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 September 30, 1997 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
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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
incorporation or organization) Identification No.)
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 X No
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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, 11,542,300 shares outstanding as of
November 5, 1997.
ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
Three and nine months ended
September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997
and 1996 6
Notes to Consolidated Financial Statements 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 30, December 31,
1997 1996
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,787 $18,298
Accounts receivable, net 15,557 13,539
Grant receivable 612 535
Prepaid expenses and other 1,624 433
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Total current assets 34,580 32,805
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PROPERTY AND EQUIPMENT, net
Communications and computer equipment 24,195 16,753
Furniture and fixtures 4,319 2,936
Leasehold improvements 1,739 1,581
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30,253 21,270
Less: Accumulated depreciation and amortization (12,440) (9,638)
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Net property and equipment 17,813 11,632
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DEFERRED INCOME TAXES 3,251 3,251
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OTHER ASSETS 1,398 1,424
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$57,042 $49,112
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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)
September 30, December 31,
1997 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $1,386 $284
Current portion of capitalized lease obligations 552 725
Accounts payable 3,916 2,807
Accrued expenses 2,607 1,923
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Total current liabilities 8,461 5,739
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LONG-TERM DEBT 5,102 1,057
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CAPITALIZED LEASE OBLIGATIONS 888 1,296
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value 5,000 shares authorized,
none issued -- --
Common Stock, $0.01 par value, 40,000 shares authorized,
11,542 and 11,538 shares issued and outstanding 115 115
Additional paid-in capital 49,343 49,339
Deferred compensation (121) (161)
Accumulated deficit (6,540) (8,290)
Cumulative translation adjustment (206) 17
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Total shareholders' equity 42,591 41,020
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$57,042 $49,112
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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 Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------
1997 1996 1997 1996
--------------------- -------------- -------------- --------------
NET REVENUES $21,715 $17,306 $65,072 $51,887
OPERATING EXPENSES:
Cost of services 11,690 9,253 35,861 27,906
Selling, general and administrative 8,986 7,621 26,682 22,047
Non-recurring compensation expense -- -- -- 12,689
--------------------- -------------- -------------- --------------
20,676 16,874 62,543 62,642
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Operating income (loss) 1,039 432 2,529 (10,755)
INTEREST EXPENSE (INCOME), NET (77) (178) (344) 302
--------------------- -------------- -------------- --------------
Income (loss) before taxes 1,116 610 2,873 (11,057)
INCOME TAX EXPENSE (BENEFIT) 435 238 1,123 (3,208)
--------------------- -------------- -------------- --------------
NET INCOME (LOSS) $681 $372 $1,750 ($7,849)
===================== ============== ============== ==============
Net income per share $0.06 $0.03 $0.14
===================== ============== ==============
Shares used in computing net income
per share 12,124 12,157 12,124
===================== ============== ==============
PRO FORMA DATA:
Historical loss before taxes ($11,057)
Pro forma income tax benefit (3,977)
--------------
Pro forma net loss ($7,080)
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Pro forma net loss per share ($0.71)
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Shares used in computing pro forma
net loss per share 9,972
==============
The accompanying notes are an integral part of these statements.
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,750 ($7,849)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Minority interest in subsidiary earnings -- 37
Depreciation and amortization 2,842 1,815
Deferred income tax benefit -- (3,680)
Non-recurring compensation charge -- 12,689
(Increase) decrease in:
Accounts receivable (2,018) (4,006)
Prepaid expenses and other (1,191) (403)
Receivable from related party -- 133
Grant receivable (77) 164
Other assets 26 (557)
Increase (decrease) in:
Accounts payable 1,109 1,295
Accrued expenses 684 103
Deferred revenue -- (421)
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Net cash provided by (used in) operating activities 3,125 (680)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,983) (4,446)
Purchase of minority interest in subsidiary -- (129)
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Net cash used in investing activities (8,983) (4,575)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on lines of credit -- (6,201)
Proceeds from long-term debt 5,515 2,169
Payments on long-term debt (368) (3,007)
Payments on capitalized lease obligations (581) (680)
Payments on subordinated notes -- (300)
Payment of Subchapter S distribution -- (2,718)
Proceeds from initial public offering, net of offering costs -- 34,612
Proceeds from exercise of stock options 4 36
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Net cash provided by financing activities 4,570 23,911
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH (223) 11
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,511) 18,667
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,298 447
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CASH AND CASH EQUIVALENTS, END OF PERIOD $16,787 $19,114
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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 nine month periods ended
September 30, 1997 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 the
Form 10-K for the year ended December 31, 1996.
Note 2: PRO FORMA INFORMATION
Pro Forma Income Data
Shortly before the effective date of the Company's initial public
offering in June 1996, 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 nine months ended
September 30, 1996 include a pro forma adjustment for 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 period. For the three months ended September 30,
1997 and 1996 and the nine months ended September 30, 1997, the Company was
fully subject to federal and state income taxes.
Note 3: EARNINGS PER SHARE
Pro Forma Net Income Per Share
Pro forma net income per share for the nine months ended September 30,
1996 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
pro forma net income per share as if they were outstanding for all periods
presented.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the EPS
calculation by replacing primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings available to common stockholders by the weighted
average shares outstanding. Diluted EPS reflects the potential dilution from the
exercise or conversion of securities into common stock, such as stock options.
Early application is prohibited, although footnote disclosure of pro forma EPS
amounts is required. For the three and nine months ended September 30, 1997 and
1996 the Company believes the effect of the application of SFAS No. 128 would be
immaterial.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997
GENERAL
ICT Group, Inc. ("ICT" or "the Company") is an independent
multinational provider of call center teleservices, which consists of outbound
and inbound telemarketing and customer support services, together with related
value-added services such as marketing, research, management and consulting
services. 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 additional 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, energy 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.
With the increasing use of teleservices by businesses and the trend
toward outsourcing call center activities, ICT believes significant
opportunities exist to expand its business. The Company's growth strategy
includes the following key elements:
o Pursue Outsourced Call Center Management Opportunities
o Increase International Presence
o Develop Strategic Alliances and Acquisitions
o Expand Value-Added Marketing Services
o Maintain Industry Specialization
o Maintain Technology Leadership
o Continue Commitment to Quality Service
8
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996:
- -----------------------------------------------
Net Revenues. Net revenues increased 26% to $21.7 million for the three
months ended September 30, 1997 from $17.3 million for the third quarter of 1996
primarily due to growth in TeleServices revenues. TeleService division revenues
increased 30% to $18.0 million for the three months ended September 30, 1997
from $13.9 million in the third quarter of 1996 resulting from continued strong
growth in both international and domestic markets. International TeleService
revenues grew 56% to $3.2 million in 1997 from $2.1 million in 1996. Domestic
TeleService revenues grew 25% to $14.8 million in 1997 from $11.8 million in
1996 as a result of growth in the insurance, financial services and health care
industries. Marketing services revenues increased 38% to $2.5 million in 1997
from $1.8 million in 1996 due to strong growth in market research revenues.
Management services revenues decreased 24% to $1.2 million in 1997 from $1.6
million in 1996 due to the conclusion of a service contract in the second
quarter of 1997.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 26% to $11.7 million for the three
months ended September 30, 1997 from $9.3 million in the third quarter of 1996.
This increase is primarily the result of increased direct labor force and
telecommunication costs required to support the increased revenue volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 18% to $9.0 million for the three months ended
September 30, 1997 from $7.6 million for the third quarter of 1996 due to
increased numbers of call centers and workstation capacity and additional sales
and systems support implemented to support business growth. As a percentage of
revenues, selling, general and administrative expenses declined to 41% in the
third quarter of 1997 from 44% in the same quarter of 1996 as the Company has
better managed the timing of opening additional call centers and adding
workstation capacity; consolidated certain call centers into larger centers,
spread fixed costs of operations over larger centers and generally managed fixed
expenses to support a larger revenue base.
Interest Expense (Income), net. Net interest income of $77,000 and
$178,000 in the third quarter of 1997 and 1996, respectively, reflects the
investment of funds obtained through the Company's initial public offering
partially offset by interest expense related to capital leases and borrowings
against the Company's equipment line of credit for capital expansion. The
decrease in net interest income is the result of increased average outstanding
balances on the equipment line of credit and decreased average invested funds in
1997 as compared to 1996. In 1997, the Company intends to finance capital
equipment purchases under its equipment line of credit. In the third quarter of
1997, the Company borrowed approximately $2.6 million under its equipment line.
Provision for Income Taxes. Provision for income taxes increased
$197,000 to $435,000 for the third quarter of 1997 from $238,000 in the third
quarter of 1996. For the third quarter of 1997 and 1996, the provision for
income taxes was approximately 39% of income before taxes.
9
Nine Months Ended September 30, 1997 and 1996
- ---------------------------------------------
Net Revenues. Net revenues increased 25% to $65.1 million for the nine
months ended September 30, 1997 from $51.9 million for the comparable 1996
period primarily due to growth in TeleServices revenues. TeleService division
revenues increased 30% to $54.4 million for the nine months ended September 30,
1997 from $41.8 million in the comparable 1996 period resulting from continued
strong growth in both international and domestic markets. International
TeleService revenues grew 94% to $9.6 million in 1997 from $5.0 million in 1996.
Domestic TeleService revenues grew 21% to $44.7 million in 1997 from $36.8
million in 1996 as a result of growth in the insurance telecommunications and
health care industries. Marketing services revenues decreased 16% to 6.7 million
in 1997 from $8.0 million in 1996 due to reduced revenues from financial service
clients within this division. Management services revenues increased 90% to $4.1
million in 1997 from $2.1 million in 1996 as a result of the Management Services
division commencing operations in the latter half of the second quarter of 1996.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 29% to $35.9 million for the nine
months ended September 30, 1997 from $27.9 million in the comparable 1996
period. This increase is due to increased direct labor force and
telecommunications costs to support the increased revenue volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 21% to $26.7 million for the nine months ended
September 30, 1997 from $22.0 million for the comparable 1996 period due to
increased numbers of call centers and workstation capacity and additional sales
and systems support implemented primarily in the latter half of 1996. As a
percentage of revenues, selling, general and administrative expenses declined to
41% in 1997 from 42% in 1996 as the Company has better managed the timing of
opening additional call centers and adding workstation capacity; consolidated
certain call centers into larger centers, spread fixed costs of operations over
the larger centers and generally managed fixed expenses to support a larger
revenue base.
Non-recurring Compensation Expense. In the second quarter of 1996, the
Company recorded a non-recurring, non-cash compensation expense of $12.7 million
in connection with its initial public offering resulting from granting and
extension of stock options.
Interest Expense (Income), net. Net interest income of $344,000 for the
nine months ended September 30, 1997 reflects the investment of funds obtained
through the Company's initial public offering partially offset by interest
expense related to capital leases and borrowings against the Company's equipment
line of credit. Subsequent to the Company's initial public offering in June
1996, the Company repaid all indebtedness under its revolving line of credit and
term loans with its bank and subordinated debt. In 1997, the Company intends to
finance capital equipment purchases under its equipment line of credit. For the
nine months ended September 30, 1997, borrowings under the equipment line of
credit were approximately $5.5 million.
Pro Forma Provision For Income Taxes. Prior to the effective date of
the Company's initial public offering, the Company was subject to taxation under
Subchapter S of the Internal Revenue Code. As a result, the net income of the
Company, for federal and state tax purposes, had been reported by and taxed
directly to the Company's shareholders. Subsequent to its initial public
offering, the Company has been fully subject to federal and state income taxes.
For the nine months ended September 30, 1997, provision for income taxes was
$1.1 million or approximately 39% of income before taxes.
10
Quarterly Results and Seasonality
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.
In the first quarter, business generally slows as a result of reduced
telemarketing activities 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. Also, 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.
Liquidity and Capital Resources
Prior to the Company's initial public offering in June 1996, ICT's
primary sources of liquidity had been cash flow from operations and borrowing on
its bank revolving line of credit. Acquisitions and capital expenditures had
been financed through bank term loans and capitalized lease obligations.
Cash provided by operating activities increased to $3.1 million for the
nine months ended September 30, 1997 from approximately $680,000 of cash used in
operating activities for the nine months ended September 30, 1996. The
approximate $3.8 million increase resulted from increased earnings before
noncash charges and reduced working capital requirements.
Cash used in investing activities increased to $9.0 million for the
nine months ended September 30, 1997 from $4.6 million for the comparable 1996
period. The increase of $4.4 million is primarily attributable to an increase in
the number of workstations to 2,358 at September 30, 1997 from 2,068 at December
31, 1997, upgraded telephony equipment and continued development and
implementation of Informix and IMA/Edge Software.
Cash provided by financing activities decreased to $4.6 million for the
nine months ended September 30, 1997 from $23.9 million for the comparable 1996
period. In 1997, the Company borrowed $5.5 million from its equipment line of
credit to partially fund its capital expenditures. In 1996, the Company raised
$34.6 million in net proceeds from its initial public offering and repaid
certain indebtedness.
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 2001. Outstanding
obligations under capitalized leases at September 30, 1997 were $1.4 million.
The Company maintains an equipment line of credit of $6.5 million that is
scheduled to expire in January 1998. At September 30, 1997, outstanding
obligations under the equipment line of credit were $6.5 million. The Company is
currently negotiating increases in its equipment line of credit.
11
The Company maintains a revolving line of credit with a bank of $15.0
million. Borrowings on the line of credit are limited to 80% of eligible
accounts receivable and bear interest at the bank's prime rate (8.50% at
September 30, 1997). At September 30, 1997, there were no borrowings outstanding
under the line of credit. The line of credit is scheduled to expire in January
1998. The Company is currently negotiating increases in its domestic financing
arrangements, as well as seeking similar arrangements for its international
operations.
The Company believes that cash flows generated from operations,
together with the remaining net proceeds from the June 1996 initial public
offering and funds available under its revolving line of credit will be
sufficient to finance its current operations and planned capital expenditures at
least through 1998.
12
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include certain
information relating to trends in the telemarketing industry and the overall
domestic economy, the Company's business strategy including the markets in which
it operates, the services it provides and the customers it targets, the benefits
of certain technologies the Company has acquired, variations in operating
results and liquidity, as well as information contained elsewhere in this Report
where statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates" or similar expressions. For such statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements in this document are subject to risks and
uncertainties that could cause the assumptions underlying such forward-looking
statements and the actual results to differ materially from those expressed in
or implied by the statements.
The most important factors that could prevent the Company from
achieving its goals--and cause the assumptions underlying the forward-looking
statements and the actual results of the Company to differ materially from those
expressed in or implied by those forward-looking statements--include, but are
not limited to, the following: (i) The competitive nature of the telemarketing
industry and the ability of the Company to continue to distinguish its services
from other telemarketing companies and other marketing activities on the basis
of quality, effectiveness, reliability and value; (ii) Economic conditions which
could alter the desire of businesses to outsource certain sales and service
functions and the ability of the Company to obtain additional contracts to
manage outsourced sales and service functions; (iii) The ability of the Company
to offer value-added services to businesses in its targeted industries and the
ability of the Company to benefit from its industry specialization strategy;
(iv) Risks associated with investments and operations in foreign countries
including, but not limited to, those related to local economic conditions,
exchange rate fluctuations, local regulatory requirements, political factors,
generally higher telecommunication costs, barriers to the repatriation of
earnings and potentially adverse tax consequences; (v) Technology risks
including the ability of the Company to select or develop new and enhanced
technology on a timely basis, anticipate and respond to technological shifts and
implement new technology to remain competitive; (vi) The ability of the Company
to successfully identify, complete and integrate strategic acquisitions that
expand or complement its business; and (vii) The results of operations which
depend on numerous factors including, but not limited to, 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 and the general competitive conditions in the telemarketing industry
and the overall economy.
13
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: None
(b) The registrant was not required to file any reports on Form 8-K for
the three months ended September 30, 1997.
14
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: November 12, 1997 By: /s/ John J. Brennan
-------------------
John J. Brennan
Chairman, President and
Chief Executive Officer
Date: November 12, 1997 By: /s/ Carl E. Smith
-----------------
Carl E. Smith
Senior Vice President,
Finance and Administration
Chief Financial Officer
15