UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ______________________,
Commission File Number: 0-20807
ICT GROUP, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2458937
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Town Center Drive, Langhorne, PA 19047
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(Address of principal executive offices) (Zip code)
215-757-0200
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Registrant's telephone number, including area code.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes____ No__X__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Shares $0.01 par value 11,500,000 Shares Outstanding as of August 12,
1996
1
ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three months and six months ended
June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and
1995 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 6 Exhibits and Reports of Form 8-K 12
SIGNATURES 13
2
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $20,070 $447
Accounts receivable, net 13,716 8,981
Receivable from related party 22 133
Grant receivable 418 537
Prepaid expenses and other 885 334
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Total current assets 35,111 10,432
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PROPERTY AND EQUIPMENT:
Communications and computer equipment 13,921 11,266
Furniture and fixtures 2,351 1,751
Leasehold improvements 1,160 885
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17,432 13,902
Less-Accumulated depreciation and amortization (8,178) (7,039)
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Net property and equipment 9,254 6,863
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DEFERRED INCOME TAXES 3,758 --
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OTHER ASSETS 1,585 1,186
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$49,708 $18,481
============= ============
The accompanying notes are an integral part of these statements
3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
June 30, December 31,
1996 1995
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings on lines of credit $715 $6,201
Current portion of long-term debt 300 705
Current portion of capitalized lease obligations 792 748
Current portion of subordinated notes due to related parties -- 180
Accounts payable and accrued expenses 4,499 3,778
Deferred revenues -- 421
Deferred income taxes 78 --
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Total current liabilities 6,384 12,033
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LONG -TERM DEBT 375 761
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CAPITALIZED LEASE OBLIGATIONS 1,605 1,632
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SUBORDINATED NOTES DUE TO RELATED PARTIES -- 120
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 129 92
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SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value 5,000 shares authorized, -- --
none issued
Common stock, $.01 par value, 40,000 shares authorized,
11,500 and 9,000 shares issued and outstanding 115 90
Additional paid-in capital 50,266 310
Deferred compensation (188) --
Retained earnings (deficit) (8,995) 3,439
Cumulative translation adjustment 17 4
----------------- -----------------
Total shareholders' equity 41,215 3,843
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$ 49,708 $18,481
================= =================
The accompanying notes are an integral part of these statements
4
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
NET REVENUES $18,361 $12,539 $34,581 $21,833
OPERATING EXPENSES:
Cost of services 9,886 7,090 18,653 12,300
Sellling, general and administrative 7,630 4,988 14,426 8,846
Non-recurring compensation expense 12,689 -- 12,689 --
------------ ------------ ------------ ------------
30,205 12,078 45,768 21,146
------------ ------------ ------------ ------------
Operating income (loss) (11,844) 461 (11,187) 687
INTEREST EXPENSE, NET 247 203 480 367
------------ ------------ ------------ ------------
Income (loss) before taxes (12,091) 258 (11,667) 320
INCOME TAX BENEFIT (3,446) -- (3,446) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(8,645) $258 $(8,221) $320
============ ============ ============ ============
PRO FORMA DATA:
Historical income (loss) before taxes $(12,091) $258 $(11,667) $320
Pro forma provision for income taxes (4,385) 110 (4,215) 136
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (7,706) $ 148 $ (7,452) $ 184
============ ============ ============ ============
Pro forma net income (loss) per share $(.81) $.02 $(.81) $.02
============ ============ ============ ============
Shares used in computing pro forma net
income (loss) per share 9,467 9,702 9,234 9,702
============ ============ ============ ============
The accompanying notes are an integral part of these statements
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (LOSS) $(8,221) $320
Adjustments to reconcile net income (LOSS) to net
cash provided by (used in) operating
activities -
Minority interest in subsidiaries' earnings 37 (12)
Depreciation and amortization 1,245 822
Deferred income taxes (benefit) (3,680) --
Non-recurring compensation expense 12,689 --
(Increase) decrease in -
Accounts receivable (4,735) (2,658)
Prepaid expenses and other (551) (485)
Receivable from related party 111 (77)
Grant receivable 118 135
Other assets (416) (175)
Increase (decrease) in -
Accounts payable and accrued expenses 723 2,560
Deferred revenue (421) --
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Net cash provided by (used in)
operating activities (3,101) 430
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,530) (2,610)
Payments for business acquisition -- (468)
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Net cash used in investing activities (3,530) (3,078)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on lines of credit (5,486) 1,689
Proceeds (payments) on long-term debt (791) 1,092
Borrowing (payments) on capitalized lease
obligations 16 (100)
Payments on subordinated notes (300) --
Payment of Subchapter S distribution (2,718) --
Proceeds from initial public offering, net 35,511 --
Proceeds from exercise of stock options 9 --
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Net cash provided by financing activities 26,241 2,681
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EFFECT OF FOREIGN EXCHANGE RATE CHANGE
ON CASH 13 2
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NET INCREASE IN CASH 19,623 35
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 447 10
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $20,070 $45
============ ============
The accompanying notes are an integral part of these statements
6
ICT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1995 and 1996, are not necessarily indicative of the results that may be
expected for the complete fiscal year. For additional information, refer to the
consolidated financial statements and footnotes thereto included in Amendment
No. 4 to the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 12, 1996.
Note 2: INITIAL PUBLIC OFFERING OF COMMON STOCK
The Company completed an initial public offering of its Common Stock
effective June 14, 1996. The Company sold 2,411,552 shares of its Common Stock
at $ 16.00 per share. The net proceeds to the Company, after underwriting
discounts and commissions, were approximately $ 35.9 million, excluding offering
expenses. An additional 463,448 shares of common stock (including 375,000 shares
purchased by the underwriters upon the exercise of an over-allotment option)
were sold by certain shareholders of the Company. The Company did not receive
any proceeds from the sale of shares of the selling Shareholders.
The balance sheet as of June 30, 1996 reflects (1) the net deferred
income tax liability of approximately $ 1.0 million which was recorded by the
Company as a result of the termination of its S Corporation status shortly
before the effective date of the Company's initial public offering ("Offering")
and (2) a distribution payable to the shareholders of the Company of all taxed
but undistributed S Corporation earnings, estimated at $ 2.7 million. The
deferred income tax liability represents the tax effect of the cumulative
differences between the financial reporting and income tax bases of certain
assets and liabilities as of the termination of S Corporation status.
Note 3: PRO FORMA INFORMATION
Pro Forma Income Data
Shortly before the effective date of the Offering, the Company
terminated its status as an S Corporation and became subject to federal and
state income taxes. Accordingly, for informational purposes, the accompanying
statements of operations for the three and six months ended June 30, 1996 and
1995 include a pro forma adjustment for the income taxes which would have been
recorded if the Company had not been an S Corporation, based on the tax laws in
effect during the respective periods.
7
Pro Forma Net Income Per Share
Pro Forma net income per share was calculated by dividing pro forma net
income by the weighted average number of shares of Common Stock outstanding for
the respective periods, adjusted for the dilutive effect of Common Stock
equivalents, if applicable, which consist of stock options, using the treasury
stock method. Pursuant to the requirements of the Securities and Exchange
Commission, Common Stock equivalents issued by the Company during the twelve
months immediately preceding the Offering have been included in the calculation
of the shares used in computing proforma net income per share as if they were
outstanding for all periods presented.
Note 4: NON-RECURRING CHARGES
The Company incurred a non-recurring, non-cash charge of approximately
$ 12.7 million during the second quarter of 1996. This charge related to the
replacement of certain previously granted options to provide for an extended
option period of five years and the accelerated vesting of certain options upon
the completion of the Company's initial public offering. In addition, the
Company recorded a significant net deferred income tax liability and
corresponding income tax expense as a result of the Company's termination of
its S corporation status.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996
GENERAL
ICT is an independent provider of call center teleservices, which
consists of outbound and inbound telemarketing, and value-added services, such
as marketing, research and consulting services, to businesses domestically and
internationally. The Company's call center management experience, technological
leadership and expertise in target industries enable it to provide clients with
high quality, cost-effective call center services. In addition to supporting
customers' teleservice programs from its own call centers, the Company is
pursuing opportunities to manage clients' call centers on a contract basis.
The Company has broadened its market position from its original
outbound consumer telemarketing orientation to its present range of call center
services through both internal growth and a series of strategic acquisitions.
ICT has expanded beyond its traditional markets of insurance, financial
services, publishing and telecommunications to include the pharmaceutical,
health care services and computer software and hardware industries, which are
emerging as areas of rapid growth in the use and outsourcing of call center
teleservices. The Company intends to pursue continued expansion through a
combination of internal growth, strategic alliances, and acquisitions of
domestic and international businesses that provide teleservices that are
complementary to ICT's core telemarketing expertise.
Results of Operations
The Company has experienced and expects to continue to experience
significant quarterly variations in operating results, principally as a result
of the timing of clients' telemarketing campaigns, the commencement and
expiration of contracts, the timing and amount of new business generated by the
Company, the Company's revenue mix, the timing of additional selling, general
and administrative expenses to support the growth and development of new
business units and the competitive conditions in the telemarketing industry. The
Company's business tends to be strongest in the fourth quarter due to the high
level of client telemarketing activity prior to the holiday season, particularly
in the financial services and consumer industries.
In the first quarter, business generally slows as a result of reduced
telemarketing activities in the financial services industry and client
transitions to new marketing programs during the first quarter of the calendar
year. In addition, the Company typically expands its operations in the first
quarter to support anticipated business growth beginning in the second quarter.
As a result, selling, general and administrative costs typically increase in the
first quarter without a commensurate increase in revenues, which results in
decreased profitability for the first quarter versus the previous fourth
quarter. Demand for the Company's services typically slows or decreases in the
third quarter as the volume of telemarketing projects decreases during the
summer months. In addition, the Company's operating expenses increase during
the third quarter in anticipation of higher demand for its services during the
fourth quarter.
The Company was subject to taxation under Subchapter S of the Internal
Revenue Code from its inception in 1987 until June 1996. As a result, the net
income of the Company, for federal and certain state and local tax purposes, has
been reported by and taxed directly to the Company's shareholders, rather than
the Company. Pro forma net income has been computed as if the Company had been
fully subject to federal and state income taxes based upon the tax laws in
effect during the respective periods.
9
Three Months Ended June 30, 1996 and 1995
Net revenues increased 46.4% to $18.4 million for the three months
ended June 30, 1996 from $12.5 million for the comparable period in 1995
primarily due to increased revenues in the Company's core domestic teleservice
business, increased business in its TeleProfessional operations, which support
pharmaceutical and information technology clients, and increased growth in its
international operations. International teleservice revenues increased 262% to
$1.7 million in the second quarter of 1996 as a result of continued growth in
Europe and the opening of Canadian operations in the first quarter of 1996.
Revenues from the marketing services operations increased 52% to $3.1 million
in the second quarter of 1996 from $2.0 million in the second quarter of 1995,
partially due to a full quarter's recognition of revenues from Smartline, the
Company's telebanking operations which was acquired in May 1995. In the second
quarter of 1996, the Company established its Call Center Management Services
division which contributed approximately $ 500,000 of revenues in the second
quarter of 1996.
Cost of services increased 39.4% to $9.9 million in the three months
ended June 30, 1996 from $ 7.1 million for the comparable period in 1995 due to
increased volume of teleservice activities. As a percentage of net revenues,
cost of services decreased to 53.8% for the three months ended June 30, 1996
from 56.5% for the 1995 comparable period due to increased productivity in the
Company's inbound operations and lower telecommunications costs as a result of
lower telephone rates negotiated in the latter half of 1995.
Selling, general and administrative expenses increased 53.0% to
$7.6 million for the three months ended June 30, 1996 from $5.0
million for the three months ended June 30, 1995 principally due to the
establishment in the second quarter of 1996, of the Company's Call Center
Management Services division; the opening of Canadian operations in the first
quarter of 1996 as well as the opening of additional domestic call centers
during 1995 and the first quarter of 1996; and, increased sales, marketing,
customer and data processing support both internationally and domestically.
Upon completion of its initial public offering, the Company recorded a
$12.7 million non-recurring compensation expense relating to the replacing of
certain previously granted options providing for an extension of the exercise
period and the vesting of certain options which were contingent upon the
completion of the offering.
Interest expense increased to $247,000 in the 1996 period from
$203,000 in the 1995 period, due to higher average outstanding balances of bank
and capitalized lease debt, which were partially offset by lower average
interest rates in the 1996 period and interest earned on the proceeds from the
Company's initial public offering.
Six Months Ended June 30, 1996 and 1995
Net revenues increased 58.4% to $34.6 million for the six months ended
June 30, 1996 from $21.8 million for the six months ended June 30, 1995
primarily due to growth in consumer telemarketing services, revenues from the
telebanking operations of Smartline (acquired in May 1995), increased revenues
from international teleservices and an increase in TeleProfessional revenues.
Costs of services increased 51.7% to $18.7 million in the six months
ended June 30, 1996 from $12.3 million for the comparable period in 1995 due to
increased volume of domestic and international teleservice activities. As a
percentage of net revenues, cost of services decreased to 53.9% in the first
half of 1996 from 56.3% in the 1995 comparable period primarily due to lower
telecommunications costs.
10
Selling, general and administrative expenses increased 63.1% to $14.4
million in the second half of 1996 from $8.8 million in the 1995 comparable
period due primarily to additional sales and support personnel for targeted
industries, international expansion and the establishment of the Company's Call
Center Management Services division.
Upon completion of its initial public offering, the Company recorded a
$12.7 million non-recurring compensation expense relating to the replacing of
certain previously granted options providing for an extension of the exercise
period and the vesting of certain options which were contingent upon the
completion of the offering.
Interest expense increased to $480,000 for the six months ended June
30, 1996 from $367,000 for the six months ended June 30, 1995 due to higher
average outstanding balances of bank and capitalized lease debt partially offer
by lower average interest rates in 1996 and interest income earned on the
proceeds from the Company's initial public offering.
Liquidity and Capital Resources
Historically, ICT's primary sources of liquidity have been cash flow
from operations and borrowing on its bank revolving line of credit. Acquisitions
and capital expenditures have been financed through bank term loans and
capitalized lease obligations. The Company has utilized any excess cash from
operations to repay its revolving bank loan and, historically, has maintained a
minimum cash balance.
Cash used by operating activities was $3.1 million for the six months
ended June 30, 1996 compared to cash provided of $430,000 for the same period in
1995. The increase in cash used was due to higher net income before
depreciation, amortization, and the non-recurring compensation charge which was
offset by the cash used for working capital. The working capital increases were
principally related to higher accounts receivable balances resulting primarily
from the increases in net revenues in each period.
Cash provided by financing activities was $26.2 million for the six
months ended June 30, 1996 compared to $2.7 million for the same period in
1995. In June 1996, the Company completed an initial public offering of its
common stock which provided net proceeds of approximately $35.5 million. The
Company repaid the outstanding indebtedness under its revolving line of credit
and certain term debt with its bank and distributed to its Shareholders $2.5
million as a portion of the S Corporation distribution.
From January 1, 1996 through June 30, 1996, the Company's capital
expenditures totalled $3.5 million. During the 1996 six month period, the
Company increased its number of workstations by approximately 500.
The Company's telemarketing activities will continue to require
significant capital expenditures. Historically, equipment purchases have been
financed through the Company's equipment line of credit and through capitalized
lease obligations with various equipment vendors and lending institutions. The
lease obligations are payable in varying installments through 2000. Outstanding
obligations under capitalized leases at June 30, 1996 were $2.6 million.
The Company believes that the funds generated from operations, together
with the net proceeds to the Company from the offering and available credit
under its line of credit and equipment line, will be sufficient to finance its
current operations and planned capital expenditures at least through 1997.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are furnished as exhibits and numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 27 Financial Data Schedule
(b) The registrant was not required to file any reports on Form 8-K for
the three months ended June 30, 1996.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ICT GROUP, INC.
Date: August 13, 1996 By: /s/ John J. Brennan
------------------------------------
John J. Brennan
Chairman, President and
Chief Executive Officer
Date: August 13, 1996 By: /s/ Carl E. Smith
------------------------------------
Carl E. Smith
Senior Vice President
Finance and Administration
Chief Financial Officer
13