Document/Exhibit Description Pages Size
1: 10-K Sykes Enterprises, Inc 30 189K
2: EX-10.29 Employment Separation Agreement Dated 11/10/2000 8 36K
3: EX-10.30 Employment Agreement Dated July 31, 2000 11 61K
4: EX-10.31 Employment Agreement Dated March 6, 2000 12 63K
5: EX-13.1 Sykes Enterprises, Inc Annual Report 37 225K
6: EX-21.1 List of Subsidiaries 2± 11K
7: EX-23.1 Consent of Ernst and Young LLP 1 8K
EXHIBIT 13.1
MARKET SHAREHOLDER DATA
Sykes' common stock is quoted on the NASDAQ National Market under the
symbol SYKE. The following table sets forth, for the periods indicated, certain
information as to the high and low sale prices per share of Sykes' common stock
as quoted on the NASDAQ National Market.
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YEAR ENDED DECEMBER 31, 2000: HIGH LOW
----------------------------- ------- -------
First Quarter............................................. $52.250 $13.375
Second Quarter............................................ 23.250 12.250
Third Quarter............................................. 16.000 4.375
Fourth Quarter............................................ 7.000 3.313
YEAR ENDED DECEMBER 31, 1999:
------------------------------------------------------------
First Quarter............................................. $32.875 $24.250
Second Quarter............................................ 34.750 20.438
Third Quarter............................................. 33.750 21.625
Fourth Quarter............................................ 51.500 22.750
Holders of Sykes' common stock are entitled to receive dividends out of the
funds legally available when and if declared by the Board of Directors. Sykes
has not declared or paid any cash dividends on its common stock in the past.
Sykes currently anticipates that all of its earnings will be retained for
development and expansion of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future.
As of March 1, 2001, the last sale price of the registrant's common stock
was $4.63 on the NASDAQ National Market, and there were approximately 1,607
holders of record of the common stock. The Company believes that there are
approximately 12,000 beneficial owners of its common stock.
1
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
consolidated financial statements. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Company's Consolidated Financial Statements
and related notes.
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YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues........................... $603,606 $572,742 $460,102 $351,593 $248,699
Income (loss) from operations...... (12,308) 39,269 32,672 24.392 21,611
Net income......................... 45,638 21,902 2,442 7,631 11,685
Net income per basic share......... 1.10 0.52 0.06 0.19 0.32
Net income per diluted share....... 1.10 0.51 0.06 0.18 0.31
PRO FORMA INFORMATION ASSUMING
ACCOUNTING CHANGE IS APPLIED
RETROACTIVELY(1)
Revenues........................... $603,606 $571,243 $460,102 $351,593 $248,699
Income (loss) from operations...... (12,308) 36,630 31,935 24,392 21,611
Net income......................... 47,706 20,286 1,981 7,631 11,685
Net income per basic share......... 1.15 0.48 0.05 0.19 0.32
Net income per diluted share....... 1.15 0.47 0.05 0.18 0.31
PRO FORMA INFORMATION EXCLUDING
ONE-TIME ITEMS ASSUMING
ACCOUNTING CHANGE IS APPLIED
RETROACTIVELY(1):
Revenues........................... $603,606 $571,243 $460,102 $351,593 $248,699
Income from operations(2, 3, 4,
5)............................... 25,996 42,609 48,282 36,605 21,611
Net income(2, 3, 4, 5, 6, 7, 8).... 13,771 23,949 29,527 23,877 11,685
Net income per basic share(2, 3, 4,
5, 6, 7, 8)...................... 0.33 0.57 0.72 0.58 0.32
Net income per diluted share(2, 3,
4, 5, 6, 7, 8)................... 0.33 0.56 0.70 0.56 0.31
BALANCE SHEET DATA:
Working capital.................... $ 92,964 $ 93,075 $ 84,632 $116,661 $116,687
Total assets....................... 357,344 419,396 361,798 268,197 238,318
Long-term debt, less current
installments..................... 8,759 80,053 75,448 35,990 8,571
Shareholders' equity............... 196,897 195,387 159,102 152,560 147,402
---------------
(1) Effective January 1, 2000, the Company changed its policy regarding the
accounting for grants and recognition of revenue based on criteria
established by Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101").
(2) The balance for 2000 is exclusive of $7.8 million of compensation expense
related to payments made to certain SHPS, Incorporated ("SHPS") option
holders as part of the Company's sale of a 93.5% ownership interest in SHPS
that occurred on June 30, 2000 and $30.5 million of restructuring and other
charges.
(3) The balance for 1999 is exclusive of $6.0 million of charges associated with
the impairment of long-lived assets.
2
(4) The balance for 1998 is exclusive of $0.5 million of expense associated with
accrued severance costs, $1.4 million of one-time merger and related charges
associated with acquisitions and $14.5 million of acquisition related
in-process research and development costs.
(5) The balance for 1997 is exclusive of $12.2 million of charges associated
with the impairment of long-lived assets and one-time merger and related
charges associated with an acquisition.
(6) The balance for 2000 is exclusive of an $84.0 million gain from the sale of
a 93.5% ownership interest in SHPS that occurred on June 30, 2000 and a gain
of $0.7 million related to the sale of a small Canadian operation that sold
roadside assistance memberships for which the Company provides customer
support and $38.3 million of one-time items as identified in note 2 above.
(7) The balance for 1998 is exclusive of $3.9 million of acquisition related
in-process research and development costs incurred by a joint venture
entity, $7.3 million of charges associated with the write-down of marketable
securities and $16.4 million of one-time charges as identified in note (4)
above.
(8) The balance for 1997 is exclusive of $2.8 million of expense associated with
acquisition related in-process research and development costs incurred by a
joint venture entity, $1.2 million of one-time merger and related charges
associated with an acquisition and $12.2 million of one-time charges as
identified in note (5) above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements, including the notes thereto. The following discussion compares the
year ended December 31, 2000 ("2000") to the year ended December 31, 1999
("1999"), and 1999 to the year ended December 31, 1998 ("1998"). The following
discussion and analysis and other sections of this report contain
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
and in the Company's Form 10-K for the year ended December 31, 2000 in Item 1 in
the section entitled "Factors Influencing Future Results And Accuracy Of
Forward-Looking Statements."
OVERVIEW
The Company derives its revenue from providing outsourced customer
management solutions and services through two business segments -- Business
Solutions and Business Services.
Business Solutions 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. Revenues from
Business Solutions usually are billed on a time and material basis, generally by
the hour, and revenues generally are recognized as the services are provided.
Revenues from fixed price contracts, generally with terms of less than one year,
are recognized using the percentage-of-completion method. A significant majority
of the Company's revenue is derived from non-fixed price contracts. The Company
has not experienced material losses due to fixed price contracts and does not
anticipate a significant increase in revenue derived from such contracts in the
future.
Business Services provides customer care outsourcing services with an
emphasis on technical support and customer service, delivered through multiple
communication channels encompassing phone, e-mail, web and chat. Revenue from
technical support and customer service, provided through the Company's support
centers, is recognized as services are rendered. These services are billed on an
amount per e-mail, a fee per call, a rate per minute or on a time and material
basis. Revenue from distribution and fulfillment services is generally billed on
a per unit basis.
Direct salaries and related costs include direct personnel compensation,
statutory and other benefits associated with such personnel and other direct
costs associated with providing services to customers. General
3
and administrative expenses include administrative, sales and marketing,
occupancy, depreciation and amortization, and other indirect costs.
Other expense, excluding the effect of one-time items, consists primarily
of interest expense, net of interest income and foreign currency transaction
gains and losses. Foreign currency transaction gains and losses generally result
from exchange rate fluctuations on intercompany transactions. During 1997, the
Company entered into a joint venture and the results of this entity are included
in the other income (expense) section of the Consolidated Statements of Income
for the time period the entity operated as a 50% joint venture. Effective
September 1, 1998, the Company acquired the remaining portion of this joint
venture.
Grants from local or state governments for the acquisition of property and
equipment are deferred and recognized as a reduction to general and
administrative costs over the corresponding useful lives of the related property
and equipment. Deferred property and equipment grants, net of amortization,
totaled $30.1 million and $21.2 million at December 31, 2000 and 1999,
respectively.
The Company's effective tax rate for the periods presented reflects the
effects of foreign taxes, net of foreign income not taxed in the United States,
nondeductible expenses for income tax purposes and a tax basis difference on the
sale of an equity interest in SHPS.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's statements of
income:
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
PERCENTAGES OF REVENUES:
Revenues.......................................... 100.0% 100.0% 100.0%
Direct salaries and related costs................. 63.3 64.6 63.0
General and administrative(1)..................... 32.4 27.5 26.8
Compensation expense associated with exercise of
options......................................... 1.3 -- --
Restructuring and other charges................... 5.0 -- --
Impairment of long-lived assets................... -- 1.0 --
Acquired in-process research and development(2)... -- -- 3.1
----- ----- -----
Income (loss) from operations..................... (2.0) 6.9 7.1
Other income (expense)(3)(4)(5)................... 13.4 (0.6) (2.7)
----- ----- -----
Income before provision for income taxes and
cumulative effect of change in accounting
principle....................................... 11.4 6.3 4.4
Provision for income taxes........................ 3.5 2.5 3.9
----- ----- -----
Income before cumulative effect of change in
accounting principle............................ 7.9 3.8 0.5
Cumulative effect of change in accounting
principle....................................... (0.3) -- --
----- ----- -----
Net income(1)(2)(3)(4)(5)............... 7.6% 3.8% 0.5%
===== ===== =====
---------------
(1) Includes charges associated with accrued severance pay and one-time merger
and related charges of 0.4% related to the acquisitions completed in 1998.
(2) Includes expense associated with the write-off of acquisition related
in-process research and development costs of 3.1% related to the Company's
original ownership and subsequent acquisition of the remaining outstanding
shares of SHPS.
(3) Includes expense associated with the write-off of acquisition related
in-process research and development costs of 0.8% related to acquisitions
completed by SHPS in 1998.
(4) Includes expense associated with the write-down of marketable securities of
1.6% in 1998.
(5) Includes gain on sale of SHPS of 13.9% in 2000.
4
2000 COMPARED TO 1999
Revenues. For 2000, the Company recorded consolidated revenues of $603.6
million, an increase of $30.9 million or 5.4%, from the $572.7 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 $68.2 million or 13.6% to $567.9 million for 2000 from $499.7
million for the comparable period during 1999. This growth in revenue was the
result of a $29.0 million or 5.5% increase in Business Services' revenues ($66.3
million or 14.8% exclusive of SHPS) and an increase of $1.9 million or 3.8% from
Business Solutions' revenues.
The increase in Business Services' revenues for 2000 was primarily
attributable to an increase in the number of technical and customer support
centers providing services throughout the period, and the resulting 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 support centers were required as a
result of continued organic growth of technical and customer support services
from both e-commerce and telephony support services. The Company had an
additional four domestic and two international technical and customer support
centers fully operational in 2000 and significantly expanded an additional four
international centers. During 2000, the Company recognized $8.0 million of
revenue associated with the licensing of the Company's diagnostic software, of
which $3.5 million related to a one-year AnswerTeam(TM) licensing agreement and
$3.6 million related to the pro rata recognition of revenue associated with a
multi-year AnswerTeam(TM) licensing agreement completed during 1999. The
decrease in distribution and fulfillment services revenue for 2000 was primarily
attributable to the closing of three international and two domestic distribution
and fulfillment centers as part of the Company's restructuring plans 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 2000 is partially
offset by a $0.7 million decline in worldwide translation and localization
services and 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. Direct salaries and related costs
increased $12.3 million or 3.3% to $382.2 million for 2000, from $369.9 million
in 1999. As a percentage of revenues, direct salaries and related costs
decreased to 63.3% in 2000 from 64.6% for the comparable period in 1999. The
increase in the dollar amount was primarily attributable to a $43.4 million
increase in salaries and benefits to support revenue growth and associated
training costs, partially offset by a $27.3 million decrease in direct material
costs associated with distribution and fulfillment services. Exclusive of SHPS,
direct salaries and all related costs increased $35.1 million or 10.8% to $359.0
million or 63.2% 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. General and administrative expenses increased
$37.8 million or 24.0% to $195.4 million for 2000, from $157.6 million in 1999.
As a percentage of revenues, general and administrative expenses increased to
32.4% in 2000 from 27.5% for the comparable period in 1999. The increase in both
the dollar amount and percentage of revenue of general and administrative
expense was primarily attributable to a $15.2 million increase in salaries and
benefits to support the Company's organic growth, an $8.2 million increase in
telecom costs, a $4.0 million increase in lease and rent expense, a $4.8 million
increase in depreciation expense associated with facility and capital equipment
expenditures all generally incurred in connection with the expansion of the
Company's technical and customer support services, and a $6.9 million increase
in bad debt expense due principally to weaker economic conditions for dot.com
clients. Exclusive of SHPS, general and administrative expenses increased $48.1
million or 35.2% to $184.5 million, or 32.5% of revenue.
5
Compensation Expense. Compensation expense associated with the exercise of
options was $7.8 million for 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.
Restructuring and Other Charges. The Company recorded restructuring and
other charges of $30.5 million during 2000. These charges were associated with
(1) the consolidation of certain of the Company's distribution and fulfillment
operations in Europe; (2) the closure of the U.S. distribution and fulfillment
operations; (3) the elimination of the worldwide translation and localization
business; (4) the consolidation of certain of the Company's professional
services locations; (5) elimination of redundant property, leasehold
improvements and equipment; (6) lease termination costs associated with vacated
properties and transportation equipment; and (7) severance payments to the
Company's former President.
Other Income and Expense. Other income was $81.2 million during 2000,
compared to other expense of $3.5 million during 1999. Excluding the $84.0
million gain associated with the sale of SHPS, the Company reported other
expense of $2.8 million for 2000. The decrease in other expense for 2000,
excluding the gain for the sale of SHPS, was attributable to a decrease in
interest expense associated with a decrease in the Company's average outstanding
debt position, partially offset by additional interest expense of $0.7 million
related to the cancellation of a contractual obligation. The Company's average
debt balance for 2000 was $44.8 million compared to $78.8 million for 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, partially offset by increases
in debt from capital expenditures and the Company's repurchase of 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).
Income Taxes. The provision for income taxes increased $7.3 million to
$21.2 million for 2000 from $13.9 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 2000. The Company's effective tax rate
exclusive of the gain and one-time items was 38.7% for 2000 compared to 38.7%
for the comparable 1999 period.
Net Income. As a result of the foregoing, inclusive of one-time items
identified above, net income increased to $45.6 million in 2000 from $21.9
million in 1999. Exclusive of one-time items, including a gain of $84.0 million
for the sale of SHPS, $7.8 million related to payouts made to SHPS' options
holders and $30.5 million in restructuring and other charges, net income for
2000 would have been $13.8 million.
1999 COMPARED TO 1998
Revenues. Revenues increased $112.6 million, or 24.5%, to $572.7 million
in 1999 from $460.1 million in 1998. Exclusive of SHPS, revenues increased $66.5
million, or 15.3%, to $499.8 million from $433.3 million in 1998. The growth in
revenues reflected an increase of $133.3 million, or 34.3% in Business Services'
revenues ($87.1 million, or 24.0%, exclusive of SHPS) and a decrease of $20.6
million in Business Solutions' revenues.
The increase in Business Services' revenues for 1999 was primarily
attributable to an increase in the number of technical and customer support
centers providing services throughout the period and the resulting increase in
e-mail requests and telephony call volumes from clients. The new support centers
were required as a result of continued growth of technical and customer support
services from both e-mail and telephony support services. During 1999, the
Company opened three domestic and four international technical and customer
support centers, significantly expanded an additional four international centers
and announced the construction of an additional five domestic centers. An
increase in distribution and fulfillment services revenue was attributable to
the Company's e-commerce initiatives in 1999.
6
The decrease in Business Solutions' revenues for 1999 was attributable to a
decline in hours billed to customers for consulting services, partially offset
by an increase in the average bill rate, the sale of the Company's Manufacturing
and Distribution operation, and to a decline in worldwide translation and
localization services due to a delay in the commencement of certain projects
when compared to 1998.
Direct Salaries and Related Costs. Direct salaries and related costs
increased $80.0 million, or 27.6%, to $369.8 million in 1999 from $289.8 million
in 1998. As a percentage of revenues, direct salaries and related costs
increased to 64.6% in 1999 from 63.0% in the comparable 1998 year. The increase
was primarily attributable to the addition of personnel to support revenue
growth and associated employee benefit and training costs.
General and Administrative. General and administrative expenses increased
$40.5 million, or 32.9%, to $163.6 million in 1999, inclusive of a $6.0 million
one-time charge associated with the impairment of long-lived assets. As a
percentage of revenues and inclusive of the one-time charge, general and
administrative expenses increased to 28.5% in 1999 from 26.8% in 1998. The
increase in the amount of general and administrative expenses was primarily
attributable to a $17.7 million increase in salaries and benefits, a $9.6
million increase in depreciation expense associated with facility and capital
equipment expenditures incurred in connection with the expansion of the
Company's technical and customer support centers and distribution and
fulfillment services, the $6.0 million one-time charge associated with the
impairment of long-lived assets, and to a $4.3 million increase in amortization
expense, primarily associated with goodwill incurred as part of the SHPS
acquisition. General and administrative expenses, exclusive of the $6.0 million
charge associated with the impairment of long-lived assets, increased $34.5
million, or 28.0%, to $157.6 million in 1999, or 27.5% of revenue.
Impairment of Long-Lived Assets. As part of the original ownership and
subsequent acquisition of the remaining outstanding shares of SHPS, the Company
determined that the technical feasibility of SHPS' in-process technology had not
been established and a portion of the technology had no alternative use.
Therefore, the Company recorded a charge of approximately $14.5 million related
to the write-off of the acquired in-process research and development during
1998.
Other Expense. Other expense was $3.5 million during 1999 compared to
$12.3 million during 1998. The other expense balance for 1998 is inclusive of a
$3.9 million loss from joint venture and a $7.3 million write-down of a
marketable security. The loss from the joint venture was attributable to
acquisition related in-process research and development costs associated with
acquisitions completed by the joint venture, which were recorded as other
expense. The increase in other expense for 1999 exclusive of the loss from the
joint venture and the write-down of a marketable security was primarily
attributable to an increase in the Company's debt position as a result of the
acquisition of SHPS completed during 1998.
Income Taxes. The provision for income taxes decreased $4.1 million, or
22.8%, to $13.9 million during 1999 from $18.0 million during 1998. The dollar
decrease was attributable to a lower amount of income before provision for
income taxes, exclusive of one-time charges. Sykes' effective tax rate decreased
to 38.7% during 1999, versus 88.0% for 1998. The effective tax rate for 1998 was
affected by approximately $14.5 million of non-deductible charges associated
with the write-off of in-process research and development costs.
Net Income. As a result of the foregoing, net income inclusive of the
one-time charge identified above increased to $21.9 million in 1999 from $2.4
million in 1998. Net income for 1999, exclusive of the $6.0 million charge
associated with the impairment of long-lived assets would have been $25.6
million.
7
QUARTERLY RESULTS
The following information presents unaudited quarterly operating results
for the Company for 2000 and 1999. The data has been prepared by the Company on
a basis consistent with the Consolidated Financial Statements included elsewhere
in this Form 10-K, and include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary for a fair presentation thereof.
The operating results for the quarters ended September 30, 2000, June 30, 2000
and March 31, 2000 have been adjusted to give effect to the change in the
Company's method of accounting for revenue recognition. These operating results
are not necessarily indicative of the Company's future performance.
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12/31/00 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS ADJUSTED FOR SAB 101, EFFECTIVE
JANUARY 1, 2000
Revenues.............................. $148,144 $136,954 $155,798 $162,710 $159,433 $140,967 $135,964 $136,378
Direct salaries and related costs..... 94,003 87,940 98,422 101,871 105,142 92,523 88,938 83,247
General and administrative(1)......... 48,609 52,064 47,787 46,914 49,229 40,350 37,767 36,277
Compensation expense associated with
exercise of options................. -- -- 7,836 -- -- -- -- --
Restructuring and other charges....... 20,828 -- 9,640 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations......... (15,296) (3,050) (7,887) 13,925 5,062 8,094 9,259 16,854
Other income (expense)(2)............. 800 (1,434) 83,076 (1,237) (1,092) (987) (863) (575)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting principle... (14,496) (4,484) 75,189 12,688 3,970 7,107 8,396 16,279
Provision for income taxes............ (3,765) (1,660) 21,693 4,923 1,540 2,761 3,249 6,300
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle... (10,731) (2,824) 53,496 7,765 2,430 4,346 5,147 9,979
Cumulative effect of change in
accounting principle, net of income
taxes of $1.3 million............... -- -- -- (2,068) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $(10,731) $ (2,824) $ 53,496 $ 5,697 $ 2,430 $ 4,346 $ 5,147 $ 9,979
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per basic share:
Income (loss) before cumulative
effect of change in accounting
principle......................... $ (0.27) $ (0.07) $ 1.27 $ 0.18 $ 0.06 $ 0.10 $ 0.12 $ 0.24
Cumulative effect of change in
accounting principle.............. -- -- -- (0.05) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per basic share... $ (0.27) $ (0.07) $ 1.27 $ 0.13 $ 0.06 $ 0.10 $ 0.12 $ 0.24
======== ======== ======== ======== ======== ======== ======== ========
Total weighted average basic
shares...................... 40,373 41,134 42,031 42,606 42,356 42,281 42,083 41,459
Net income (loss) per diluted share:
Income (loss) before cumulative
effect of change in accounting
principle......................... $ (0.27) $ (0.07) $ 1.27 $ 0.18 $ 0.06 $ 0.10 $ 0.12 $ 0.23
Cumulative effect of change in
accounting principle.............. -- -- -- (0.05) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per diluted
share............................. $ (0.27) $ (0.07) $ 1.27 $ 0.13 $ 0.06 $ 0.10 $ 0.12 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Total weighted average diluted
shares...................... 40,373 41,134 42,098 42,902 43,063 43,032 43,097 42,824
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AS PREVIOUSLY REPORTED
Revenues.............................. $148,144 $137,570 $155,867 $161,312 $159,433 $140,967 $135,964 $136,378
Direct salaries and related costs..... 94,003 88,254 98,606 102,211 105,142 92,523 88,938 83,247
General and administrative(1)......... 48,609 52,124 45,389 46,915 49,229 40,350 37,767 36,277
Compensation expense associated with
exercise of options................. -- -- 7,836 -- -- -- -- --
Restructuring and other charges....... 20,828 -- 9,640 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations......... (15,296) (2,808) (5,604) 12,186 5,062 8,094 9,259 16,854
Other income (expense)(2)............. 800 (1,434) 83,076 (1,237) (1,092) (987) (863) (575)
-------- -------- -------- -------- -------- -------- -------- --------
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Income (loss) before provision for income
taxes. (14,496) (4,242) 77,472 10,949 3,970 7,107 8,396 16,279
Provision for income taxes............. (3,765) (1,569) 22,579 4,248 1,540 2,761 3,249 6,300
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...................... $(10,731) $ (2,673) $ 54,893 $ 6,701 $ 2,430 $ 4,346 $ 5,147 $ 9,979
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per basic share...... $ (0.27) $ (0.07) $ 1.27 $ 0.18 $ 0.06 $ 0.10 $ 0.12 $ 0.24
======== ======== ======== ======== ======== ======== ======== ========
Total weighted average basic
shares....................... 40,373 41,134 42,031 42,606 42,356 42,281 42,083 41,459
Net income (loss) per diluted share.... $ (0.27) $ (0.06) $ 1.30 $ 0.16 $ 0.06 $ 0.10 $ 0.12 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Total weighted average diluted
shares....................... 40,373 41,134 42,098 42,902 43,063 43,032 43,097 42,824
---------------
(1) The quarter ended December 31, 1999 includes $6.0 million of charges
associated with the write-down of software and computer equipment.
(2) The quarter ended June 30, 2000 includes an $84.0 million gain associated
with the sale of SHPS.
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 general corporate purposes. In
future periods, the Company intends similar uses of any such funds, including
possible additional acquisitions.
During 2000, the Company generated $23.3 million in cash from operating
activities. The Company utilized these funds as well as $159.8 million of cash
generated from the sale of 93.5% of its equity interest in SHPS, $8.4 million in
proceeds from grants and $3.2 million from issuance of Company stock to pay down
approximately $74.4 million in debt, invest $72.3 million in capital
expenditures and to purchase $40.6 million of the Company's common stock. 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.
The Company's capital expenditures for the year ended December 31, 2000
were $72.3 million, which are generally funded by cash generated from operating
activities and borrowings available under its credit facilities. Approximately
58% of the capital expenditures were the result of investing in new and existing
technical and customer support centers, 37% was expended for systems
infrastructure, and 5% of the capital expenditures were SHPS related prior to
its June 30, 2000 sale.
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 0.25% or (b) a Euro 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 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 0.25% 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 Facility. In addition, a commitment fee up
to 0.375 % 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 December 31,
2000, the Company had approximately $156.2 million of availability under its
credit facilities.
9
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.
IMPACT OF YEAR 2000
In prior years, 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
and services of third parties. Sykes will continue to monitor its critical
computer applications and those of its suppliers and vendors to ensure that any
delayed Year 2000 matters that may arise are addressed promptly.
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 operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 31, 2000, the Company
had $8.9 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 2000, a one-point increase in the
weighted average interest rate would increase the Company's annual interest
expense by approximately $0.5 million. Under its current policy, the Company
does not use derivative instruments to manage its exposure to changes in
interest rates.
10
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Sykes Enterprises, Incorporated
We have audited the accompanying consolidated balance sheets of Sykes
Enterprises, Incorporated as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sykes Enterprises, Incorporated as of December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1, the Company changed its method of accounting for
certain grants and revenues.
Ernst & Young LLP
Tampa, Florida
February 15, 2001
11
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
IN THOUSANDS (EXCEPT PER
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,141 $ 31,001
Restricted cash........................................... -- 15,109
Receivables............................................... 135,609 126,477
Prepaid expenses and other current assets................. 17,679 15,252
-------- --------
Total current assets.............................. 183,429 187,839
Property and equipment, net................................. 151,842 134,756
Marketable securities....................................... -- 200
Intangible assets, net...................................... 8,861 76,831
Deferred charges and other assets........................... 13,212 19,770
-------- --------
$357,344 $419,396
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 100 $ 3,236
Accounts payable.......................................... 34,636 37,410
Income taxes payable...................................... 5,502 932
Accrued employee compensation and benefits................ 32,746 24,206
Customer deposits......................................... -- 11,821
Other accrued expenses and current liabilities............ 17,481 17,159
-------- --------
Total current liabilities......................... 90,465 94,764
Long-term debt.............................................. 8,759 80,053
Deferred grants............................................. 30,143 21,199
Deferred revenue............................................ 31,072 26,593
Other long-term liabilities................................. 8 1,400
-------- --------
Total liabilities................................. 160,447 224,009
-------- --------
Commitments and contingencies (Note 15)
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;
43,084 and 42,734 issued............................... 431 427
Additional paid-in capital................................ 159,696 155,023
Retained earnings......................................... 91,435 45,797
Accumulated other comprehensive income.................... (14,082) (5,860)
-------- --------
237,480 195,387
Treasury stock at cost; 2,981 shares (none in 1999)......... (40,583) --
-------- --------
Total shareholders' equity........................ 196,897 195,387
-------- --------
$357,344 $419,396
======== ========
See accompanying notes to consolidated financial statements.
12
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
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YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
IN THOUSANDS (EXCEPT PER SHARE DATA)
Revenues.................................................... $603,606 $572,742 $460,102
-------- -------- --------
Operating expenses:
Direct salaries and related costs......................... 382,236 369,850 289,802
General and administrative................................ 195,374 157,644 123,159
Compensation expense associated with exercise of
options................................................ 7,836 -- --
Restructuring and other charges........................... 30,468 -- --
Impairment of long-lived assets........................... -- 5,979 --
Acquired in-process research and development.............. -- -- 14,469
-------- -------- --------
Total operating expenses.......................... 615,914 533,473 427,430
-------- -------- --------
Income (loss) from operations............................... (12,308) 39,269 32,672
-------- -------- --------
Other income (expense):
Interest, net............................................. (2,942) (3,669) (959)
Gain on sale of equity interest in SHPS................... 84,036 -- --
Loss from joint venture................................... -- -- (3,947)
Write-down of marketable securities....................... -- -- (7,335)
Other..................................................... 111 152 (29)
-------- -------- --------
Total other income (expense)...................... 81,205 (3,517) (12,270)
-------- -------- --------
Income before provision for income taxes and cumulative
effect of change in accounting principle.................. 68,897 35,752 20,402
-------- -------- --------
Provision for income taxes:
Current................................................... 24,794 20,387 25,592
Deferred.................................................. (3,603) (6,537) (7,632)
-------- -------- --------
Total provision for income taxes.................. 21,191 13,850 17,960
-------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 47,706 21,902 2,442
Cumulative effect of change in accounting principle, net of
income taxes of $1.3 million.............................. (2,068) -- --
-------- -------- --------
Net income.................................................. $ 45,638 $ 21,902 $ 2,442
======== ======== ========
Net income per basic share:
Income before cumulative effect of change in accounting
principle.............................................. $ 1.15 $ 0.52 $ 0.06
Cumulative effect of change in accounting principle....... (0.05) -- --
-------- -------- --------
Net income per basic share................................ $ 1.10 $ 0.52 $ 0.06
======== ======== ========
Weighted average shares outstanding -- basic.............. 41,518 42,045 41,258
Net income per diluted share:
Income before cumulative effect of change in accounting
principle.............................................. $ 1.15 $ 0.51 $ 0.06
Cumulative effect of change in accounting principle....... (0.05) -- --
-------- -------- --------
Net income per diluted share.............................. $ 1.10 $ 0.51 $ 0.06
======== ======== ========
Weighted average shares outstanding -- diluted............ 41,645 42,995 42,288
Pro forma amounts assuming accounting change is applied
retroactively:
Net income................................................ $ 47,706 $ 20,286 $ 1,981
Net income per basic share................................ $ 1.15 $ 0.48 $ 0.05
Net income per diluted share.............................. $ 1.15 $ 0.47 $ 0.05
See accompanying notes to consolidated financial statements.
13
SYKES ENTERPRISES, INCORPORATED CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK TOTAL
------ ------ ---------- -------- ------------- -------- --------
(IN THOUSANDS)
Balance at January 1, 1998...................... 41,120 $411 $133,592 $22,151 $ (3,594) $ -- $152,560
Issuance of common stock........................ 332 3 1,074 -- -- -- 1,077
Tax effect of non-qualified exercise of stock
options....................................... -- -- 1,534 -- -- -- 1,534
Distributions................................... -- -- -- (698) -- -- (698)
Net income...................................... -- -- -- 2,442 -- -- 2,442
Recognition of write-down on marketable
securities.................................... -- -- -- -- 735 -- 735
Foreign currency translation adjustment......... -- -- -- -- 1,452 -- 1,452
--------
Comprehensive income............................ 4,629
------ ---- -------- ------- -------- -------- --------
Balance at December 31, 1998.................... 41,452 414 136,200 23,895 (1,407) -- 159,102
Issuance of common stock........................ 1,282 13 11,371 -- -- -- 11,384
Tax effect of non-qualified exercise of stock
options....................................... -- -- 7,452 -- -- -- 7,452
Net income...................................... -- -- -- 21,902 -- -- 21,902
Foreign currency translation adjustment......... -- -- -- -- (4,453) -- (4,453)
--------
Comprehensive income............................ 17,449
------ ---- -------- ------- -------- -------- --------
Balance at December 31, 1999.................... 42,734 427 155,023 45,797 (5,860) -- 195,387
Issuance of common stock........................ 350 4 3,208 -- -- -- 3,212
Tax effect of non-qualified exercise of stock
options....................................... -- -- 1,465 -- -- -- 1,465
Purchase of treasury stock...................... -- -- -- -- -- (40,583) (40,583)
Net income...................................... -- -- -- 45,638 -- -- 45,638
Foreign currency translation adjustment......... -- -- -- -- (8,222) -- (8,222)
--------
Comprehensive income............................ 37,416
------ ---- -------- ------- -------- -------- --------
Balance at December 31, 2000.................... 43,084 $431 $159,696 $91,435 $(14,082) $(40,583) $196,897
====== ==== ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
14
SYKES ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 45,638 $ 21,902 $ 2,442
Depreciation and amortization............................... 36,829 35,338 21,831
Impairment of long-lived assets............................. -- 5,979 --
Cumulative effect of accounting change, net of tax.......... 2,068 -- --
Gain on sale of equity interest in SHPS, Incorporated....... (84,036) -- --
Acquired in-process research and development costs.......... -- -- 14,469
Write-down of intangible assets............................. 6,000 -- --
Write-down of marketable securities......................... -- -- 7,335
Deferred income taxes....................................... (3,603) (6,537) (7,632)
(Gain) loss on disposal of property and equipment........... 13,275 15 (525)
Changes in assets and liabilities:
Receivables............................................... (30,515) (16,762) (25,588)
Prepaid expenses and other current assets................. 3,761 1,599 (2,912)
Intangible assets......................................... 926 (1,113) (738)
Deferred charges and other assets......................... 3,154 (1,638) (1,033)
Accounts payable.......................................... (3,487) 5,246 2,841
Income taxes payable...................................... 7,480 (2,166) --
Accrued employee compensation and benefits................ 11,744 4,508 7,270
Customer deposits......................................... 10,921 (3,176) 11,373
Other accrued expenses and current liabilities............ 1,250 (36) 6,090
Deferred revenue.......................................... 3,314 9,386 5,954
Other long-term liabilities............................... (1,392) (1,268) (48)
--------- -------- --------
Net cash provided by operating activities.......... 23,327 51,277 41,129
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (72,334) (66,657) (37,293)
Investment in joint venture................................. -- -- (10,723)
Acquisition of businesses................................... -- (8,346) (28,131)
Proceeds from sale of equity interest in SHPS,
Incorporated.............................................. 159,776 -- --
Proceeds from sale of marketable securities................. -- -- 1,000
Proceeds from sale of property and equipment................ -- 191 3,462
--------- -------- --------
Net cash provided by (used for) investing
activities....................................... 87,442 (74,812) (71,685)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Paydowns under revolving line of credit agreements.......... (198,301) (84,540) (16,932)
Borrowings under revolving line of credit agreements........ 124,607 88,398 93,810
Payments of long-term debt.................................. (1,103) -- (89,688)
Borrowings under long-term debt............................. 367 -- --
Proceeds from issuance of stock............................. 3,212 11,084 1,077
Proceeds from grants........................................ 8,394 7,698 2,575
Purchase of treasury stock.................................. (40,583) -- --
Distributions............................................... -- -- (698)
--------- -------- --------
Net cash provided by (used for) financing
activities....................................... (103,407) 22,640 (9,856)
--------- -------- --------
Adjustments for foreign currency translation................ (8,222) (4,453) 1,452
--------- -------- --------
Net decrease in cash and cash equivalents................... (860) (5,348) (38,960)
CASH AND CASH EQUIVALENTS -- BEGINNING...................... 31,001 36,349 75,309
--------- -------- --------
CASH AND CASH EQUIVALENTS -- ENDING......................... $ 30,141 $ 31,001 $ 36,349
========= ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.................................................. $ 4,254 $ 6,809 $ 1,553
Income taxes.............................................. $ 17,130 $ 22,426 $ 13,402
See accompanying notes to consolidated financial statements.
15
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sykes Enterprises, Incorporated and consolidated subsidiaries (the
"Company" or "Sykes") 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
an emphasis on technical support and customer service. These services are
delivered through multiple communication channels encompassing phone, e-mail,
web and chat. 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 primarily within the technology, communications
and financial services markets.
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Sykes and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates;
however, management does not believe these differences would have a material
effect on operating results.
Recognition of Revenue. The Company primarily recognizes its revenue from
services as those services are performed under a fully executed contractual
agreement. Royalty revenue is recognized at the time royalties are earned and
the remaining revenue is recognized on fixed price contracts using the
percentage-of-completion method of accounting. Adjustments to fixed price
contracts and estimated losses, if any, are recorded in the period when such
adjustments or losses are known. Product sales are recognized upon shipment to
the customer and satisfaction of all obligations.
The Company recognizes revenue from software and contractually provided
rights in accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"), as amended by Statement of Position 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2" ("SOP 98-4"), Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"), and Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). Revenue is recognized from
licenses of the Company's software products and rights when the agreement has
been executed, the product or right has been delivered or provided,
collectibility is probable and the software license fees or rights are fixed and
determinable. Contracts that provide for multiple elements are accounted for
pursuant to the above standards. If any portion of the license fees or rights is
subject to forfeiture, refund or other contractual contingencies, the Company
will postpone revenue recognition until these contingencies have been removed.
Sykes generally accounts for consulting services separate from software license
fees for those multi-element arrangements where consulting services are a
separate element and are not essential to the customer's functionality
requirements and there is vendor-specific objective evidence of fair value for
these services. Revenue from support and maintenance activities is recognized
ratably over the term of the maintenance period and the unrecognized portion is
recorded as deferred revenue.
Accounting Change for Revenue Recognition. During the fourth quarter of
2000, the Company adopted SAB 101, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
Securities and Exchange Commission. Based on criteria established by SAB 101,
adopted retroactive to January 1, 2000, the Company modified its accounting
treatment for the recognition of
16
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenue as it related to two revenue sources. First, recognition of grants in
excess of building costs received for the development of new technical and
customer support centers will be deferred until the funds are released from
escrow by the local or state government, which generally coincides with
completion of the construction of the facility and training of the staff.
Previously, recognition of this excess grant income as a reduction of general
and administrative costs began when the funds were placed in escrow at the
beginning of the construction of the facility. Second, revenues that were
recognized as services were performed and as the related fees became collectible
under agreements between the Company and its customers will be deferred until
either a final contract or purchase order has been fully executed.
The cumulative effect of change on 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 is included in income for the year ended December 31, 2000.
The effect of these changes for the year ended December 31, 2000 was to increase
income before cumulative effect of the change in accounting principle by $0.2
million or less than $0.01 per diluted share. The pro forma amounts presented in
the income statement were presented as if the change in accounting principle had
been made retroactively to prior periods.
The following unaudited table summarizes the amounts included in the
cumulative effect adjustment as of January 1, 2000 that the Company recognized
in 2000 for each of the three-month periods ended (in thousands):
[Enlarge/Download Table]
INCREASE (DECREASE)
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- -------------- ------------
(UNAUDITED)
Revenues................................... $1,499 $ -- $ -- $ --
Operating expenses......................... (342) (184) (373) (315)
------ ----- ----- -----
Income before provision for income taxes... 1,841 184 373 315
Provision for income taxes................. 713 71 144 122
------ ----- ----- -----
Net Income................................. $1,128 $ 113 $ 229 $ 193
====== ===== ===== =====
Cash and Cash Equivalents. Cash and cash equivalents consist of highly
liquid short-term investments classified as available for sale as defined under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Cash in the amount of approximately
$9.8 million and $7.3 million was held in taxable interest bearing investments
at December 31, 2000 and 1999, respectively, which are classified as available
for sale and have an average maturity of approximately 30 days.
Restricted Cash. The financial statements include restricted cash, which
is held in conjunction with deposits by customers at December 31, 1999. Included
in current liabilities at December 31, 1999 is the related payable.
Property and Equipment. Property and equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Improvements to leased premises are amortized over the
shorter of the related lease term or the useful lives of the improvements. Cost
and related accumulated depreciation on assets retired or disposed of are
removed from the accounts and any gains or losses resulting therefrom are
credited or charged to income. Depreciation expense was approximately $35.4
million, $30.6 million and $21.0 million, for the years ended December 31, 2000,
1999 and 1998, respectively. Property and equipment includes approximately $40.0
thousand and $2.0 million of additions included in accounts payable at December
31, 2000 and 1999, respectively. Accordingly, these non-cash transactions have
been excluded from the accompanying consolidated statements of cash flows for
the years ended December 31, 2000 and 1999, respectively.
17
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999 and 1998, the Company capitalized certain costs incurred to
internally develop software upon the establishment of technological feasibility.
Costs incurred prior to the establishment of technological feasibility were
expensed as incurred. Capitalized internally developed software costs, net of
accumulated amortization, were approximately $1.6 million and $2.9 million at
December 31, 2000 and 1999, respectively.
Land received from various local and state governmental agencies under
grants is recorded at fair value at date of grant. During the years ended
December 31, 2000, 1999 and 1998, the Company recorded approximately $1.3
million, $1.1 million and $0.3 million, respectively, in land acquisitions as a
result of such grants. Accordingly, these non-cash transactions have been
excluded from the accompanying Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998.
Investment in Joint Venture. The Company had a 50% interest in a joint
venture (SHPS) that was accounted for using the equity method of accounting.
Accordingly, the Company recorded its proportionate share of the gains and
losses of the joint venture in the results of operations for the first eight
months of 1998. Effective September 1, 1998, the Company acquired the remaining
50% equity interest in this joint venture (See Note 2).
Intangible Assets. Intangible assets primarily consist of the excess of
costs over fair market value of the net assets of the acquired business of $8.7
million and $65.5 million at December 31, 2000 and 1999, respectively, net of
accumulated amortization of $4.7 million and $17.6 million, respectively. Also
included in intangible assets are existing technologies and covenants not to
compete arising from business acquisitions of $0.2 million and $11.3 million at
December 31, 2000 and 1999, respectively, net of accumulated amortization of
$0.7 million and $5.1 million, respectively. The intangible assets are stated at
cost and are being amortized on a straight-line basis over periods ranging from
10 to 20 years for the excess of costs over fair value of the net assets of the
acquired business, and two to five years for the existing technologies and
covenants not to compete. Amortization expense was approximately $4.0 million,
$6.0 million and $1.7 million for the years ended December 31, 2000, 1999 and
1998, respectively.
Impairment of Long-lived Assets. The Company reviews long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of property and equipment is measured by comparison
of its carrying amount to undiscounted future net cash flows the property and
equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount that the
carrying amount of the property and equipment exceeds its fair market value, as
determined by discounted cash flows. Sykes assesses the recoverability of
goodwill by determining whether the unamortized goodwill balance can be
recovered through undiscounted future results of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future results using a discount rate reflecting the Company's average cost of
funds. During 1999, the Company recorded an impairment loss of approximately
$6.0 million related to software and computer equipment.
Income Taxes. Sykes uses the asset and liability method of accounting for
income taxes. Deferred income taxes are recorded to reflect the tax consequences
on future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Deferred Grants. Grants for land and the acquisition of buildings,
property and equipment are deferred and recognized as a reduction to general and
administrative costs over the corresponding useful lives of the related assets.
Amortization of the property and equipment grants that is included in income was
approximately $2.6 million, $1.3 million and $0.8 million for the years ended
December 31, 2000, 1999 and 1998, respectively. There are no significant
contingencies associated with the grants that would impact the Company's ability
to utilize assets received in association with the grants.
18
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Revenue. The Company invoices certain contracts in advance. The
deferred revenue is earned over the life of the respective contract, which range
from six months to three years.
Comprehensive Income. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130"), which requires all items that are required to be
recognized under accounting standards as components of other comprehensive
income be reported in the financial statements.
Fair Value of Financial Instruments. The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
- Cash, accounts receivable and accounts payable. The carrying amount
reported in the balance sheet for cash, accounts receivable and accounts
payable approximates their fair value.
- Long-term Debt. The fair value of the Company's long-term debt,
including the current portion thereof, is estimated based on the quoted
market price for the same or similar types of borrowing arrangements. The
carrying value of the Company's long-term debt approximates fair value
because the debt bears variable interest rates.
Non-monetary Transaction. During 1998, the Company sold a software license
in exchange for convertible preferred stock in a privately held corporation
("Kyrus"). The convertible preferred stock has a fair market value of $5.5
million, which represented the sales price recorded by the Company (See Note
15). The cost of this security is included in the Consolidated Balance Sheet
under the caption "Deferred charges and other assets" at December 31, 2000 and
1999, respectively.
Foreign Currency Translation. The assets and liabilities of the Company's
foreign subsidiaries, whose functional currency is other than the U.S. Dollar,
are translated at the exchange rates in effect on the reporting date, and income
and expenses are translated at the weighted average exchange rate during the
period. The net effect of translation gains and losses is not included in
determining net income, but is included in accumulated other comprehensive
income, which is reflected as a separate component of shareholders' equity.
Foreign currency transactional gains and losses are included in determining net
income. Such gains and losses are not material for any period presented.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
financial instruments and hedging activities and requires the Company to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure them at fair value. Gains and losses resulting from changes in fair
value would be accounted for depending on the use of the derivative and whether
it is designated and qualifies for hedge accounting. This statement is effective
for financial statements beginning in 2001. Sykes does not anticipate that the
adoption of this SFAS No. 133 will have a significant effect on its results of
operations or financial position.
Reclassifications. Certain amounts from prior years have been reclassified
to conform to the current year's presentation.
NOTE 2. 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 thousand
consisting of $40 thousand of cash and approximately 12 thousand 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
19
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Effective 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.
Effective 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.
Effective September 1, 1998, the Company acquired the remaining 50% of the
outstanding common stock of SHPS, Incorporated ("SHPS") for $28.1 million plus
the assumption of SHPS' debt. The transaction was accounted for under the
purchase method of accounting and accordingly, the results of operations for the
period September 1, 1998 to December 31, 1998, have been included in the
accompanying financial statements. The unaudited pro forma combined historical
results, as if SHPS had been acquired on January 1, 1998, are estimated to be
revenues of $491.8 million, net loss of $11.5 million and basic and diluted loss
per share of $0.27 for the year ended December 31, 1998. The purchase price was
allocated to the assets and liabilities of SHPS based on fair values at the date
of acquisition. In connection with the acquisition of SHPS, the Company
determined the acquired in-process technology had no present or future
technological feasibility. Accordingly, the Company recorded a charge for the
amount of the purchase price allocated to the acquired in-process research and
development of $14.5 million. This charge is reflected in the accompanying
Consolidated Statement of Income for the year ended December 31, 1998.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS
for approximately $165.5 million cash. The cash proceeds reflected in the
Statement of Cash Flows for 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 the sale. The sale of SHPS resulted in a gain for
financial reporting purposes of approximately $84.0 million ($59.9 million net
of taxes). The Consolidated Statement of Income for 2000 includes the results of
SHPS through June 30, 2000, its disposition date. SHPS generated revenue and
income from operations during 2000 of $35.7 million and $1.7 million,
respectively, for the year ended December 31, 2000 compared to $73.0 million and
$5.9 million for the year ended 1999, exclusive of compensation expense
associated with the exercise of options.
NOTE 3. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. With the
exception of $5.5 million of convertible preferred stock, included in other
assets, the Company's credit concentrations are limited due to the wide variety
of customers and markets in which the Company's services are sold.
20
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. RECEIVABLES
Receivables consist of the following (in thousands):
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
Trade accounts receivable................................... $135,380 $110,551
Unbilled accounts receivable................................ 983 9,470
Notes from officers......................................... 412 542
Other....................................................... 6,094 8,354
-------- --------
142,869 128,917
Less allowance for doubtful accounts........................ 7,260 2,440
-------- --------
$135,609 $126,477
======== ========
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
Land........................................................ $ 6,365 $ 5,114
Buildings and leasehold improvements........................ 54,132 41,171
Equipment, furniture and fixtures........................... 178,630 172,270
Capitalized software development costs...................... 1,644 2,896
Transportation equipment.................................... 135 448
Construction in progress.................................... 12,188 16,291
-------- --------
253,094 238,190
Less accumulated depreciation............................... 101,252 103,434
-------- --------
$151,842 $134,756
======== ========
NOTE 6. MARKETABLE SECURITIES
During 1997, the Company purchased SystemSoft Corp. common stock in
conjunction with a strategic technology exchange agreement between the parties
that had an original cost basis of $8.0 million. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the investment is classified as available-for-sale
securities. During 1998, the Company wrote-down its investment in SystemSoft
Corp. by approximately $7.3 million due to a significant reduction in its market
value, which was determined to be other than temporary. The remaining investment
was written off in 2000.
NOTE 7. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following (in thousands):
[Download Table]
DECEMBER 31,
-----------------
2000 1999
------- -------
Convertible preferred stock................................. $ 5,500 $ 5,500
Non-current deferred tax asset, net......................... 4,301 10,352
Other....................................................... 3,411 3,918
------- -------
$13,212 $19,770
======= =======
21
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. ACCRUED EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits consist of the following (in
thousands):
[Download Table]
DECEMBER 31,
-----------------
2000 1999
------- -------
Accrued compensation........................................ $22,650 $12,763
Accrued employment taxes.................................... 2,762 7,229
Accrued vacation............................................ 4,012 2,742
Other....................................................... 3,322 1,472
------- -------
$32,746 $24,206
======= =======
NOTE 9. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following (in
thousands):
[Download Table]
DECEMBER 31,
-----------------
2000 1999
------- -------
Deferred revenue, current................................... $ 2,655 $ 3,839
Accrued roadside assistance claim costs..................... 2,161 1,427
Accrued telephone charges................................... 2,093 2,213
Accrued legal and professional fees ........................ 1,490 811
Accrued interest............................................ 56 213
Other....................................................... 9,026 8,656
------- -------
$17,481 $17,159
======= =======
NOTE 10. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
[Download Table]
DECEMBER 31,
----------------
2000 1999
------ -------
Syndicated credit facility, $150.0 million maximum, due
February 2003, interest payable quarterly, the facility is
guaranteed by a pledge of 66% of common stock of certain
subsidiaries.............................................. $ -- $80,000
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 2,284
Notes payable and capital leases, principal and interest
payable in monthly installments through December 2002,
interest at varying rates up to prime plus 1 percent,
collateralized by certain equipment....................... 100 1,005
------ -------
Total debt.................................................. 8,859 83,289
Less current portion........................................ 100 3,236
------ -------
Long-term debt.............................................. $8,759 $80,053
====== =======
22
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities of total debt as of December 31, 2000 are as follows
(in thousands):
[Download Table]
TOTAL
YEAR AMOUNT
---- ------
2001........................................................ $ 100
2002........................................................ 8,759
------
$8,859
======
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 0.25% or (b) a Euro 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 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 0.25% 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 Facility. In addition, a commitment fee up
to 0.375% 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. 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. At December
31, 2000, the Company was in compliance with all loan requirements.
23
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Sykes presents data in the 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. The components of other accumulated comprehensive
income are as follows (in thousands):
[Enlarge/Download Table]
ACCUMULATED
UNREALIZED FOREIGN OTHER
LOSS ON CURRENCY COMPREHENSIVE
SECURITIES TRANSLATION INCOME (LOSS)
---------- ----------- -------------
Balance at January 1, 1998.......................... $ (735) $ (2,859) $ (3,594)
Foreign currency translation adjustment............. -- 1,452 1,452
Unrealized loss on securities....................... (6,600) -- (6,600)
Less: Reclassification adjustment for loss realized
in net income..................................... 7,335 -- 7,335
------- -------- --------
Balance at December 31, 1998........................ -- (1,407) (1,407)
Foreign currency translation adjustment............. -- (4,453) (4,453)
------- -------- --------
Balance at December 31, 1999........................ -- (5,860) (5,860)
Foreign currency translation adjustment............. -- (8,222) (8,222)
------- -------- --------
Balance at December 31, 2000........................ $ -- $(14,082) $(14,082)
======= ======== ========
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 12. INCOME TAXES
The components of income before provision for income taxes are as follows
(in thousands):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Domestic.................................................. $43,797 $17,048 $ 4,009
Foreign................................................... 25,100 18,704 16,393
------- ------- -------
Total income before income taxes................ $68,897 $35,752 $20,402
======= ======= =======
24
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision for income taxes consists of the following (in thousands):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Current:
Federal................................................... $14,507 $ 6,856 $14,365
State..................................................... 2,412 1,225 2,338
Foreign................................................... 7,875 12,306 8,889
------- ------- -------
Total current provision for income taxes.......... 24,794 20,387 25,592
------- ------- -------
Deferred:
Federal................................................... (4,306) (348) (5,120)
State..................................................... (716) (296) (855)
Foreign................................................... 1,419 (5,893) (1,657)
------- ------- -------
Total deferred provision for income taxes......... (3,603) (6,537) (7,632)
------- ------- -------
Total provision for income taxes.................. $21,191 $13,850 $17,960
======= ======= =======
The components of the net deferred tax asset (liability) are as follows (in
thousands):
[Download Table]
DECEMBER 31,
-----------------
2000 1999
------- -------
Domestic current:
Deferred tax asset:
Accrued expenses....................................... $10,225 $ 1,589
Deferred compensation.................................. -- 96
Bad debt reserve....................................... 1,543 700
Valuation allowance.................................... (1,819) --
Other.................................................. 11 8
------- -------
Total current deferred tax asset.................. 9,960 2,393
------- -------
Deferred tax liability:
Prepaid expenses.......................................... (240) (290)
Other..................................................... (925) (925)
------- -------
Total current deferred tax liability.............. (1,165) (1,215)
------- -------
Net domestic current deferred tax asset........... 8,795 1,178
------- -------
Foreign current:
Deferred tax asset:
Net operating loss carry-forward....................... 1,815 1,470
Valuation allowance.................................... (1,815) (1,240)
------- -------
Total foreign current deferred tax asset.......... -- 230
------- -------
Net current deferred tax asset, included in prepaid expenses
and other current assets.................................. $ 8,795 $ 1,408
======= =======
25
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Download Table]
DECEMBER 31,
-----------------
2000 1999
------- -------
Domestic non-current:
Deferred tax asset:
Unrealized loss on security............................ $ 1,736 $ 3,009
Intangible assets...................................... 920 5,171
Deferred revenue....................................... -- 1,736
Net operating loss carry-forward....................... 83 83
Valuation allowance.................................... (348) (2,894)
Other.................................................. 519 265
------- -------
Total non-current deferred tax asset.............. 2,910 7,370
------- -------
Deferred tax liability:
Property and equipment.................................... (2,477) (1,188)
Intangible assets......................................... -- (1,919)
Other..................................................... (734) --
------- -------
Total non-current deferred tax liability.......... (3,211) (3,107)
------- -------
Net domestic non-current deferred tax asset
(liability)..................................... (301) 4,263
------- -------
Foreign non-current:
Deferred tax asset:
Intangible assets...................................... 1,312 4,058
Deferred revenue....................................... 5,628 3,391
------- -------
Total non-current deferred tax asset.............. 6,940 7,449
------- -------
Deferred tax liability:
Property and equipment.................................... (1,342) (866)
Untaxed reserve........................................... (996) (494)
------- -------
Total non-current deferred tax liability.......... (2,338) (1,360)
------- -------
Net foreign non-current deferred tax asset........ 4,602 6,089
------- -------
Net non-current deferred tax asset, included in
deferred charges and other assets............... $ 4,301 $10,352
======= =======
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $59.5
million at December 31, 2000, excluding amounts, which, if remitted, generally
would result in minimal additional U.S. income taxes because of available
foreign tax credits. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $7.5 million
would have been required.
At December 31, 2000, the Company's French subsidiary had an operating loss
carryforward of approximately $4.2 million that expires through the year 2006.
26
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the principal differences between income taxes at
the federal statutory rate and the effective income tax amounts reflected in the
financial statements (in thousands):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Statutory tax............................................... $24,113 $12,513 $ 7,141
State income taxes, net of federal tax benefit.............. 877 604 669
Effect of foreign income not subject to federal and state
income tax................................................ (3,017) 9 (162)
In-process research and development......................... -- -- 5,064
Valuation on unrealized loss on marketable security......... (2,546) -- 3,000
Valuation on net operating loss carry-forward............... 3,412 430 704
Non-deductible amortization................................. 410 514 63
Loss from joint venture..................................... -- -- 1,382
Foreign taxes, net of foreign income not taxed in the United
States.................................................... 5,647 (1,468) (565)
Tax basis difference on sale of equity interest in SHPS,
Incorporated.............................................. (7,280) -- --
Permanent differences....................................... 296 440 359
Other....................................................... (721) 808 305
------- ------- -------
Total provision for income taxes.................. $21,191 $13,850 $17,960
======= ======= =======
The Company is currently under examination by the Internal Revenue Service
for the tax years ended July 31, 1999 and 1998. In the opinion of management,
any liability that may arise from the prior period as a result of the
examination will not have a material effect on the Company's financial
condition, results of operations, or cash flows.
NOTE 13. 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. As a result of the second
quarter restructuring, the Company reduced the number of employees by 157 during
2000 and expects the remaining lease obligations related to the closed
facilities to be completed by June 2001. Included in the second quarter
restructuring and other charges is a $3.5 million lease termination payment
related to the corporate aircraft.
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
into its Charlotte, North Carolina center and the exit of its worldwide
localization operations. In connection with the fourth quarter restructuring,
the Company plans to reduce the number of employees by 250. The Company expects
to substantially complete the workforce reduction by March 2001 and any
remaining lease obligations related to the closed facilities by December 2001.
Included in the restructuring and other charges is a $2.4 million severance
payment related to the employment contract of the Company's former President.
The Company estimates it may achieve up to approximately $12.0 million in
annualized savings related to the closed operations included in the second and
fourth quarter restructurings.
27
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The major components of restructuring and other charges for the year ended
December 31, 2000 are as follows (in thousands):
[Enlarge/Download Table]
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 is as follows (in
thousands):
[Enlarge/Download Table]
RESTRUCTURING OTHER TOTAL
------------- ------- --------
Balance established in 2000........................... $ 24,366 $ 6,102 $ 30,468
Reduction in workforce cash outflows.................. (912) -- (912)
Lease termination cash payments....................... (477) (3,639) (4,116)
Non-cash write-down and reserve of property and
equipment........................................... (14,088) (103) (14,191)
Non-cash write-down and reserve of intangible
assets.............................................. (6086) -- (6,086)
Other cash outflows................................... (95) -- (95)
-------- ------- --------
Balance remaining at December 31, 2000................ $ 2,708 $ 2,360 $ 5,068
======== ======= ========
NOTE 14. 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 (in thousands):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Basic:
Weighted average common shares outstanding................ 41,518 42,045 41,258
------ ------ ------
Total weighted average basic shares outstanding... 41,518 42,045 41,258
Diluted:
Dilutive effect of stock options.......................... 127 950 1,030
------ ------ ------
Total weighted average diluted shares
outstanding..................................... 41,645 42,995 42,288
====== ====== ======
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and buildings under operating leases
having terms ranging from one to twenty-two years. The building leases contain
up to two five-year renewal options. Rental expense under operating leases for
the years ended December 31, 2000, 1999 and 1998 was approximately $17.4
million, $16.7 million, and $11.2 million, respectively.
28
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum rental payments under
operating leases having a remaining non-cancelable term in excess of one year
subsequent to December 31, 2000 (in thousands):
[Download Table]
TOTAL
YEAR AMOUNT
---- -------
2001........................................................ $10,826
2002........................................................ 7,706
2003........................................................ 5,600
2004........................................................ 3,724
2005........................................................ 2,510
Thereafter.................................................. 23,374
-------
Total minimum payments required................... $53,740
=======
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 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 of the software license. The Company has not recorded
the convertible preferred stock subject to the contingency in the accompanying
Consolidated Balance Sheets as of December 31, 2000 and 1999. 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. This lawsuit is in the very early stages and formal
discovery has not yet begun. 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 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.
29
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan covering defined employees who meet
established eligibility requirements. Under the original plan provisions, the
Company matched 25% of participant contributions to a maximum matching amount of
1% of participant compensation. During 1997, the Company increased the 401(k)
matching provision to 50% of participating contributions to a maximum matching
amount of 2% of participant compensation. The Company contribution was
approximately $0.9 million, $0.8 million and $0.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively. In addition, two of the
Company's subsidiaries maintained separate defined contribution plans, one of
which was merged into the Company's 401(k) plan effective January 1, 1998 and
the second one was terminated with the Company's sale of SHPS, Incorporated. The
combined contributions made to these plans were approximately $0.2 million, $0.1
million, and $0.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
NOTE 17. STOCK OPTIONS
1996 Employee Stock Option Plan. The Company's 1996 Employee Stock Option
Plan (the "Employee Plan") permits the granting of incentive or non-qualified
stock options to purchase up to approximately 2.625 million shares of the
Company's common stock at not less than the fair value at the time the options
are granted. All options granted under the Employee Plan expire if not exercised
by the tenth anniversary of their grant date with the exception of outstanding
options converted pursuant to the acquisition of McQueen consistent with
pooling-of-interests rules and expire five years from grant date. Certain other
officers and employees hold options to purchase additional shares of common
stock at a range of $0.03 to $30.76 per share that vest ratably over the
three-year period following the date of grant, except for approximately 360
thousand options associated with the outstanding options from the acquisition of
McQueen which are immediately exercisable. Transactions related to the 1996
Employee Stock Option Plan are summarized as follows (in thousands):
[Download Table]
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at January 1, 1998.............................. 1,374 $16.67
(Exercisable: 391 at $11.02)
Granted................................................... 682 $21.46
Exercised................................................. (329) $ 3.14
Expired or terminated..................................... (313) $23.91
-----
Outstanding at December 31, 1998............................ 1,414 $20.05
(Exercisable: 344 at $19.49)
Granted................................................... 860 $23.50
Exercised................................................. (677) $17.71
Expired or terminated..................................... (320) $22.70
-----
Outstanding at December 31, 1999............................ 1,277 $22.90
(Exercisable: 365 at $20.99)
Granted................................................... 373 $18.84
Exercised................................................. (75) $21.18
Expired or terminated..................................... (933) $21.21
-----
Outstanding at December 31, 2000............................ 642 $23.19
=====
(Exercisable: 326 at $23.66)
Options available for future grant........................ 712
=====
30
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table further summarizes information about the 1996 Employee
Stock Option Plan at December 31, 2000:
[Download Table]
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES DEC. 31, 2000 LIFE PRICE DEC. 31, 2000 PRICE
---------------- -------------- --------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.03 to $ 1.24 1 2.0 $ 0.90 1 $ 0.90
$ 8.00 8 5.3 $ 8.00 8 $ 8.00
$13.23 to $30.76 633 8.0 $23.44 317 $24.16
--- ---
Total 642 7.9 $23.19 326 $23.66
=== ===
1996 Non-Employee Director Stock Option Plan. The Company's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") permits the
granting of non-qualified stock options to purchase up to 431 thousand shares of
the Company's common stock to members of the Board of Directors who are not
employees of the Company. Each outside director will receive options to purchase
5 thousand shares of common stock on the first day of each calendar year. Also,
on the date on which a new outside director is first elected or appointed, he or
she automatically will be granted options to purchase 5 thousand shares of
common stock. All options granted will have an exercise price equal to the then
fair market value of the common stock. All options granted under the
Non-Employee Plan expire if not exercised by the tenth anniversary of their
grant date.
Transactions related to the 1996 Non-Employee Director Stock Option Plan
are summarized as follows (in thousands):
[Enlarge/Download Table]
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
Outstanding at January 1, 1998.............................. 73 $16.56
(Exercisable: none)
Granted................................................... 40 $20.44
Exercised................................................. (7) $ 8.00
Expired or terminated..................................... -- $ --
---
Outstanding at December 31, 1998............................ 106 $18.53
(Exercisable: 39 at $16.67)
Granted................................................... 35 $23.81
Exercised................................................. (8) $ 8.00
Expired or terminated..................................... -- $ --
---
Outstanding at December 31, 1999............................ 133 $20.58
(Exercisable: 66 at $18.79)
Granted................................................... 67 $15.01
Exercised................................................. (15) $19.03
Expired or terminated..................................... (5) $23.81
---
Outstanding at December 31, 2000............................ 180 $18.53
===
(Exercisable: 81 at $19.90)
Options available for future grant.......................... 195
===
31
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table further summarizes information about the 1996
Non-Employee Director Stock Option Plan at December 31, 2000:
[Download Table]
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES DEC. 31, 2000 LIFE PRICE DEC. 31, 2000 PRICE
--------------- -------------- --------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$ 4.48 15 9.8 $ 4.48 -- $ --
$ 8.00 12 5.3 $ 8.00 13 $ 8.00
$13.53 8 9.5 $13.53 -- $ --
$18.39 5 7.2 $18.39 3 $18.39
$18.76 45 9.3 $18.76 -- $ --
$20.74 30 7.3 $20.74 20 $20.74
$22.23 30 6.4 $22.23 30 $22.23
$23.81 30 8.3 $23.81 10 $23.81
$25.42 5 6.4 $25.42 5 $25.42
--- --
Total 180 8.0 $18.53 81 $19.90
=== ==
1997 Management Incentive Stock Option Plan. The Company's 1997 Management
Incentive Stock Option Plan (the "Management Incentive Plan") permits the
granting of non-qualified stock options to purchase up to approximately 4.0
million shares of the Company's common stock at not less than the fair value at
the time the options are granted. At December 31, 2000, 1999 and 1998, no
options granted were exercisable. All options granted under the Management
Incentive Plan expire if not exercised by the tenth anniversary of their grant
date.
Transactions related to the 1997 Management Incentive Stock Option Plan are
summarized as follows (in thousands):
[Download Table]
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at January 1, 1998.............................. -- $ --
Granted................................................... 770 $21.19
Exercised................................................. -- $ --
Expired or terminated..................................... -- $ --
-----
Outstanding at December 31, 1998............................ 770 $21.19
Granted................................................... 155 $29.96
Exercised................................................. -- $ --
Expired or terminated..................................... (405) $20.00
-----
Outstanding at December 31, 1999............................ 520 $24.73
Granted................................................... 1,594 $18.29
Exercised................................................. -- $ --
Expired or terminated..................................... (526) $20.83
-----
Outstanding at December 31, 2000............................ 1,588 $19.56
=====
Options available for future grant.......................... 2,412
=====
32
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table further summarizes information about the 1997
Management Incentive Stock Option Plan at December 31, 2000:
[Download Table]
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES DEC. 31, 2000 LIFE PRICE DEC. 31, 2000 PRICE
--------------- -------------- --------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$16.24 60 9.2 $16.24 -- $ --
$18.00 1,163 9.2 $18.00 -- $ --
$18.93 20 7.7 $18.93 -- $ --
$19.88 50 7.9 $19.88 -- $ --
$20.00 70 7.3 $20.00 -- $ --
$23.50 40 8.7 $23.50 -- $ --
$26.58 30 8.0 $26.58 -- $ --
$29.21 80 8.4 $29.21 -- $ --
$30.76 75 8.1 $30.76 -- $ --
----- ---
Total 1,588 8.9 $19.56 -- $ --
===== ===
2000 Stock Option Plan. The Company's 2000 Stock Option Plan (the "2000
Plan") permits the granting of incentive stock options to purchase up to 4.0
million shares of the Company's common stock to certain employees of the Company
at not less than the fair market value at the time the options are granted. All
options granted under the 2000 Plan expire if not exercised by a fixed
expiration date, which is no later than the tenth anniversary of their grant
date.
Transactions related to the 2000 Plan are summarized as follows (in
thousands):
[Download Table]
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at January 1, 2000.............................. -- $ --
Granted................................................... 1,081 $ 6.85
Exercised................................................. -- $ --
Expired or terminated..................................... (16) $13.46
-----
Outstanding at December 31, 2000............................ 1,065 $ 6.75
=====
Exercisable: None
Options available for future grant.......................... 2,935
=====
The following table further summarizes information about the 2000 Stock
Option Plan at December 31, 2000:
[Download Table]
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES DEC. 31, 2000 LIFE PRICE DEC. 31, 2000 PRICE
---------------- -------------- --------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$ 4.05 715 9.8 $ 4.05 -- $ --
$ 4.32 to $ 5.94 65 9.9 $ 4.95 -- $ --
$11.28 to $14.31 271 9.6 $13.68 -- $ --
$17.68 to $20.17 14 9.4 $18.92 -- $ --
----- ---
Total 1,065 9.8 $ 6.75 -- $ --
===== ===
33
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plan. Sykes' Employee Stock Purchase Plan (the
"ESPP") allows eligible employee participants to purchase shares of the
Company's common stock at a discount through payroll deductions. The ESPP, which
qualifies under Code Section 423 of the Internal Revenue Code of 1986, was
adopted by the Company's Board of Directors on April 1, 1999 and approved by the
shareholders. Pursuant to the ESPP, Sykes reserved 1.0 million shares of its
common stock for issuance.
Under the ESPP, eligible employees may purchase the Company common stock at
87.5% of the market price on the last day of the offering period. The maximum
each employee may purchase within an offering period shall not exceed $6.25
thousand in market value of Company common stock. The Company will typically
have four three-month offering periods each year.
The weighted average fair value share price of the purchase rights granted
under the ESPP during the year ended December 31, 2000 was $7.29. For the years
ended December 31, 2000 and 1999, 85 thousand and 16 thousand, respectively, of
such shares were purchased and 899 thousand shares remain available for future
issuance.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Therefore, no compensation expense
has been recognized for stock options granted at fair market value under its
plans.
If the Company had elected to recognize compensation expense for stock
options based on the fair value at grant date, consistent with the method
prescribed by SFAS No. 123, net income and earnings per share would have been
reduced to the pro forma amounts as follows (in thousands except per share
amounts):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Net income as reported.................................... $45,638 $21,902 $ 2,442
Pro forma net income (loss) as prescribed by SFAS 123..... $40,580 $14,459 $(3,339)
Net income per diluted share as reported.................. $ 1.10 $ 0.51 $ 0.06
Pro forma net income (loss) per diluted share as
prescribed by SFAS 123.................................. $ 0.97 $ 0.34 $ (0.08)
The pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (i) a discount rate of 6.2 percent for
2000, a discount rate of 6.1 percent for 1999, and a discount rate of 6.0
percent for 1998; (ii) a volatility factor of 82.67 percent based upon the
average trading price of the Company's common stock since it began trading on
the Nasdaq National Market; (iii) no dividend yield; and (iv) an average
expected option life of five years (three years for the ESPP) for 2000 and an
average expected option life of four years (two years for the ESPP) for 1999 and
1998. In addition, the pro forma amount for 2000 and 1999 includes approximately
$189 thousand and $88 thousand, respectively, related to purchase discounts
offered under the ESPP (none for 1998).
NOTE 18. SEGMENTS AND GEOGRAPHIC INFORMATION
On June 13, 2000, the Company announced its initiatives to strategically
focus its operations into two business segments entitled Business Services and
Business Solutions. These segments are consistent with the Company's management
of these businesses and generally reflect its financial reporting structure and
operating focus. The Business Services group represents approximately 91% of the
Company's consolidated revenue for 2000 and is comprised of the Company's
technical and customer support and distribution and fulfillment segments. These
services are delivered through multiple communication channels encompassing
phone, e-mail, web, and chat. The Business Solutions group, which represents
approximately 9% of the Company's consolidated revenue for 2000, provides
professional services in e-commerce and customer
34
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relationship management (CRM) with a focus on business strategy development,
project management, business process redesign, change management, knowledge
management, education, training and web development.
The following table presents information about the Company's reportable
segments, as revised to reflect the change from a single segment in 1999 and
1998 to two (2) segments (in thousands):
[Enlarge/Download Table]
CONSOLIDATED
BUSINESS SERVICES(2) BUSINESS SOLUTIONS OTHER(1) TOTAL
-------------------- ------------------ -------- ------------
For the Year Ended December 31,
2000:
Revenue....................... $550,920 $52,686 $ -- $603,606
Depreciation and
amortization............... $ 35,828 $ 1,001 $ -- $ 36,829
Income (loss) from operations,
before compensation expense
associated with exercise of
options and restructuring
and other charges.......... $ 26,522 $ (526) $ -- $ 25,996
Compensation expense
associated with exercise of
options.................... (7,836) (7,836)
Restructuring and other
charges.................... (30,468) (30,468)
Other income (expense)........ 81,205 81,205
Provision for income taxes.... (21,191) (21,191)
Cumulative effect of change in
accounting principle....... (2,068) (2,068)
--------
Net income............ $ 45,638
========
For the Year Ended December 31,
1999:
Revenue....................... $521,967 $50,775 $ -- $572,742
Depreciation and
amortization............... $ 34,609 $ 729 $ -- $ 35,338
Income (loss) from operations,
before impairment of
long-lived assets.......... $ 46,618 $(1,370) $ -- $ 45,248
Impairment of long-lived
assets..................... (5,979) (5,979)
Other income (expense)........ (3,517) (3,517)
Provision for income taxes.... (13,850) (13,850)
--------
Net income............ $ 21,902
========
35
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Enlarge/Download Table]
CONSOLIDATED
BUSINESS SERVICES(2) BUSINESS SOLUTIONS OTHER(1) TOTAL
-------------------- ------------------ -------- ------------
For the Year Ended December 31,
1998:
Revenue....................... $388,746 $71,356 $ -- $460,102
Depreciation and
amortization............... $ 20,972 $ 859 $ -- $ 21,831
Income from operations, before
acquired in-process
research and development... $ 43,748 $ 3,393 $ -- $ 47,141
Acquired in-process research
and development............ (14,469) (14,469)
Other income (expense)........ (12,270) (12,270)
Provision for income taxes.... (17,960) (17,960)
--------
Net income............ $ 2,442
========
---------------
(1) Other items are shown for purposes of reconciling to the Company's
consolidated totals as shown in the table above for the three years ended
December 31, 2000. The accounting policies of the reportable segments are
the same as those described in the summary of accounting policies.
Inter-segment revenues are not material to the Business Services and
Business Solutions segment results. Total assets are not disclosed since
they are not identified and reported by segment to the Company's management.
(2) Business Services revenue includes $35.7 million, $73.0 million and $26.8
million for the years ended December 31, 2000, 1999 and 1998, respectively,
from SHPS, Incorporated, a previously wholly-owned subsidiary of the
Company, which was sold in June 2000.
No single customer accounted for 10% of consolidated revenues for the years
ended December 31, 2000, 1999, and 1998.
Information about the Company's operations by geographic location is as
follows (in thousands):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
Americas............................................. $390,268 $391,341 $295,729
International........................................ 213,338 181,401 164,373
-------- -------- --------
$603,606 $572,742 $460,102
======== ======== ========
Income before provision for income taxes:
Americas............................................. $ 56,087 $ 21,325 $ 6,506
International........................................ 12,810 14,427 13,896
-------- -------- --------
$ 68,897 $ 35,752 $ 20,402
======== ======== ========
Total assets:
Americas............................................. $221,133 $300,755 $259,542
International........................................ 136,211 118,641 102,256
-------- -------- --------
$357,344 $419,396 $361,798
======== ======== ========
NOTE 19. RELATED PARTY TRANSACTIONS
During 2000, the Company terminated its ten-year operating lease agreement
with the Company's Chairman (and majority shareholder) for its corporate
aircraft and paid a lease termination fee of $3.5 million. This lease
termination payment is included in restructuring and other charges in the
accompanying
36
SYKES ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Statement of Income for the year ended December 31, 2000. After the
lease termination, the Company paid the Chairman (and majority shareholder) $213
thousand for the use of the corporate aircraft in 2000. The lease expense for
each of the years ended December 31, 2000, 1999 and 1998, exclusive of lease
termination payments, was $0.3 million, $0.6 million, and $0.6 million,
respectively.
During the period from September 1, 2000 through December 31, 2000, the
Company also paid a company, in which the Chairman (and majority shareholder)
has an 80% equity interest, $247 thousand for management and site development
services.
A member of the board of directors of the Company received broker
commissions from the Company's 401(k) investment firm of $25 thousand for each
of the years ended December 31, 2000, 1999, and 1998, respectively, and
insurance commissions for the placement of the Company's various corporate
insurance programs of $75 thousand for each of the years ended December 31, 2000
and 1999, respectively (none in 1998).
37
Dates Referenced Herein and Documents Incorporated by Reference
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