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 June 30, 2001.
[ ] 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
incorporation or organization) Identification No.)
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 August 8, 2001, there were 40,179,879 shares of common stock outstanding.
Page 1 of 72
The Exhibit Index Appears on Page 26
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PART I
ITEM 1 - FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS' REPORT.
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
Restated
(See Note 1)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 41,883 $ 30,141
Receivables ........................................................ 97,394 135,609
Prepaid expenses and other current assets .......................... 18,036 17,679
--------- ---------
Total current assets ............................................. 157,313 183,429
Property and equipment, net .......................................... 150,956 151,842
Intangible assets, net ............................................... 7,986 8,861
Deferred charges and other assets .................................... 15,406 13,822
--------- ---------
$ 331,661 $ 357,954
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt ............................. $ 37 $ 100
Accounts payable ................................................... 17,522 34,636
Income taxes payable ............................................... 1,179 5,502
Accrued employee compensation and benefits ......................... 30,134 32,746
Other accrued expenses and current liabilities ..................... 15,048 17,481
--------- ---------
Total current liabilities ........................................ 63,920 90,465
Long-term debt ....................................................... -- 8,759
Deferred grants ...................................................... 41,129 31,758
Deferred revenue ..................................................... 28,441 31,072
Other long-term liabilities........................................... 71 8
--------- ---------
Total liabilities ................................................ 133,561 162,062
--------- ---------
Contingencies
Shareholders' equity
Preferred stock, $0.01 par value, 10,000 shares
authorized; no shares issued and outstanding ..................... -- --
Common stock, $0.01 par value, 200,000 shares authorized;
43,154 and 43,084 issued ......................................... 431 431
Additional paid-in capital ......................................... 159,992 159,696
Retained earnings .................................................. 98,480 90,430
Accumulated other comprehensive income (loss) ...................... (20,220) (14,082)
--------- ---------
238,683 236,475
Treasury stock at cost; 2,981 shares ............................... (40,583) (40,583)
--------- ---------
Total shareholders' equity ....................................... 198,100 195,892
--------- ---------
$ 331,661 $ 357,954
========= =========
See accompanying notes to condensed consolidated financial statements.
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3
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
--------- --------- --------- -----------
Restated
(See Note 1)
Revenues ........................................... $ 123,252 $ 155,798 $ 263,673 $ 318,508
--------- --------- --------- ---------
Operating expenses:
Direct salaries and related costs ................ 78,413 98,422 167,125 200,293
General and administrative ....................... 40,193 47,787 83,440 94,701
Compensation expense associated with exercise
of options ..................................... -- 7,836 -- 7,836
Restructuring and other charges .................. -- 9,640 -- 9,640
--------- --------- --------- ---------
Total operating expenses ....................... 118,606 163,685 250,565 312,470
--------- --------- --------- ---------
Income (loss) from operations ...................... 4,646 (7,887) 13,108 6,038
--------- --------- --------- ---------
Other income (expense):
Interest, net .................................... 111 (1,093) 132 (2,328)
Gain on sale of equity interest in SHPS .......... -- 84,036 -- 84,036
Other ............................................ 47 133 (334) 131
--------- --------- --------- ---------
Total other income (expense) ................... 158 83,076 (202) 81,839
--------- --------- --------- ---------
Income before provision for income taxes and
cumulative effect of change in accounting
principle ........................................ 4,804 75,189 12,906 87,877
Provision for income taxes ......................... 1,777 21,693 4,856 26,616
--------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle ............................. 3,027 53,496 8,050 61,261
Cumulative effect of change in accounting
principle, net of income taxes of $580 ........... -- -- -- (919)
--------- --------- --------- ---------
Net income ......................................... $ 3,027 $ 53,496 $ 8,050 $ 60,342
========= ========= ========= =========
Net income per basic share:
Income before cumulative effect of change in
accounting principle ........................... $ 0.08 $ 1.27 $ 0.20 $ 1.45
Cumulative effect of change in accounting
principle ...................................... -- -- -- (0.02)
--------- --------- --------- ---------
Net income per basic share ....................... $ 0.08 $ 1.27 $ 0.20 $ 1.43
========= ========= ========= =========
Total weighted average basic shares ................ 40,164 42,031 40,156 42,319
========= ========= ========= =========
Net income per diluted share:
Income before cumulative effect of change in
accounting principle ........................... $ 0.07 $ 1.27 $ 0.20 $ 1.44
Cumulative effect of change in accounting
principle ...................................... -- -- -- (0.02)
--------- --------- --------- ---------
Net income per diluted share ..................... $ 0.07 $ 1.27 $ 0.20 $ 1.42
========= ========= ========= =========
Total weighted average diluted shares .............. 40,463 42,098 40,370 42,522
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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4
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000, SIX MONTHS ENDED DECEMBER 31, 2000 AND
SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Comprehensive Treasury
(in thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
-------- ------- ---------- --------- ------------- --------- ---------
Balance at January 1, 2000 (restated) 42,734 $ 427 $ 155,023 $ 43,643 $ (5,860) $ -- $ 193,233
Issuance of common stock 302 3 2,853 -- -- -- 2,856
Purchase of treasury stock -- -- -- -- -- (16,199) (16,199)
Net income for the six months
ended June 30, 2000 (restated) -- -- -- 60,342 -- -- 60,342
Foreign currency translation
adjustment -- -- -- -- (7,895) -- (7,895)
---------
Comprehensive income (restated) 52,447
-------- ------- --------- --------- --------- --------- ---------
Balance at June 30, 2000
(restated) 43,036 430 157,876 103,985 (13,755) (16,199) 232,337
Issuance of common stock 48 1 355 -- -- -- 356
Purchase of treasury stock -- -- -- -- -- (24,384) (24,384)
Tax-effect of non-qualified
exercise of stock options -- -- 1,465 -- -- -- 1,465
Net loss for the six months
ended December 31, 2000 -- -- -- (13,555) -- -- (13,555)
Foreign currency translation
adjustment -- -- -- -- (327) -- (327)
---------
Comprehensive loss (13,882)
-------- ------- --------- --------- --------- --------- ---------
Balance at December 31, 2000
(restated) 43,084 431 159,696 90,430 (14,082) (40,583) 195,892
Issuance of common stock 70 -- 296 -- -- -- 296
Net income for the six months
ended June 30, 2001 -- -- -- 8,050 -- -- 8,050
Foreign currency translation
adjustment -- -- -- -- (6,138) -- (6,138)
---------
Comprehensive income
1,912
-------- ------- --------- --------- --------- --------- ---------
Balance at June 30, 2001 43,154 $ 431 $ 159,992 $ 98,480 $ (20,220) $ (40,583) $ 198,100
======== ======= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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5
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
(in thousands)
2001 2000
---------- ------------
Restated
(See Note 1)
Cash flows from operating activities:
Net income ................................................... $ 8,050 $ 60,342
Depreciation and amortization ................................ 18,285 19,327
Cumulative effect of accounting change, net of tax ........... -- 919
Gain on sale of equity interest in SHPS ...................... -- (84,036)
Deferred income tax (benefit) provision ...................... (525) 125
Loss on disposal of property and equipment ................... 271 --
Changes in assets and liabilities:
Receivables ................................................ 31,844 (19,819)
Prepaid expenses and other current assets .................. (724) (2,902)
Deferred charges and other assets .......................... (374) (200)
Accounts payable ........................................... (14,886) (5,724)
Income taxes payable ....................................... (1,034) 20,727
Accrued employee compensation and benefits ................. (1,534) 6,857
Customer deposits, net of restricted cash .................. -- 2,653
Other accrued expenses and current liabilities ............. (2,820) 9,430
Deferred revenue ........................................... (2,384) 23,605
Other long-term liabilities ................................ (751) (1,385)
---------- ----------
Net cash provided by operating activities .................. 33,418 29,919
---------- ----------
Cash flows from investing activities:
Capital expenditures ......................................... (19,925) (34,055)
Proceeds from sale of property and equipment ................. 19 --
Proceeds from sale of equity interest in SHPS ................ -- 159,776
---------- ----------
Net cash provided by (used for) investing activities ...... (19,906) 125,721
---------- ----------
Cash flows from financing activities:
Paydowns under revolving line of credit agreements ........... (13,347) (140,500)
Borrowings under revolving line of credit agreements ......... 13,336 68,236
Payments of long-term debt ................................... (8,352) (1,088)
Borrowings under long-term debt .............................. -- 387
Proceeds from issuance of stock .............................. 296 2,856
Purchase of treasury stock ................................... -- (16,199)
Proceeds from grants ......................................... 9,071 4,020
---------- ----------
Net cash provided by (used for) financing activities ...... 1,004 (82,288)
---------- ----------
Effect of exchange rates on cash ................................ (2,774) (7,895)
---------- ----------
Net increase in cash and cash equivalents ....................... 11,742 65,457
Cash and cash equivalents - beginning ........................... 30,141 31,001
---------- ----------
Cash and cash equivalents - ending .............................. $ 41,883 $ 96,458
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ............................................... $ 584 $ 2,127
Income Taxes ........................................... $ 2,859 $ 8,565
See accompanying notes to condensed consolidated financial statements.
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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries ("Sykes" or the
"Company") provides outsourced customer management 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, project management, business process redesign, change management,
knowledge management, education, training and web development. Sykes' Business
Services group provides customer care outsourcing services with emphasis on
technical support and customer service. These services are delivered through
multiple communication channels encompassing phone, e-mail, web and chat. Sykes'
services are provided to customers on a worldwide basis primarily within the
technology, communications and financial services markets.
NOTE 1 - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
After the Company filed its Annual Report on Form 10-K for the year ended
December 31, 2000 with the United States Securities and Exchange Commission
("SEC"), the Company determined that the accounting for the recognition of cash
grants received in excess of building costs for the development of new technical
and customer support centers required revision, as explained below.
During the fourth quarter of 2000, the Company adopted retroactive to January 1,
2000, Staff Accounting Bulletin No. 101, " Revenue Recognition in Financial
Statements" ("SAB 101"), which resulted in a cumulative effect of change in
accounting principle. The cumulative effect of the change related to prior years
resulted in a charge to income of $2.1 million (net of income taxes of $1.3
million), or $0.05 per diluted share, which was deducted from income for the
year ended December 31, 2000. In adopting SAB 101, the Company had modified its
accounting treatment for the recognition of revenue as it related to, among
other things, the accounting for cash grants received in excess of building
costs for the development of new technical and customer support centers which
represented approximately $1.2 million (net of income taxes of $0.7 million) of
the cumulative effect of the $2.1 million change, or $0.03 per diluted share.
Prior to the adoption of SAB 101, the Company recognized the excess of cash
grants received over the costs of construction of the related facility ("excess
cash grants") as a reduction of general and administrative costs commencing on
the date the funds were placed in escrow and construction of the facility
began. In connection with the adoption of SAB 101, the Company changed its
method of accounting for excess cash grants to delay their recognition until
the funds were released from escrow and construction of the facility was
complete, at which time they were recognized as a reduction of salaries and
other direct costs related to training of personnel at the facility involved.
Subsequent to the issuance of its consolidated financial statements for the year
ended December 31, 2000, the Company determined that the excess cash grants
should not be offset against direct salaries and related costs to the extent
training costs were incurred and recognized at the time the funds were released
from escrow and construction of the facility was complete. Instead the excess
cash grants should have been deferred and recognized as a reduction of
depreciation expense over the weighted average useful life of the equipment
utilized at a new facility (which generally approximates five years) with the
amortization beginning when construction of the facility is complete and the
facility is occupied.
Accordingly, the Company reversed the portion of the cumulative effect of change
in accounting principle related to the excess cash grants of $1.2 million (net
of income taxes of $0.7 million), or $0.03 per diluted share, previously
recorded by the Company as of January 1, 2000. As a result, the accompanying
condensed consolidated financial statements for the six months ended June 30,
2000 and the condensed consolidated balance sheet as of December 31, 2000 have
been restated from the amounts previously reported.
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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 1 - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the significant effects of the restatement is as follows:
Condensed Consolidated Statement of Income: AS
SIX MONTHS ENDED JUNE 30, 2000: PREVIOUSLY AS
In thousands (except per share amounts) REPORTED RESTATED
---------- ----------
Revenues ......................................... $ 318,508 $ 318,508
Operating expenses ............................... (312,470) (312,470)
Income from operations ........................... $ 6,038 $ 6,038
Income before cumulative effect of change in
accounting principle ........................... $ 61,261 $ 61,261
Cumulative effect of change in
accounting principle ........................... $ (2,068) $ (919)
Net income ....................................... $ 59,193 $ 60,342
Net income per basic share ....................... $ 1.40 $ 1.43
Net income per diluted share ..................... $ 1.39 $ 1.42
Condensed Consolidated Balance Sheet Data:
AS OF DECEMBER 31, 2000:
In thousands
Deferred charges and other assets ................ $ 13,212 $ 13,822
Total assets ..................................... $ 357,344 $ 357,954
Deferred grants .................................. $ 30,143 $ 31,758
Retained earnings ................................ $ 91,435 $ 90,430
Shareholders' equity ............................. $ 196,897 $ 195,892
NOTE 2 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("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 only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for any future
quarters or the year ending December 31, 2001. For further information, refer to
the restated consolidated financial statements and notes thereto, included in
the Company's Form 10-K/A for the year ended December 31, 2000 as filed with the
SEC.
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8
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 2 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS (continued)
ACCOUNTING CHANGE FOR REVENUE RECOGNITION - During the fourth quarter of 2000,
the Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. Based on criteria established by SAB 101, adopted retroactive to January 1,
2000, the Company modified its accounting treatment for the recognition of
revenue as it related to contract services. Revenues, in certain limited
situations, that were recognized as services were performed and as the related
fees became collectible under agreements between the Company and its customers
are deferred until either a final contract or purchase order has been fully
executed.
The cumulative effect of the change on prior years resulted in a charge to
income of $0.9 million (net of income taxes of $0.6 million), or $0.02 per
diluted share, which has been deducted in the determination of net income for
the six months ended June 30, 2000. The effect of this change for the six months
ended June 30, 2000 was to increase income before cumulative effect of the
change in accounting principle by $0.9 million or $0.02 per diluted share.
The cumulative effect adjustment of $0.9 million (net of income taxes of $0.6
million) as of January 1, 2000 was recognized in income during the three-month
period ended in March 31, 2000.
DEFERRED GRANTS - Recognition of income associated with grants of land and the
acquisition of property, buildings and equipment is deferred until after the
completion and occupancy of the building and title has passed to the Company and
the funds have been released from escrow. The deferred amounts for both land and
building are amortized and recognized as a reduction of depreciation expense
included within general and administrative costs over the corresponding useful
lives of the related assets. Any excess amounts over the cost of the building
are allocated to the cost of equipment and, only after the grants are released
from escrow, recognized as a reduction of depreciation expense over the weighted
average useful life of the related equipment, which approximates five years.
Amortization of the deferred grants that is included in income for the three
months ended June 30, 2001 and 2000 was $0.1 million and $0.5 million,
respectively, and for the six months ended June 30, 2001 and 2000 was $0.7
million and $1.1 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective January
1, 2001, and the adoption of SFAS No. 133 had no impact on the financial
position, results of operations, or cash flows of the Company.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which is effective for transfers after March 31, 2001. This
statement is effective for disclosures about securitizations and collateral
transactions and for recognition and reclassification of collateral for fiscal
years ending after December 15, 2000. SFAS No. 140 replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". It revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the provisions of SFAS No. 125 without
reconsideration. The adoption of SFAS No. 140 had no impact on the financial
position, results of operations, or cash flows of the Company.
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9
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 2 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS No. 142, which is
effective for the Company on January 1, 2002. The Company has not evaluated the
effect, if any, that the adoption of SFAS No. 142 will have on the Company's
consolidated financial statements.
NOTE 3 - CONTINGENCIES
The Company is aware of sixteen purported class action lawsuits that have been
filed against Sykes and certain of its officers alleging violations of federal
securities laws. All of the actions have been consolidated into one case which
is pending in the United States District Court for the Middle District of
Florida. The plaintiffs purport to assert claims on behalf of a class of
purchasers of Sykes' common stock during the period from July 27, 1998 through
September 18, 2000. The consolidated action claims 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 consolidated action alleges that during
2000, 1999, and 1998, the Company and certain of its officers made materially
false statements concerning the Company's financial condition and its future
prospects. The consolidated complaint also claims that certain of the Company's
quarterly financial statements during 1999 and 1998 were not prepared in
accordance with generally accepted accounting principles. The consolidated
action seeks compensatory and other damages, and costs and expenses associated
with the litigation. The Company believes these claims are without merit and
intends to defend the actions vigorously.
The Company is also aware of a lawsuit filed by Kyrus that asserts functionality
issues associated with software that Kyrus had licensed from the Company. At the
time of the software license, the Company and Kyrus entered into an agreement
which provided for a return of a portion of the convertible preferred stock
transferred to the Company in consideration of the license in the event that
revenues generated by Kyrus from the software did not reach agreed upon levels.
In this lawsuit, Kyrus claims it incurred significant expenses due to the
failure of the software to function properly and is entitled to reimbursement of
these expenses. Kyrus also claims that revenues from the software did not meet
the minimum levels agreed upon and that Kyrus is therefore entitled to a return
of the convertible preferred stock having a fair value of $4.5 million at the
time Kyrus licensed the software from the Company. The Company has not recorded
the convertible preferred stock subject to the contingency in the accompanying
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.
Therefore, in the event the Company is required to return the preferred stock to
Kyrus, the return will not impact the Company's financial position or results of
operations. This litigation is currently pending in the Court of Common Pleas
for Greenville County, South Carolina. The Company intends to vigorously defend
this lawsuit.
Although the Company intends to vigorously defend these lawsuits, it cannot
predict their outcome or the impact 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 financial condition
and results of operations.
The Company from time to time is involved in other 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 financial position or results of operations.
9
10
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 3 - CONTINGENCIES (continued)
A lease agreement, relating to the Company's customer support center in Ireland,
contains a cancellation clause which requires the Company, in the event of
cancellation, to restore the facility to its original state at an estimated cost
of $285 thousand as of June 30, 2001 and pay a cancellation fee of $378
thousand, which approximates the annual rental payments under the lease
agreement. In addition, under certain circumstances (including cancellation of
the lease and cessation of the support center's operations in the facility), the
Company is contingently liable until June 16, 2005 to repay any proceeds
received in association with the facility's grant agreement. As of June 30,
2001, the grant proceeds subject to repayment totaled $1.2 million. As of June
30, 2001, the Company had no plans to cancel this lease agreement.
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Sykes presents data in the Condensed Consolidated Statements of Changes in
Shareholders' Equity in accordance with SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes rules for the reporting of comprehensive
income and its components. Total comprehensive income was $1.2 million and $50.8
million for the three months ended June 30, 2001 and 2000, respectively, and
$1.9 million and $52.5 million for the six months ended June 30, 2001 and 2000,
respectively.
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 5 - RESTRUCTURING AND OTHER CHARGES
The Company recorded restructuring and other charges during the second and
fourth quarters of 2000 totaling $30.5 million. Related to the second quarter
restructuring and other charges totaling $9.6 million, the Company consolidated
several European and one U.S. distribution and fulfillment center and closed or
consolidated six professional services offices. Included in the second quarter
2000 restructuring and other charges is a $3.5 million lease termination payment
related to the corporate aircraft. As a result of the second quarter
restructuring, the Company reduced the number of employees by 157 during 2000
and satisfied the remaining lease obligations related to the closed facilities
during 2001.
The Company also announced, after a comprehensive review of operations, its
decision to exit certain non-core lower margin businesses to reduce costs,
improve operating efficiencies and focus on its core competencies of technical
support, customer service and consulting solutions. As a result, the Company
recorded $20.9 million in restructuring and other charges during the fourth
quarter of 2000 related to the closure of its U.S. fulfillment and distribution
operations, the consolidation of its Tampa, Florida technical support center and
the exit of its worldwide localization operations. Included in the fourth
quarter 2000 restructuring and other charges is a $2.4 million severance payment
related to the employment contract of the Company's former President. In
connection with the fourth quarter restructuring, the Company reduced the number
of employees by 245 during the first half of 2001 and expects the remaining
lease obligations related to the closed facilities to be completed by December
2001.
10
11
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 5 - RESTRUCTURING AND OTHER CHARGES (continued)
The major components of restructuring and other charges established during the
second and fourth quarters of 2000 are as follows (in thousands):
Restructuring Other Total
------------- ------- -------
Severance and related costs ........... $ 1,614 $ 2,360 $ 3,974
Lease termination costs ............... 1,765 3,639 5,404
Write-down of property and equipment .. 14,088 103 14,191
Write-down of intangible assets ....... 6,086 -- 6,086
Other ................................. 813 -- 813
------- ------- -------
$24,366 $ 6,102 $30,468
======= ======= =======
A summary of the restructuring and other charges activity for the three and six
months ended June 30, 2001 (none for the comparable period in 2000), is as
follows (in thousands):
Restructuring Other Total
------------- ------- -------
Three months ended June 30, 2001:
Balance remaining as of April 1, 2001 .......... $ 2,070 $ 2,239 $ 4,309
Reduction in workforce cash outflows ............ (220) (550) (770)
Lease termination cash payments ................ (110) -- (110)
Other cash outflows ............................ (822) -- (822)
------- ------- -------
Balance remaining at June 30, 2001 ............. $ 918 $ 1,689 $ 2,607
======= ======= =======
Six months ended June 30, 2001:
Balance remaining as of January 1, 2001 ........ $ 2,708 $ 2,360 $ 5,068
Reduction in workforce cash outflows ........... (548) (671) (1,219)
Lease termination cash payments ................ (311) -- (311)
Other cash outflows ............................ (931) -- (931)
------- ------- -------
Balance remaining at June 30, 2001 ............. $ 918 $ 1,689 $ 2,607
======= ======= =======
NOTE 6 - LONG TERM DEBT
Long-term debt consists of the following (in thousands):
June 30, 2001 Dec. 31, 2000
------------- -------------
Syndicated credit facility, $100.0 million maximum, due February
2003, interest payable quarterly, the facility is guaranteed by
a pledge of 66% of common stock of certain subsidiaries .................. $ -- $ --
Syndicated multi-currency credit facility, $15.0 million maximum,
due February 2002, interest payable in accordance with the terms of the
individual promissory notes outstanding; the facility is guaranteed by
a pledge of 66% of common stock of certain subsidiaries .................. -- 8,759
Notes payable and capital leases, principal and interest payable
in monthly installments through June 2002, interest at varying
rates up to prime plus 1 percent, collateralized by certain equipment .... 37 100
------ -------
Total debt ............................................................... 37 8,859
Less current portion ..................................................... 37 100
------ -------
Long-term debt ........................................................... $ -- $ 8,759
====== =======
Principal maturities of total debt as of June 30, 2001 are as follows (in
thousands):
Total
YEAR Amount
------
2001.......... $ 37
-------
$ 37
=======
11
12
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 6 - LONG TERM DEBT (continued)
On June 22, 2001, 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 is $100.0 million (previously $150.0
million). The $100.0 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
("Multi-Currency 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 0.50% or (b) a Euro
rate plus an applicable margin of up to 2.25%. 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 0.25% 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 0.50% 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
Facility and Multi-Currency Facility. In addition, a commitment fee up to 0.40%
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. 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 and Multi-Currency Facility, the
Company is required to maintain certain financial ratios and other financial and
non-financial conditions. The Amended Credit Facility and Multi-Currency
Facility prohibit, without the consent of the syndicated lenders, the Company
from incurring additional indebtedness, limits certain investments, advances or
loans and restricts substantial asset sales, acquisitions, capital expenditures,
stock repurchases and cash dividends. At June 30, 2001, the Company was in
compliance with all loan requirements.
NOTE 7 - INCOME TAXES
The Company's effective tax rate was 37.6% and 30.3% for the six months ended
June 30, 2001 and 2000, respectively. The effective tax rate differs from the
statutory federal income tax rate primarily due to the effects of foreign, state
and local income taxes, foreign income not subject to federal and state income
taxes, non-deductible intangibles and other permanent differences.
NOTE 8 - 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 number of shares used in the earnings per share computation are as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
Basic:
Weighted average common shares outstanding ................. 40,164 42,031 40,156 42,319
Diluted:
Dilutive effect of stock options ............................. 299 67 214 203
-------- -------- -------- --------
Total weighted average diluted shares outstanding ....... 40,463 42,098 40,370 42,522
======== ======== ======== ========
12
13
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 9 - STOCK OPTIONS
The Company's 2001 Equity Incentive Plan (the "2001 Plan") was adopted by the
Company's Board of Directors on March 15, 2001 and approved by the Company's
shareholders on April 26, 2001. The 2001 Plan permits the granting of options,
stock appreciation rights and other stock-based awards to purchase up to 7.0
million shares of the Company's common stock to eligible employees and certain
non-employees, who provide services to the Company, at not less than the fair
value at the time the options, stock appreciation rights and other stock-based
awards are granted. The term of the options, stock appreciation rights and other
stock-based awards granted under the 2001 Plan cannot exceed a period of ten
years from the date of grant. No stock appreciation rights or other stock-based
awards granted under the 2001 Plan are outstanding as of June 30, 2001.
Upon adoption of the 2001 Plan, the Company terminated the 1996 Employee Stock
Option Plan, the 1997 Management Incentive Stock Option Plan and the 2000 Stock
Option Plan and the related options available for future grant under these plans
of approximately 0.7 million shares, 2.4 million shares and 2.9 million shares,
respectively. The options previously granted under these plans are not affected
and continue to be governed by their respective plans.
Transactions related to options granted under the 2001 Plan are summarized as
follows:
Weighted
Average
Shares Exercise
(in thousands) Price
Outstanding at January 1, 2001 .................. -- $ --
Granted ....................................... 55 $ 8.94
Exercised ..................................... -- $ --
Expired or terminated ......................... -- $ --
---------
Outstanding at June 30, 2001 ..................... 55 $ 8.94
=========
Exercisable: None
Options available for future grant ............... 6,945
=========
The following table further summarizes information about the 2001 Plan at June
30, 2001:
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range Of At Remaining Exercise At Exercise
Exercise Prices June 30, 2001 Life Price June 30, 2001 Price
-------------------- ---------------- ----------- --------- -------------- --------
(in thousands) (in thousands)
$ 5.75 10 9.8 $ 5.75 -- $ --
$ 5.98 5 9.9 $ 5.98 -- $ --
$10.11 40 9.1 $ 10.11 -- $ --
-------- ---------
Total 55 9.1 $ 8.94 -- $ --
======== =========
13
14
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 10 - SEGMENT REPORTING AND MAJOR CLIENT
The Company has two reportable segments entitled Business Services and Business
Solutions. The Business Services group is comprised of the Company's technical
and customer support and distribution and fulfillment businesses. The Business
Solutions group provides professional services in e-commerce, including IT
staffing, and customer relationship management (CRM) with a focus on business
strategy development, project management, business process redesign, change
management, knowledge management, education, training and web development. There
has been no change in the basis of the Company's segmentation or in the
measurement of segment profit as compared with the Annual Report on Form 10-K/A
for the year ended December 31, 2000.
Business Services' revenue includes $12.9 million or 10.5% of consolidated
revenues and $27.1 million or 10.3% of consolidated revenues for the three and
six months ended June 30, 2001, respectively, from a major provider of
communications services. This compared to $4.8 million or 3.1% of consolidated
revenues and $5.0 million or 1.6% of consolidated revenues for the three and six
months ended June 30, 2000, respectively.
14
15
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Unaudited)
NOTE 10 - SEGMENT REPORTING AND MAJOR CLIENT (continued)
Information about the Company's reportable segments for the three months and six
months ended June 30, 2001 compared to the corresponding prior year periods is
as follows (in thousands):
Business Business Consolidated
Three Months Ended June 30, 2001: Services Solutions Other Total
-------- --------- -------- ------------
Revenue ...................................... $ 113,380 $ 9,872 $ -- $ 123,252
Depreciation and amortization................. 9,259 102 -- 9,361
Income (loss) from operations................. $ 4,874 $ (228) $ -- $ 4,646
Other income (expense)........................ 158 158
Provision for income taxes.................... (1,777) (1,777)
---------
Net income.................................... $ 3,027
=========
Three Months Ended June 30, 2000:
Revenue ...................................... $ 140,978(1) $ 14,820(2) $ -- $ 155,798
Depreciation and amortization................. 9,716 228 -- 9,944
Income from operations before compensation
expense associated with exercise of
options and restructuring and
other charges............................... $ 8,762(1) $ 827(2) $ -- $ 9,589
Compensation expense associated with
exercise of options......................... (7,836) (7,836)
Restructuring and other charges............... (9,640) (9,640)
Other income (expense)........................ 83,076 83,076
Provision for income taxes.................... (21,693) (21,693)
---------
Net income.................................... $ 53,496
=========
Six Months Ended June 30, 2001:
Revenue ...................................... $ 243,773 $ 19,900 $ -- $ 263,673
Depreciation and amortization................. 18,090 195 -- 18,285
Income (loss) from operations................. $ 14,136 $ (1,028) $ -- $ 13,108
Other income (expense)........................ (202) (202)
Provision for income taxes.................... (4,856) (4,856)
---------
Net income.................................... $ 8,050
=========
Six Months Ended June 30, 2000 (restated):
Revenue ...................................... $ 290,353(1) $ 28,155(2) $ -- $ 318,508
Depreciation and amortization................. 18,891 436 -- 19,327
Income from operations before compensation
expense associated with exercise of
options and restructuring and other
charges..................................... $ 22,157(1) $ 1,357(2) $ -- $ 23,514
Compensation expense associated with
exercise of options......................... (7,836) (7,836)
Restructuring and other charges............... (9,640) (9,640)
Other income (expense)........................ 81,839 81,839
Provision for income taxes.................... (26,616) (26,616)
Cumulative effect of change in accounting
principle.................................. (919) (919)
---------
Net income.................................... $ 60,342
=========
(1) For the three and six months ended June 30, 2000, Business Services' revenue
includes $25.1 million and $51.7 million, respectively, from SHPS, Incorporated,
a previously wholly owned subsidiary of the Company, which was sold in June
2000, and U.S. fulfillment and distribution, a business in which the Company
exited in connection with the fourth quarter 2000 restructuring. The Company
continues to operate its European fulfillment and distribution business.
Additionally, income from operations includes $0.6 million and $0.8 million for
the three and six months ended June 30, 2000, respectively, from SHPS and U.S.
fulfillment and distribution.
(2) For the three and six months ended June 30, 2000, Business Solutions'
revenue includes $2.7 million and $5.2 million, respectively, from the Company's
localization operations, a business in which the Company exited in connection
with the fourth quarter 2000 restructuring. Additionally, income from operations
includes a loss of $0.1 million and $0.1 million for the three and six months
ended June 30, 2000, respectively, from localization.
15
16
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of Sykes
Enterprises, Incorporated and subsidiaries (the "Company") as of June 30, 2001,
the related condensed consolidated statements of operations for the three- and
six-month periods ended June 30, 2001, and of changes in shareholders' equity
and cash flows for the six-month period ended June 30, 2001. These financial
statements are the responsibility of the Company's management.
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 of 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 of America, the
objective of which is the expression of 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 such condensed consolidated financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
July 30, 2001
16
17
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
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.
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes included elsewhere in this report and in the
Sykes Enterprises, Incorporated (the "Company") Annual Report on Form 10-K/A for
the year ended December 31, 2000 filed with the Securities and Exchange
Commission. Subsequent to the issuance of its consolidated financial statements
for the year ended December 31, 2000, the Company revised its method of
accounting for excess cash grants. As a result, the condensed consolidated
statement of income for the six months ended June 30, 2000 and the condensed
consolidated balance sheet as of December 31, 2000 have been restated from the
amounts previously reported. The effects of the restatement are presented in
Note 1 to the condensed consolidated financial statements and have been
reflected herein.
Management's discussion and analysis may contain forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
that are based on current expectations, estimates, forecasts, and projections
about the Company, management's beliefs, and assumptions made by management. In
addition, other written or oral statements, which constitute forward-looking
statements, may be made from time to time by or on behalf of Sykes. 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. These statements are not guarantees of future performance and are
subject to a number of risks and uncertainties, including those discussed below
and elsewhere in this report. The Company's actual results may differ materially
from what is expressed or forecasted in such forward-looking statements. All
forward-looking statements are made as of the date hereof, and Sykes undertakes
no obligation to update any such forward-looking statements, whether as a result
of new information, future events or otherwise.
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: the marketplace's continued receptivity to Sykes' terms and elements
of services offered under Sykes' standardized contract for future bundled
service offerings; Sykes' ability to continue the growth of its support service
revenues through additional technical and customer support centers; Sykes'
ability to leverage its customer relationship practice; Sykes' ability to
further penetrate into vertically integrated markets; Sykes' ability to expand
revenues within the global markets; Sykes' ability to continue to establish a
competitive advantage through sophisticated technological capabilities;
uncertainties relating to pending litigation; Sykes' dependence on key clients;
Sykes' ability to attract and retain experienced personnel; potential
difficulties in continuing to expand and manage growth; Sykes' ability to grow
through selective acquisitions and mergers; rapid technological change; Sykes'
reliance on technology and computer systems; Sykes' dependence on trend toward
outsourcing; risk of emergency interruption of technical and customer support
center operations; risks associated with international operations and expansion;
existence of substantial competition; dependence on senior management; control
by principal shareholder and anti-takeover considerations; volatility of stock
price may result in loss of investment; and the risk factors listed from time to
time in Sykes' registration statements and reports as filed with the Securities
Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenues
For the three months ended June 30, 2001, the Company recorded consolidated
revenues of $123.3 million, a decrease of $32.5 million or 20.9%, from $155.8
million of consolidated revenues for the comparable period during 2000.
Exclusive of SHPS, Incorporated ("SHPS"), in which 93.5% of the Company's
ownership interest was sold on June 30, 2000, and exclusive of U.S. fulfillment
and distribution and the Company's localization operations, from which the
Company exited in connection with the fourth quarter 2000 restructuring,
revenues decreased $4.7 million or 3.7% for the three months ended June 30,
2001, from $128.0 million for the comparable period during 2000. This decrease
in revenue was the result of a $2.5 million or 2.2% decrease in Business
Services' revenues, exclusive of SHPS and U.S. fulfillment and distribution
operations, and a decrease of $2.2 million or 18.5% from Business Solutions'
revenues, exclusive of the Company's localization operations.
17
18
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Revenues (continued)
The decrease in Business Services' revenues for the three months ended June 30,
2001 was primarily attributable to a $3.5 million one-time licensing fee
recorded during the comparable period in 2000 and a decrease in the Company's
European fulfillment and distribution services revenues. The decrease in
European fulfillment and distribution services revenue for the three months
ended June 30, 2001 was primarily attributable to a reduction in business from
several customers, including a dot.com client, who was undergoing financial
restructuring.
The decrease in Business Solutions' revenues for the three months ended June 30,
2001, was primarily due to competitive pricing pressures and a decline in the
demand for professional services, including IT staffing, from clients who have
been affected by the economic slowdown and have reacted by delaying IT projects.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $20.0 million or 20.3% to $78.4
million for the three months ended June 30, 2001, from $98.4 million in 2000. As
a percentage of revenues (excluding the $3.5 million one-time licensing fee in
2000), direct salaries and related costs decreased to 63.6% in 2001 from 64.6%
for the comparable period in 2000. The decrease in the dollar amount of direct
salaries and related costs was primarily attributable to a $19.1 million
decrease in direct salaries and related costs associated with SHPS, U.S.
fulfillment and distribution and the Company's localization operations. As a
percentage of revenues, direct salaries and related costs, exclusive of SHPS,
U.S. fulfillment and distribution, the Company's localization operations and the
$3.5 million one-time licensing fee in 2000, remained relatively flat at 63.6%
in 2001 and 63.7% for the comparable period in 2000.
General and Administrative
General and administrative expenses decreased $7.6 million or 15.9% to $40.2
million for the three months ended June 30, 2001, from $47.8 million in 2000. As
a percentage of revenues (excluding the $3.5 million one-time licensing fee in
2000), general and administrative expenses increased to 32.6% in 2001 from 31.4%
for the comparable period in 2000. The decrease in the dollar amount of general
and administrative expenses was primarily attributable to an $8.1 million
decrease in general and administrative expenses associated with SHPS, U.S.
fulfillment and distribution and the Company's localization operations. This
decrease was offset by a $0.5 million increase in legal and professional fees, a
$0.5 million increase in consulting fees and a $1.2 million increase in
depreciation and amortization associated with facility and capital equipment
expenditures incurred in connection with both technology infrastructure and the
expansion of the Company's technical and customer support centers. As a
percentage of revenues, general and administrative expenses, exclusive of SHPS,
U.S. fulfillment and distribution, the Company's localization operations and the
$3.5 million one-time licensing fee in 2000, increased to 32.6% in 2001 from
31.8% for the comparable period in 2000.
Compensation expense associated with the exercise of options was $7.8 million
for the three months ended June 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
three months ended June 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.
18
19
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Other Income and Expense
Interest and other income was $0.2 million for the three months ended June 30,
2001, compared to interest and other income of $83.1 million for the comparable
2000 period, inclusive of the gain on sale of SHPS of $84.0 million. The
decrease in interest and other income was attributable to a decrease of $1.2
million in interest expense associated with a decrease in the Company's average
outstanding debt position. The Company's average debt balance for the second
quarter of 2001 was $0.1 million compared to $89.2 million for the second
quarter of 2000. 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 approximately 3.0
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).
Provision for Income Taxes
The provision for income taxes decreased $19.9 million to $1.8 million for the
three months ended June 30, 2001 from $21.7 million for the comparable period in
2000. The decrease in the provision for income taxes was primarily attributable
to the decrease in income for the three months ended June 30, 2001, as the
comparable period in 2000 included the gain on sale of SHPS. The effective tax
rate was 37.0% for the three months ended June 30, 2001 and 28.9% for the
comparable 2000 period. The effective tax rate differs from the statutory
federal income tax rate primarily due to the effects of foreign, state and local
income taxes, foreign income not subject to federal and state income taxes,
non-deductible intangibles and other permanent differences.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 (AS
RESTATED)
Revenues
For the six months ended June 30, 2001, the Company recorded consolidated
revenues of $263.7 million, a decrease of $54.8 million or 17.2%, from $318.5
million of consolidated revenues for the comparable period during 2000.
Exclusive of SHPS, in which 93.5% of the Company's ownership interest was sold
on June 30, 2000, and exclusive of U.S. fulfillment and distribution and the
Company's localization operations, from which the Company exited in connection
with the fourth quarter 2000 restructuring, revenues increased $1.4 million or
1.0% for the six months ended June 30, 2001 to $263.0 million, from $261.6
million for the comparable period during 2000. This increase in revenue was the
result of a $4.4 million or 1.8% increase in Business Services' revenues,
exclusive of SHPS and U.S. fulfillment and distribution operations, offset by a
decrease of $3.1 million or 13.2% from Business Solutions' revenues, exclusive
of the Company's localization operations.
The increase in Business Services' revenues for the six months ended June 30,
2001 was primarily attributable to an increase in new and expanded contracts for
technical and customer support services, highlighted by a further
diversification into the communications market, partially offset by a decrease
in the Company's European fulfillment and distribution services revenues and a
$3.5 million one-time licensing fee recorded during the comparable period in
2000. The decrease in European fulfillment and distribution services revenue for
the six months ended June 30, 2001 was primarily attributable to a reduction in
business from several customers, including a dot.com client, who was undergoing
financial restructuring.
The decrease in Business Solutions' revenues for the six months ended June 30,
2001, was primarily due to competitive pricing pressures and a decline in the
demand for professional services, including IT staffing, from clients who have
been affected by the economic slowdown and have reacted by delaying IT projects.
19
20
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Direct Salaries and Related Costs
Direct salaries and related costs decreased $33.2 million or 16.6% to $167.1
million for the six months ended June 30, 2001, from $200.3 million in 2000. As
a percentage of revenues, (excluding the $3.5 million one-time licensing fee in
2000) direct salaries and related costs decreased to 63.4% in 2001 from 63.6%
for the comparable period in 2000. The decrease in the dollar amount of direct
salaries and related costs was primarily attributable to a $39.3 million
decrease in direct salaries and related costs associated with SHPS, U.S.
fulfillment and distribution and the Company's localization operations and a
$2.0 million decrease in direct material costs associated primarily with the
European fulfillment and distribution services. This decrease was partially
offset by a $7.8 million increase in salaries and benefits due to higher direct
labor and benefit costs to support additional technical and customer support
centers and associated training costs, fluctuations in client forecasting as a
result of market uncertainties and shifts in client mix. As a percentage of
revenues, direct salaries and related costs, exclusive of SHPS, U.S. fulfillment
and distribution, the Company's localization operations, and the $3.5 million
one-time licensing fee in 2000 increased to 63.4% in 2001 from 62.3% for the
comparable period in 2000.
General and Administrative
General and administrative expenses decreased $11.3 million or 11.9% to $83.4
million for the six months ended June 30, 2001, from $94.7 million in 2000. As a
percentage of revenues (excluding the $3.5 million one-time licensing fee in
2000), general and administrative expenses increased to 31.6% in 2001 from 30.1%
for the comparable period in 2000. The decrease in the dollar amount of general
and administrative expenses was primarily attributable to a $16.3 million
decrease in general and administrative expenses associated with SHPS, U.S.
fulfillment and distribution and the Company's localization operations. This
decrease was offset by a $1.4 million increase in legal and professional fees, a
$1.0 million increase in consulting fees and a $3.4 million increase in
depreciation and amortization associated with facility and capital equipment
expenditures incurred in connection with both technology infrastructure and the
expansion of the Company's technical and customer support centers. As a
percentage of revenues, general and administrative expenses, exclusive of SHPS,
U.S. fulfillment and distribution, the Company's localization operations and the
$3.5 million one-time licensing fee in 2000, increased to 31.6% in 2001 from
30.2% for the comparable period in 2000.
Other Income and Expense
Interest and other expense was $0.2 million during the six months ended June 30,
2001, compared to $2.2 million during the comparable 2000 period, exclusive of
the gain on sale of SHPS of $84.0 million. This decrease was attributable to a
decrease of $2.5 million in interest expense associated with a decrease in the
Company's average outstanding debt position. The Company's average debt balance
for the first six months of 2001 was $0.2 million compared to $83.8 million for
the first six months of 2000. 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
approximately 3.0 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).
20
21
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Provision for Income Taxes
The provision for income taxes decreased $21.7 million to $4.9 million for the
six months ended June 30, 2001 from $26.6 million for the comparable period in
2000. The decrease in the provision for income taxes was primarily attributable
to the decrease in income for the six months ended June 30, 2001, as the
comparable period in 2000 included the gain on sale of SHPS. The effective tax
rate was 37.6% for the six months ended June 30, 2001 and 30.3% for the
comparable 2000 period. The effective tax rate differs from the statutory
federal income tax rate primarily due to the effects of foreign, state and local
income taxes, foreign income not subject to federal and state income taxes,
non-deductible intangibles and other permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows generated from
operations and from 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 and for working capital and other general corporate purposes. In
future periods, the Company intends similar uses of any such funds, including
possible acquisitions and the repurchase of its common stock in the open market.
In 2001, the Company generated $33.4 million in cash from operating activities
and $9.1 million in cash from grant proceeds which were used to invest $19.9
million in capital expenditures, pay down $8.4 million in borrowings under the
Company's credit facilities and increase available cash $11.7 million.
Net cash flows provided by operating activities for the six months ended June
30, 2001 was $33.4 million compared to $29.9 million for the comparable period
in 2000. The $3.5 million increase in net cash flows provided by operating
activities, or $80.5 million decrease in net cash flows excluding the gain on
sale of SHPS as of June 30, 2000, was a result of a decrease in net income of
$52.3 million, a net decrease in non-cash expenses of $2.3 million, and a net
decrease in assets and liabilities of $25.9 million. This net decrease in assets
and liabilities of $25.9 million was principally due to a decrease in deferred
revenue of $26.0 million, primarily related to revenue for diagnostic software,
a decrease in income taxes payable of $21.8 million, primarily related to the
taxes on the gain on sale of SHPS, a decrease of $31.8 million in accounts
payable and other accrued accounts offset by a decrease of $51.7 million in
receivables, primarily due to a decrease in revenues and increased collection
efforts.
Capital expenditures, which are generally funded by cash generated from
operating activities and borrowings available under its credit facilities, were
$19.9 million for the six months ended June 30, 2001 compared to $34.1 million
for the six months ended June 30, 2000. Capital expenditures for 2001 were $14.2
million lower than the comparable period of 2000, or $10.5 million lower
excluding SHPS. In 2001, approximately 67% of the capital expenditures were the
result of investing in new and existing technical and customer support centers
and 23% was expended for systems infrastructure. In 2001, the Company
anticipates capital expenditures in the range of $40.0 million to $45.0 million.
The primary sources of cash flows from financing activities are from borrowings
under the Company's syndicated credit facility, as amended on June 22, 2001,
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 is $100.0 million. The $100.0 million Amended Credit Facility
includes a $10.0 million swingline loan to be used for
21
22
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
working capital purposes. In addition, the Company has a $15.0 million
multi-currency credit facility that provides for multi-currency lending. The
Amended Credit Facility matures on February 28, 2003, and the multi-currency
facility matures on February 28, 2002. At June 30, 2001, the Company had $41.9
million in cash and cash equivalents and $115.0 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 debt repayment requirements, continued expansion objectives and
anticipated levels of capital expenditures 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.
At June 30, 2001, the Company had no debt outstanding at variable interest
rates. Based on the Company's level of variable rate debt outstanding during the
first six months of 2001, a one-point increase in the weighted average interest
rate would increase the Company's annual interest expense by approximately $2
thousand. (The variable interest rates are generally equal to the Eurodollar
rate plus an applicable margin). The Company has not historically used
derivative instruments to manage its exposure to changes in interest rates.
FLUCTUATIONS IN QUARTERLY RESULTS
For the year ended December 31, 2000, quarterly revenues as a percentage of
total annual revenues were approximately 27%, 26%, 23% and 24%, 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 the 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 fulfillment and distribution services.
22
23
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
PART II - OTHER INFORMATION.
ITEM 1 - 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, 2000. Since August
14, 2001, 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. Class Action Litigation.
The Company is aware of sixteen purported class action lawsuits that have been
filed against Sykes and certain of its officers alleging violations of federal
securities laws. All of the actions have been consolidated into one case which
is pending in the United States District Court for the Middle District of
Florida. The plaintiffs purport to assert claims on behalf of a class of
purchasers of Sykes' common stock during the period from July 27, 1998 through
September 18, 2000. The consolidated action claims 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 consolidated action alleges that during
2000, 1999 and 1998, the Company and certain of its officers made materially
false statements concerning the Company's financial condition and its future
prospects. The consolidated complaint also claims that certain of the Company's
quarterly financial statements during 1999 and 1998 were not prepared in
accordance with generally accepted accounting principles. The consolidated
action seeks compensatory and other damages, and costs and expenses associated
with the litigation. The Company believes these claims are without merit and
intends to defend the actions vigorously.
The Company is also aware of a lawsuit filed by Kyrus that asserts functionality
issues associated with software that Kyrus had licensed from the Company. At the
time of the software license, the Company and Kyrus entered into an agreement
which provided for a return of a portion of the convertible preferred stock
transferred to the Company in consideration of the license in the event that
revenues generated by Kyrus from the software did not reach agreed upon levels.
In this lawsuit, Kyrus claims it incurred significant expenses due to the
failure of the software to function properly and is entitled to reimbursement of
these expenses. Kyrus also claims that revenues from the software did not meet
the minimum levels agreed upon and that Kyrus is therefore entitled to a return
of the convertible preferred stock having a fair value of $4.5 million at the
time Kyrus licensed the software from the Company. The Company has not recorded
the convertible preferred stock subject to the contingency in the accompanying
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.
Therefore, in the event the Company is required to return the preferred stock to
Kyrus, the return will not impact the Company's financial position or results of
operations. This litigation is currently pending in the Court of Common Pleas
for Greenville County, South Carolina. The Company intends to vigorously defend
this lawsuit.
Although the Company intends to vigorously defend these lawsuits, it cannot
predict their outcome or the impact 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 financial condition
and results of operations.
B. Other Litigation.
The Company from time to time is involved in other 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 financial position or results of operations.
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24
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
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:
10.33 Amendment No. 1 to Amended and Restated Credit Agreement among
Sykes Enterprises, Incorporated and Bank of America, N.A.,
dated June 22, 2001.
10.34 Credit Agreement among Sykes Enterprises, Incorporated and
Bank of America, N.A. (formerly Nationsbank, N.A.), dated
February 17, 1998, as amended February 27, 1998, January 18,
2000, May 2, 2000 and June 22, 2001.
10.35 Employment Separation Agreement dated July 5, 2001 between
James E. Lamar and Sykes Enterprises, Incorporated.
15 Letter regarding unaudited interim financial information.
(b) Reports on Form 8-K
None.
24
25
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
Date: August 14, 2001 By: /s/ W. Michael Kipphut
- ----------------------- ---------------------------------------------------
W. Michael Kipphut
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
26
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
EXHIBIT INDEX
Exhibit
Number
------
10.33 Amendment No. 1 to Amended and Restated Credit Agreement among
Sykes Enterprises, Incorporated and Bank of America, N.A.,
dated June 22, 2001.
10.34 Credit Agreement among Sykes Enterprises, Incorporated and
Bank of America, N.A. (formerly Nationsbank, N.A.), dated
February 17, 1998, as amended February 27, 1998, January 18,
2000, May 2, 2000 and June 22, 2001.
10.35 Employment Separation Agreement dated July 5, 2001 between
James E. Lamar and Sykes Enterprises, Incorporated.
15 Letter regarding unaudited interim financial information
26