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 March 31, 1998 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 (I.R.S. Employer
of 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 _____
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, 11,542,525 shares outstanding as of May 4, 1998.
ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three months ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 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 1 LEGAL PROCEEDINGS 12
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, December 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,519 $ 17,711
Accounts receivable, net 21,000 17,684
Grant receivable 764 788
Prepaid expenses and other 1,693 1,079
Deferred income taxes 0 179
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Total current assets 39,976 37,441
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PROPERTY AND EQUIPMENT, net
Communications and computer equipment 28,107 26,077
Furniture and fixtures 4,999 4,579
Leasehold improvements 2,165 2,147
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35,271 32,803
Less: Accumulated depreciation and amortization (14,550) (13,359)
-------- --------
Net property and equipment 20,721 (19,444)
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DEFERRED INCOME TAXES 3,409 3,315
-------- --------
OTHER ASSETS 1,406 1,378
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$ 65,512 $ 61,578
======== ========
The accompanying notes are an integral part of these statements.
3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, December 31,
1998 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,918 $ 1,386
Current portion of capitalized lease obligations 725 744
Accounts payable 6,093 5,823
Accrued expenses 4,859 3,959
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Total current liabilities 13,595 11,912
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LONG-TERM DEBT 6,582 4,799
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CAPITALIZED LEASE OBLIGATIONS 1,325 1,499
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value 5,000 shares authorized,
none issued -- --
Common Stock, $0.01 par value, 40,000 shares authorized,
11,542 and 11,542 shares issued and outstanding 115 115
Additional paid-in capital 49,258 49,258
Deferred compensation (94) (107)
Accumulated deficit (4,952) (5,618)
Cumulative translation adjustment (317) (280)
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Total shareholders' equity 44,010 43,368
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$ 65,512 $ 61,578
======== ========
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
March 31,
-----------------------------
1998 1997
------------ ----------
NET REVENUES $ 27,020 $ 20,492
OPERATING EXPENSES:
Cost of services 16,302 11,415
Selling, general and administrative 9,664 8,440
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25,966 19,855
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Operating income 1,054 637
INTEREST INCOME, NET (38) (138)
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Income before income taxes 1,092 775
INCOME TAXES 426 302
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NET INCOME $ 666 $ 473
======== ========
EARNINGS PER SHARE:
Basic earnings per share $ 0.06 $ 0.04
======== ========
Diluted earnings per share $ 0.06 $ 0.04
======== ========
Shares used in computing basic earnings per share 11,542 11,554
======== ========
Shares used in computing diluted earnings per share 12,053 12,185
======== ========
The accompanying notes are an integral part of these statements.
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 666 $ 473
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,204 831
(Increase) decrease in:
Accounts receivable (3,316) (1,865)
Prepaid expenses and other (614) (559)
Grant receivable 24 74
Deferred income taxes 85 85
Other assets (28) (26)
Increase (decrease) in:
Accounts payable 270 674
Accrued expenses 900 1,190
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Net cash provided by (used in) operating activities (809) 877
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,468) (3,055)
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Net cash used in investing activities (2,468) (3,055)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,661 813
Payments on long-term debt (346) (58)
Payments on capitalized lease obligations (193) (209)
Proceeds from exercise of stock options -- 30
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Net cash provided by financing activities 2,122 576
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH
AND CASH EQUIVALENTS (37) (45)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,192) (1,647)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,711 18,298
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,519 $ 16,651
======== ========
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 month periods ended March 31,
1998 and 1997 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, 1997.
Note 2: EARNINGS PER SHARE
The Company has presented earnings per share pursuant to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," and the Securities
and Exchange Commission Staff Accounting Bulletin No. 98. Basic earnings per
share ("Basic EPS") is computed by dividing the net income for each period by
the weighted average number of shares of Common stock outstanding for each
period. Diluted earnings per share ("Diluted EPS") is computed by dividing the
net income for each period by the weighted average number of shares of Common
stock and Common stock equivalents outstanding for each period. For the three
months ended March 31, 1998 and 1997, Common stock equivalents outstanding used
in computing Diluted EPS were 511,000 and 631,000, respectively.
Note 3: RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires that all
components of comprehensive income be reported in the financial statements. SFAS
No. 130 became effective for fiscal years beginning after December 15, 1997,
with initial application as of the beginning of the Company's 1998 fiscal year.
SFAS No. 130 requires reclassification of prior period financial statements to
reflect application of the provisions of the new standard. For the three months
ended March 31, 1998 and 1997, comprehensive income was as follows:
March 31,
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1998 1997
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Net Income $ 666,000 $ 473,000
Foreign currency translation adjustments (23,000) (27,000)
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Comprehensive income $ 643,000 $ 446,000
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Note 4: DEBT
On April 21, 1998, the Company and several of its subsidiaries entered into an
agreement with two banks which provides for a $45.0 million line of credit (the
"1998 Credit Agreement"). The 1998 Credit Agreement can be drawn upon through
April 21, 2001. Borrowings may be used for acquisitions, working capital,
capital expenditures, and other corporate purposes. Interest is calculated at a
variable rate. Borrowing are secured by the Company's accounts receivable and
certain fixed assets. The Company is required to maintain certain financial
ratios and a specified level of net worth, as defined, and payments of dividends
and repurchases of stock are limited.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1998
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:
[ ] Pursue Outsourced Call Center Management Opportunities
[ ] Increase International Presence
[ ] Develop Strategic Alliances and Acquisitions
[ ] Expand Value-Added Marketing Services
[ ] Maintain Industry Specialization
[ ] Maintain Technology Leadership
[ ] Continue Commitment to Quality Service
8
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997:
Net Revenues. Net revenues increased 32% to $27.0 million for the three
months ended March 31, 1998 from $20.5 million for the three months ended March
31, 1997 resulting from continued strong growth from financial services,
telecommunications, and health care clients. Revenues from the TeleServices
division increased 29% to $20.6 million for the three months ended March 31,
1998 from $16.0 million in the three months ended March 31, 1997 resulting from
continued strong growth in the domestic markets. Domestic TeleServices revenues
grew 38% to $18.0 million in 1998 from $13.0 million in 1997 primarily as a
result of growth in the financial services, telecommunications, and health care
industries. (Domestic TeleServices revenues and Marketing Services revenues have
been restated for the move of our health care unit, Medical Marketing Services,
from the Domestic TeleServices division to the Marketing Services division.)
International TeleServices revenues were $2.8 million in 1998 versus $3.0
million in 1997 due to a 50% increase in European revenues which was offset by
reduced revenues from ICT Canada and ICT Spantel due to timing differences on
certain telecommunications projects. Marketing Services revenues increased 35%
to $4.1 million in 1998 from $3.0 million in 1997 as each of its three business
units achieved double digit growth. Management Services revenues increased 53%
to $2.3 million in 1998 from $1.5 million in 1997 reflecting the addition and
expansion of several customer service contracts.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 43% to $16.3 million for the three
months ended March 31, 1998 from $11.4 million in the three months ended March
31, 1997. 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 15% to $9.7 million for the three months ended
March 31, 1998 from $8.4 million for the three months ended March 31, 1997 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
36% in the first quarter of 1998 from 41% in the same quarter of 1997 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 Income, net. Net interest income of $38,000 and $138,000 in
the first quarter of 1998 and 1997, 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 1998 as compared to 1997.
In 1998, the Company intends to finance capital equipment purchases under its
equipment line of credit. In the first quarter of 1998, the Company borrowed
approximately $2.7 million under its equipment line.
Provision for Income Taxes. Provision for income taxes increased
$124,000 to $426,000 for the first quarter of 1998 from $302,000 in the first
quarter of 1997. For the first quarter of 1998 and 1997, the provision for
income taxes was approximately 39% of income before taxes.
9
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
Cash used in operating activities was $809,000 for the three months
ended March 31, 1998 versus $877,000 of cash provided by operating activities
for the three months ended March 31, 1997. The approximate $1.7 million decrease
resulted from increased working capital requirements.
Cash used in investing activities was $2.5 million for the three months
ended March 31, 1998 compared to $3.1 million for the first quarter of 1997. The
$2.5 million of capital expenditures is primarily attributable to an increase in
the number of workstations to 2,678 at March 31, 1998 from 2,520 at December 31,
1997, upgraded telephony equipment and continued development and implementation
of Oracle and IMA/Edge Software.
Cash provided by financing activities increased to $2.1 million for the
three months ended March 31, 1998 from $576,000 for the comparable 1997 period.
In 1998, the Company borrowed $2.7 million from its equipment line of credit to
fund its capital expenditures.
10
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 March 31, 1998 were $2.1 million. In
1998, the Company signed a three year, $45 million credit agreement (the "1998
Credit Agreement") with BankBoston, N.A. and Summit Bancorp as discussed in Note
2. At March 31, 1998, outstanding obligations under the equipment line of credit
were $8.5 million.
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 the 1998 Credit Agreement will be sufficient
to finance its current operations and planned capital expenditures at least
through 1998.
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 the company's expansion plans and the opportunities
available to the Company to expand its business, the financing of capital
equipment purchases, variations in operating results, and liquidity and capital
resources, 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, in
addition to those discussed in the Company's final prospectus filed with the
Securities and Exchange Commission on June 17, 1996 pursuant to Rule 424(b) of
the Securities Act of 1933, 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.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported by the Company, on October 23, 1997, a
shareholder, purporting to act on behalf of a class of ICT
shareholders, filed a complaint in the United States District Court for
the Eastern District of Pennsylvania against the Company and certain of
its directors. The complaint alleges that the defendants violated the
federal securities laws, and seeks compensatory and other damages,
including rescission of stock purchases made by the plaintiff and other
class members in connection with the company's initial public offering.
The defendants believe the complaint is without merit and deny all of
the allegations of wrongdoing and are vigorously defending the suit. On
February 2, 1998, the defendants filed a motion to dismiss the
complaint. The motion has the effect of a stay of discovery and all
other proceedings while it is pending. A pretrial conference was held
on March 30, 1998, at which time the court heard oral arguments on the
motion. The motion is currently pending.
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:
10.13 Credit Agreement dated as of April 21, 1998 among the
Registrant, Eurotel Marketing Limited, Yardley
Enterprises, Inc, Harvest Resources, Inc., ICT/Canada
Marketing, Inc., BankBoston, N.A., and Summit Bank.
10.14 Security Agreement dated as of April 21, 1998 between
the Registrant and BankBoston, N.A.
27 Financial Data Schedule
(b) The registrant was not required to file any reports on Form 8-K for
the three months ended March 31, 1998.
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: May 12, 1998 By: /s/ John J. Brennan
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John J. Brennan
Chairman, President and
Chief Executive Officer
Date: May 12, 1998 By: /s/ Carl E. Smith
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Carl E. Smith
Senior Vice President,
Finance and Administration
Chief Financial Officer
13