRUCTURING AND OTHER CHARGES
During June 2000, management committed to and commenced implementation of a
restructuring plan (the "Restructuring Plan"), which was designed to reduce
costs and improve operating efficiencies. Significant activities of the
Restructuring Plan include the (1) consolidation of certain of the Company's
distribution and fulfillment operations, (2) consolidation of certain of the
Company's professional staffing and consulting operations, (3) elimination of
redundant property, leasehold improvements and equipment, and (4) lease
termination costs associated with vacated properties and transportation
equipment. A restructuring and other charge of approximately $9.6 million ($6.9
million after tax) was recorded in the second quarter of 2000. The Company
planned to reduce the number of employees by 130, of which 115 were associated
with the Company's distribution and fulfillment operations and 15 were
associated with the professional staffing and consulting operations. The
consolidation of certain distribution and fulfillment sites and certain
professional consulting offices began during June 2000 and is expected to be
completed by June 1, 2001.
The major components of restructuring and other charges recorded in the quarter
ended June 30, 2000 as originally estimated are as follows:
DESCRIPTION
-----------
Severance and related costs ................ $1,110,000
Lease termination costs .................... 3,564,000
Write-down of property and equipment ....... 2,530,000
Write-down of intangible assets ............ 1,185,000
Other ...................................... 1,251,000
----------
$9,640,000
==========
During the third quarter of 2000, the Company has reduced the number of
employees by 100 in distribution and fulfillment and 15 in professional staffing
and consulting operations. A summary of the Restructuring Plan activity is as
follows:
DESCRIPTION
-----------
Balance established on June 30, 2000 ................. $ 9,640,000
Reduction in workforce cash outflows ................. (766,504)
Lease termination cash payments ...................... (2,975,350)
Non-cash write-down of property and equipment ........ (2,235,505)
Non-cash write-down of intangible assets ............. (1,171,508)
Other cash outflows .................................. (1,073,146)
-----------
Balance at September 30, 2000 ........................ $ 1,417,987
===========
9
10
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding during the periods. Diluted earnings per share includes the
weighted average number of common shares outstanding during the respective
periods and the further dilutive effect, if any, from stock options using the
treasury stock method.
The numbers of shares used in the earnings per share computation are as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 2000 1999 2000
---------- ---------- ---------- ----------
Basic:
Weighted average common shares outstanding ................. 41,940,706 41,909,739 42,280,529 41,133,885
---------- ---------- ---------- ----------
Total weighted average basic shares outstanding ......... 41,940,706 41,909,739 42,280,529 41,133,885
Diluted:
Dilutive effect of stock options ............................. 1,043,837 87,105 751,900 --
---------- ---------- ---------- ----------
Total weighted average diluted
shares outstanding .................................. 42,984,543 41,996,844 43,032,429 41,133,885
========== ========== ========== ==========
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
Sykes Enterprises, Incorporated
We have reviewed the accompanying consolidated balance sheet of Sykes
Enterprises, Incorporated as of September 30, 2000 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the three-month and nine-month periods then ended. These financial statements
are the responsibility of the Company's management. We did not make a similar
review of the consolidated statements of operations, changes in shareholders'
equity and cash flows for the three-month and nine-month periods ended
September 30, 1999.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements at September 30, 2000, and for
the three-month and nine-month periods then ended for them to be in conformity
with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Sykes
Enterprises, Incorporated as of December 31, 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended (not presented herein) and in our report dated February 7,
2000, except for Note 1 as to which the date is October 30, 2000, we expressed
an unqualified opinion on those consolidated financial statements, as restated.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
was derived.
/s/ Ernst & Young LLP
Tampa, Florida
November 17, 2000
10
11
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Sykes Enterprises,
Incorporated (the "Company") December 31, 1999 Consolidated Financial
Statements, as restated, including the notes thereto. The following discussion
and analysis contains forward-looking statements that involve risks and
uncertainties. Words such as "may", "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", variations of such words, and similar
expressions are intended to identify such forward-looking statements. Similarly,
statements that describe the Company's future plans, objectives, or goals also
are forward-looking statements. Future 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.
Factors that could cause actual results to differ materially from what is
expressed or forecasted in such forward-looking statements include, but are not
limited to, customer resistance to Sykes' standardized contract for future
bundled service offerings; variations in the term and the elements of services
offered under Sykes' standardized contract for future bundled service offerings;
changes in applicable accounting principles; difficulties or delays in
implementing Sykes' bundled service offerings; failure to achieve sales,
marketing, and other objectives of Sykes' strategic alliance; construction
delays of new call centers; difficulties in managing growth; rapid technological
change; loss of significant customers; risks inherent in conducting business
abroad; currency fluctuations; changes in legislation; fluctuations in business
conditions and the economy; Sykes' ability to attract and retain key management
personnel; the marketplace's continued receptivity to Sykes' bundled service
offering; Sykes' ability to continue the growth of its support service revenues
through additional technical support centers; Sykes' ability to further
penetrate into vertically integrated markets; Sykes' ability to expand its
global presence through strategic alliances and selective acquisitions; Sykes'
ability to expand its e-commerce service platform revenues; Sykes' ability to
continue to establish a competitive advantage through sophisticated
technological capabilities; Sykes' ability to complete its restructuring plan;
the ultimate outcome of pending class action lawsuits; and the risk factors
listed from time to time in Sykes' registration statements and reports as filed
with the Securities Exchange Commission. All forward-looking statements are made
as of the date hereof, and Sykes undertakes no obligation to update any such
forward-looking statements.
OVERVIEW
On June 13, 2000, the Company announced its initiatives to strategically focus
its operations into two business units entitled Business Solutions and Business
Services. Sykes' Business Solutions group, which represents approximately 10% of
the Company's consolidated revenue, provides professional services in
e-commerce, globalization and Customer Relationship Management (CRM) with a
focus on business strategy development, solution implementation, web design,
development and education, localization and program management. Sykes' Business
Services group represents approximately 90% of the Company's consolidated
revenue and is comprised of the Company's core competencies of technical and
customer support, distribution and fulfillment. These services are delivered
through multiple communication channels encompassing web, e-mail and telephony
support. The revenue comparisons below reflect the Company's strategic focus on
its operations as Business Solutions and Business Services.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
For the nine months ended September 30, 2000, the Company recorded consolidated
revenues of $454.7 million, an increase of $41.4 million or 10.0%, from the
$413.3 million of consolidated revenues for the comparable period during 1999.
Exclusive of SHPS (in which 93.5% of the Company's ownership interest was sold
on June 30, 2000), revenues increased $59.0 million or 16.4% to $419.0 million
for the nine months ended September 30, 2000 from $360.0 million for the
comparable period during 1999. This growth in revenue was the result of a $39.7
million or
11
12
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (CONTINUED)
10.6% increase in Business Services' revenues ($57.5 million or 17.9% exclusive
of SHPS) and an increase of $1.7 million or 4.5% from Business Solutions'
revenues.
The increase in Business Services' revenues for the nine months ended September
30, 2000 was primarily attributable to an increase in the number of technical
and customer support centers providing services throughout the period, and the
resultant increase in e-mail requests and telephony call volumes from clients,
the licensing of the Company's diagnostic software, partially offset by a
decrease from distribution and fulfillment services revenues. The new technical
support centers were required as a result of continued growth of technical and
customer support services from both e-commerce and telephony support services.
Subsequent to the third quarter of 1999, the Company opened three domestic and
two international technical support centers and significantly expanded an
additional four international centers. During the nine months ended September
30, 2000, the Company recognized $7.1 million of revenue associated with the
licensing of the Company's AnswerTeam(TM) diagnostic software, of which $3.5
million relates to a one-year licensing agreement that was completed during the
nine months ended September 30, 2000, and $2.4 million relates to the pro rata
recognition of revenue associated with a licensing agreement completed during
1999. The decrease in distribution and fulfillment services revenue for the nine
months ended September 30, 2000 was primarily attributable to the closing of
three international and one domestic distribution and fulfillment centers as
part of the Company's restructuring plan and a client's decision to discontinue
its operations within North America.
The increase in Business Solutions' revenues was attributable to a focus on
professional e-commerce services, including web design, development and program
management and an increase in the average bill rate charged for consulting
services. The increase in Business Solutions' revenue for the nine months ended
September 30, 2000 is partially offset by a $1.9 million reduction in revenue
associated with the sale of the Company's Manufacturing and Distribution
operations during the second quarter of 1999.
Direct salaries and related costs increased $24.4 million or 9.2% to $289.1
million for the nine months ended September 30, 2000, from $264.7 million in
1999. As a percentage of revenues, direct salaries and related costs decreased
slightly to 63.6% in 2000 from 64.0% for the comparable period in 1999. The
increase in the dollar amount was primarily attributable to a $36.8 million
increase in salaries and benefits to support revenue growth and associated
training costs, partially offset by a $19.7 million decrease in direct material
costs associated with distribution and fulfillment services. In addition, during
the nine months ended September 30, 1999, the Company capitalized $0.6 million
of costs related to internally developed software with no additional costs
capitalized during the nine months ended September 30, 2000. Exclusive of SHPS,
direct salaries and all related costs increased $30.9 million or 13.1% to $265.9
million or 63.5% of revenue. The decrease in direct salaries and all related
costs as a percentage of revenue resulted from economies of scale associated
with spreading costs over a larger revenue base.
General and administrative expenses increased $30.0 million or 26.3% to $144.4
million for the nine months ended September 30, 2000, from $114.4 million in
1999. As a percentage of revenues, general and administrative expenses
increased to 31.8% in 2000 from 27.7% for the comparable period in 1999. The
increase in both the dollar amount and percentage of revenue of general and
administrative expenses was primarily attributable to a $7.7 million increase
in salaries and benefits to support the Company's organic growth, a $5.4
million increase in telecom costs, a $3.9 million increase in lease and rent
expense, and a $4.2 million increase in depreciation expenses associated with
facility and capital equipment expenditures, all generally incurred in
connection with the integration and expansion of the Company's technical and
customer support services, a $3.1 million increase in bad debt expense, and a
$5.7 million increase of legal and professional fees and other costs. Grants
received in excess of property and equipment costs are recognized as a
reduction of general and administrative expenses, which were $0.9 million
higher during the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. Exclusive of SHPS, general and administrative
expenses increased $39.6 million or 42.2% to $133.6 million, or 31.9% of
revenue.
12
13
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (CONTINUED)
Compensation expense associated with the exercise of options was $7.8 million
for the nine months ended September 30, 2000. This charge related to payments
made to certain SHPS' option holders as part of the Company's sale of a 93.5%
ownership interest in SHPS that occurred on June 30, 2000.
The Company recorded restructuring and other charges of $9.6 million during the
nine months ended September 30, 2000. These charges were associated with (1) the
consolidation of certain of the Company's distribution and fulfillment
operations; (2) the consolidation of certain of the Company's professional
services locations; (3) elimination of redundant property, leasehold
improvements and equipment; and (4) lease termination costs associated with
vacated properties and transportation equipment.
Interest and other expense was $3.6 million during the nine months ended
September 30, 2000, compared to $2.4 million during the comparable 1999 period.
The increase in interest and other expense for the nine-month period was
attributable to $0.7 million of interest expense associated with cancellation of
a contractual obligation and a $0.6 million charge associated with the
disposition of assets, partially offset by a decrease in the Company's average
outstanding debt position. The Company's average debt balance for the nine
months ended September 30, 2000, was $67.6 million compared to $77.4 million for
the nine months ended September 30, 1999. The decrease in the average debt
balance is principally due to the repayment of debt from the proceeds generated
from the sale of SHPS, offset by capital expenditures and the Company's
repurchase of 2.5 million shares of its common stock during 2000 that are being
held as treasury shares.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS for
$165.5 million cash. The sale of SHPS resulted in a gain for financial
accounting purposes of $84.0 million ($59.9 million net of taxes).
The provision for income taxes increased $13.0 million to $25.3 million for the
nine months ended September 30, 2000 from $12.3 million for the comparable
period in 1999. The increase in the provision for income taxes was primarily
attributable to the gain associated with the sale of SHPS, partially offset by
the compensation expense associated with the exercise of options and the
restructuring and other charges that were incurred during the nine months ended
September 30, 2000. The Company's effective tax rate exclusive of the gain and
one-time charges was 39.2% for the nine months ended September 30, 2000 compared
to 38.7% for the comparable 1999 period.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
For the three months ended September 30, 2000, the Company recorded consolidated
revenues of $137.6 million, a decrease of $3.4 million or 2.4%, from the $141.0
million of consolidated revenues for the comparable period during 1999.
Exclusive of SHPS, revenues increased $14.6 million or 11.8% for the three
months ended September 30, 2000, from $123.0 million for the comparable period
during 1999. This growth in revenue was the result of a $14.1 million or 12.6%
increase in Business Services' revenues, exclusive of SHPS, and an increase of
$0.5 million or 4.5% from Business Solutions' revenues.
The increase in Business Services' revenues for the three months ended September
30, 2000 was primarily attributable to an increase in the number of technical
and customer support centers providing services throughout the period and the
resultant increase in e-mail requests and telephony call volumes from clients,
partially offset by a decrease from distribution and fulfillment services
revenues. The new technical and customer support centers were required as a
result of continued growth of technical and customer support services from both
e-commerce and traditional telephony support services. During the three months
ended September 30, 2000, the Company recognized $1.2 million of revenue
associated with the licensing of the Company's AnswerTeam(TM) diagnostic
software related to the pro rata recognition of revenue associated with a
licensing agreement completed during 1999. The decrease in distribution and
fulfillment services revenue for the three months ended September 30, 2000 was
primarily attributable to the closing of three international and one domestic
distribution and fulfillment centers as
13
14
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999 (continued)
part of the Company's restructuring plan and also a client's decision to
discontinue its operations within North America.
The increase in Business Solutions' revenues for the three months ended
September 30, 2000, was attributable to a focus on professional e-commerce
services, including web design, development and program management and, an
increase in the average bill rate charged for consulting services.
Direct salaries and related costs decreased $4.2 million or 4.6% to $88.3
million for the three months ended September 30, 2000, from $92.5 million in
1999. As a percentage of revenues, direct salaries and related costs decreased
to 64.2% in 2000 from 65.6% for the comparable period in 1999. The decrease in
the dollar amount was primarily attributable to a $6.5 million decrease indirect
material costs associated with distribution and fulfillment services, partially
offset by a $3.8 million increase in salaries and benefits to support revenue
growth and associated training costs. Exclusive of SHPS, direct salaries and all
related costs increased $6.3 million or 7.7% to $88.3 million or 64.2% of
revenue.
General and administrative expenses increased $11.8 million or 29.2% to $52.1
million for the three months ended September 30, 2000, from $40.3 million in
1999. As a percentage of revenues, general and administrative expenses increased
to 37.9% in 2000 from 28.6% for the comparable period in 1999. The increase in
the dollar amount of general and administrative expenses was primarily
attributable to a $2.2 million increase in salaries and benefits to support the
Company's organic growth, a $3.9 million increase in bad debt expenses, a $2.5
million increase in legal and professional fees, a $2.0 million increase in
telecom costs and a $1.2 million increase of other costs.
Exclusive of SHPS, general and administrative expenses increased $18.7 million
or 55.9% from $33.4 million, or 27.2% of revenue.
Interest and other expense was $1.4 million during the three months ended
September 30, 2000, compared to $1.0 million during the comparable 1999 period.
The increase in interest and other expense for the three-month period was
attributable to $0.7 million of interest expense associated with the
cancellation of a contractual obligation and a $0.6 million charge associated
with the disposition of assets, partially offset by a decrease in the Company's
average outstanding debt position. The Company's average debt balance for the
third quarter of 2000 was $15.5 million compared to $78.9 million for the third
quarter of 1999. The decrease in the average debt balance is principally due to
the repayment of debt from the proceeds generated from the sale of SHPS, offset
by capital expenditures and the Company's repurchase of 2.5 million shares of
its common stock during 2000 that are being held as treasury shares.
The provision for income taxes decreased $4.4 million to an income tax benefit
of $1.6 million for the three months ended September 30, 2000 from $2.8 million
for the comparable period in 1999. The decrease in the provision for income
taxes was primarily attributable to the loss incurred during the three months
ended September 30, 2000. The Company's effective tax rate was 37.0% for the
three months ended September 30, 2000 compared to 38.8% for the comparable 1999
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows from operations and
available borrowings under its credit facilities. The Company has utilized its
capital resources to make capital expenditures associated primarily with its
technical and customer support services, invest in technology applications and
tools to further develop the Company's service offerings, repurchase its shares
in the open market and for working capital and other general corporate purposes.
In addition, the Company intends to use its future sources of liquidity for the
aforementioned items and for possible acquisitions.
14
15
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
During the nine months ended September 30, 2000, the Company utilized proceeds
from the sale of SHPS, grants and stock issuances to fund cash repayments of its
Amended Credit Facility, capital expenditures, common stock purchases and cash
used in operating activities. The purchase of the shares of the Company's common
stock was in connection with stock repurchase programs announced in February
2000 and July 2000, respectively. The capital expenditures were predominately
the result of integration and expansion of the Company's technical and customer
support centers.
On May 2, 2000, the Company amended and restated its existing syndicated credit
facility with a syndicate of lenders (the "Amended Credit Facility"). Pursuant
to the terms of the Amended Credit Facility, the amount of the Company's
revolving credit facility was maintained at $150.0 million. The $150.0 million
Amended Credit Facility includes a $10.0 million swingline loan to be used for
working capital purposes. In addition, the Company amended and restated its
$15.0 million multi-currency credit facility that provides for multi-currency
lending. Borrowings under the Amended Credit Facility bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Eurodollar rate plus an applicable margin of up to 1.75%.
Borrowings under the $10.0 million swingline loan bear interest, at the
Company's option, at (a) the lender's base rate plus an applicable margin of up
to .25% or (b) a Quoted Rate for swingline loans. Borrowings under the $15.0
million multi-currency facility bear interest, at the Company's option, at (a)
the lender's base rate plus an applicable margin of up to .25% or (b) a quoted
Euro rate for swingline loans. The Company paid aggregate financing fees of
approximately $0.3 million, which have been deferred and are being amortized
over the term of the Amended Credit Agreement. In addition, a commitment fee up
to .375% will be charged on the unused portion of the Amended Credit Facility on
a quarterly basis. The Amended Credit Facility matures on February 28, 2003, and
the multi-currency facility matures on February 28, 2002. At September 30, 2000,
the Company had approximately $145.0 million of availability under its credit
facilities.
The Company believes that its current cash levels, accessible funds under its
credit facilities and cash flows from future operations will be adequate to meet
its working capital needs, continued expansion objectives, anticipated levels of
capital expenditures and debt repayment requirements, for the foreseeable
future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in non-U.S. currency exchange rates. The Company is exposed to non-U.S. exchange
rate fluctuations as the financial results of non-U.S. subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The cumulative translation effects for
subsidiaries using functional currencies other than the U.S. dollar are included
in accumulated other comprehensive income in shareholders' equity. Movements in
non-U.S. currency exchange rates may affect the Company's competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-United States based competitors. Under its current policy, the Company
does not use non-U.S. exchange derivative instruments to manage its exposure to
changes in non-U.S. currency exchange rates.
The Company's exposure to interest rate risk results from its variable rate debt
outstanding under its credit facilities. At September 30, 2000, the Company had
$20.2 million in debt outstanding at variable interest rates, which is generally
equal to the Eurodollar rate plus an applicable margin. Based on the Company's
level of variable rate debt during the first nine months of 2000, a one-point
increase in the weighted average interest rate would increase the Company's
annual interest expense by approximately $0.6 million. Under its current policy,
the Company does not use derivative instruments to manage its exposure to
changes in interest rates.
15
16
SYKES ENTERPRISES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPACT OF YEAR 2000
In prior periods, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. During September 1999, the Company completed its
remediation and testing of its systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
Sykes is not aware of any material problems resulting from Year 2000 issues,
either with its products and services, its internal systems, or those products
or services of third parties. Sykes will continue to monitor its critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any delayed Year 2000 matters that may arise are addressed
promptly.
FLUCTUATIONS IN QUARTERLY RESULTS
For the year ended December 31, 1999, quarterly revenues, as restated, as a
percentage of total annual revenues were approximately 24%, 24%, 24% and 28%,
respectively, for the first through fourth quarters of the year. The Company has
experienced and anticipates that in the future it will continue to experience
variations in quarterly revenues. The variations are due to the timing of new
contracts and renewal of existing contracts, the timing of expenses incurred to
support new business, the timing and frequency of client spending for e-commerce
and e-business activities, non-U.S. currency fluctuations, and the seasonal
pattern of technical and customer support, and distribution and fulfillment
services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be
measured at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for financial statements beginning in 2001. The Company is currently
studying the future effects of adopting this statement. However, due to our
limited use of derivative financial instruments, adoption of Statement No. 133
is not expected to have a significant effect on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. Sykes
believes its revenue recognition practices for software meet these
requirements. The Company is required to adopt the provisions of this Bulletin
in the fourth fiscal quarter of 2000 and is currently in the process of
assessing the impact of its adoption on other revenue sources. Further, while
Staff Accounting Bulletin No. 101 does not supersede the software industry
specific revenue recognition guidance, with which Sykes believes it is in
compliance, this bulletin in practice may change interpretations of software
recognition requirements.
16
17
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART II - OTHER INFORMATION
ITEM 3 - LEGAL PROCEEDINGS
Reference is made to Part I, Item 3 "Legal Proceedings" of the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 1999, filed
November 20, 2000. Since March 29, 2000, the Company has not been named as a
defendant in any action, which, to the best of the Company's knowledge, could
have a material adverse effect on the financial condition or results of
operations of the Company other than the actions described below.
A. Actions Arising under Federal Securities Laws. In February 2000,
fourteen purported class action lawsuits were filed in the Middle District of
Florida against the Company and certain of its officers alleging violations of
federal securities laws. In October 2000, the putative class action lawsuits
were consolidated before one judge in the United States District Court for the
Middle District of Florida. In September 14, 2000, that court appointed co-lead
plaintiffs and their counsel. On November 3, 2000, the lead plaintiffs filed an
amended class action complaint in the Florida consolidated action. The
Company's and the other defendant's response to the amended complaint is due on
November 30, 2000.
The complaint contains varying allegations, including that we made materially
false and misleading statements with respect to our 1999 financial statements
that were part of our filings with the SEC and our press releases during 1999
and 2000. The amended class action complaint alleges claims under Section 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of that Act.
The amended class action purports to assert claims on behalf of a class of
purchasers of Sykes common stock during 1999 and through September 18, 2000.
The amended class action complaint does not specify the amount of damages
sought.
In addition, two class action lawsuits were filed on September 20, 2000 in the
United States District Court for the Eastern District of New York. The
plaintiffs for the New York actions purport to assert claims on behalf of a
class of purchasers of Sykes common stock between February 7, 2000 and
September 18, 2000. The complaints for the New York actions contain
substantially similar allegations to those in the Florida action. The Company
will seek to transfer the New York action to the Middle District of Florida and
consolidate the New York action with the Florida consolidated action.
The Company intends to defend the actions vigorously. However, the Company
cannot predict the outcome of these lawsuits or the impact that they may have
on the Company. The Company also cannot predict whether any other suits,
claims, or investigations may arise in the future based on the same claims. The
outcome of any of these lawsuits or any future lawsuits, claims, or
investigations relating to the same subject matter may have a material adverse
impact on the Company's liquidity, financial condition, and results of
operations.
B. Kyrus.
Kyrus Corporation filed a lawsuit against Sykes concerning the license of
certain software by Sykes to Kyrus. In 1998, the Company entered into a
transaction pursuant to which Sykes granted to Kyrus a license for software
related to Sykes' former retail division and used by the retailing industry. In
exchange for the license, Sykes received preferred stock of Kyrus valued at
$10.0 million. In the suit, Kyrus asserts, in part, that the software contained
functionality problems that prevented Kyrus from successfully marketing the
software at their projected levels. Based on Kyrus' assertions, the Company was
to return up to $4.5 million of the shares of Kyrus preferred stock if Kyrus
was unable to reach certain sales volumes from the software. Kyrus' complaint
seeks a return of $4.5 million of $10.0 million in preferred stock held by the
Company and the recovery of approximately $1.6 million in charges allegedly
required to fix customer problems. The Company intends to defend the action
vigorously. The Company has tendered the defense to its insurance carrier, who
is defending the case but has reserved its rights with respect to any ultimate
claims.
C. Other Litigation. From time to time, the Company is involved in other
litigation incidental to its business. In the opinion of management, no
litigation to which the Company currently is a party is likely to have a
materially adverse effect on the Company's results of operations or financial
condition, if decided adversely to the Company.
Although the Company intends to defend these lawsuits vigorously, the Company
cannot predict the outcome of these lawsuits or the impact that these lawsuits
or any other suits, claims, or investigations relating to the same subject
matter may have on the Company's liquidity or financial condition.
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
The following documents are filed as an exhibit to this Report:
15 Letter re: unaudited interim financial information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a form 8-K, dated September 18, 2000, on September
22, 2000, reporting under Item 5 its revised earnings forecast for the
second half of 2000, changes to its strategic alliance with Perot
Systems, and a restatement of prior financial results.
17
18
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
Date: November 17, 2000 By: /s/ W. Michael Kipphut
- ----------------------- --------------------------------------------
W. Michael Kipphut
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
19
SYKES ENTERPRISES, INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
EXHIBIT INDEX
Exhibit
Number
- -------
10.26 Employment Agreement dated July 31, 2000 between James E.
Lamar and Sykes Enterprises, Incorporated.
10.27 Employment Separation Agreement dated as of September 20, 2000
between Dale W. Saville and Sykes Enterprises, Incorporated.
10.28 Employment Separation Agreement dated as of September 22, 2000
between Scott J. Bendert and Sykes Enterprises, Incorporated.
15 Letter re: unaudited interim financial information
27.1 Financial Data Schedule
19