<PAGE>
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, 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
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ICT GROUP, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2458937
- ------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Town Center Drive, Langhorne, PA 19047
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip code)
215-757-0200
--------------------------------------------------------------
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, 11,534,700 shares outstanding as of
November 13, 1996
1
<PAGE>
ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Nine months ended September 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 ON FORM 8-K 12
SIGNATURES 13
2
<PAGE>
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,114 $ 447
Accounts receivable, net 12,987 8,981
Receivable from related party -- 133
Grant receivable 373 537
Prepaid expenses and other 737 334
--------- ---------
Total current assets 33,211 10,432
--------- ---------
PROPERTY AND EQUIPMENT:
Communications and computer equipment 14,709 11,266
Furniture and fixtures 2,681 1,751
Leasehold improvements 1,433 885
--------- ---------
18,823 13,902
Less Accumulated depreciation and amortization (8,825) (7,039)
--------- ---------
Net property and equipment 9,998 6,863
--------- ---------
DEFERRED INCOME TAXES 3,758 --
--------- ---------
OTHER ASSETS 1,714 1,186
--------- ---------
$ 48,681 $ 18,481
========= =========
The accompanying notes are an integral part of these statements
3
<PAGE>
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings on lines of credit $ -- $ 6,201
Current portion of long-term debt 253 705
Current portion of capitalized lease
obligations 734 748
Current portion of subordinated notes due
to related parties -- 180
Accounts payable 3,028 1,733
Accrued expenses 2,148 2,045
Deferred revenues -- 421
Deferred income taxes 78 --
--------- ---------
Total current liabilities 6,241 12,033
--------- ---------
LONG-TERM DEBT 375 761
--------- ---------
CAPITALIZED LEASE OBLIGATIONS 1,441 1,632
--------- ---------
SUBORDINATED NOTES DUE TO RELATED PARTIES -- 120
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 92
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value
5,000 shares authorized, none issued -- --
Common Stock, $0.01 par value,
40,000 shares authorized,
11,526 and 9,000 shares
issued and outstanding 115 90
Additional paid-in capital 49,292 310
Deferred compensation (175) --
Retained earnings (deficit) (8,623) 3,439
Cumulative translation adjustment 15 4
--------- ---------
Total shareholders' equity 40,624 3,843
--------- ---------
$ 48,681 $ 18,481
========= =========
The accompanying notes are an integral part of these statements
4
<PAGE>
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1996 1995 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
NET REVENUES $17,306 $ 14,246 $51,887 $ 36,079
OPERATING EXPENSES:
Cost of services 9,253 7,856 27,906 20,156
Selling, general and administrative 7,621 5,704 22,047 14,550
Non-recurring compensation expense -- -- 12,689 --
-------- -------- ------- --------
16,874 13,560 62,642 34,706
-------- -------- ------- --------
Operating income (loss) 432 686 (10,755) 1,373
-------- -------- ------- --------
INTEREST EXPENSE (INCOME), NET (178) 254 302 621
-------- -------- ------- --------
Income (loss) before taxes 610 432 (11,057) 752
INCOME TAX EXPENSE (BENEFIT) 238 -- (3,208) --
-------- -------- ------- --------
NET INCOME (LOSS) $ 372 $ 432 ($ 7,849) $ 752
======== ======== ======= ========
PRO FORMA DATA:
Historical income (loss) before taxes $ 610 $ 432 ($11,057) $ 752
Pro forma provision for income taxes 238 184 (3,977) 320
-------- -------- ------- --------
Pro forma net income $ 372 $ 248 ($ 7,080) $ 432
======== ======== ======= ========
Pro forma net income (loss) per share $ 0.03 $ 0.03 ($ 0.71) $ 0.04
======== ======== ======= ========
Shares used in computing pro forma
net income (loss) per share 12,157 9,702 9,972 9,702
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($ 7,849) $ 752
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Minority interest in subsidiary earnings 37 (4)
Depreciation and amortization 1,815 1,258
Deferred income taxes (benefit) (3,680) --
Non-recurring compensation charge 12,689 --
(Increase) decrease in:
Accounts receivable (4,006) (3,028)
Prepaid expenses and other (403) (359)
Receivable from related party 133 --
Grant receivable 164 24
Other assets (557) (1,171)
Increase (decrease) in:
Accounts payable 1,295 2,103
Accrued expenses 103 662
Deferred revenue (421) 120
-------- --------
Net cash provided by (used in)
operating activities (680) 357
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,446) (2,375)
Purchase of minority interest in subsidiary (129) --
Payments for business acquisition -- (468)
-------- --------
Net cash used in investing activities (4,575) (2,843)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on lines of credit (6,201) 2,528
Proceeds from long-term debt 2,169 1,000
Payments on long-term debt (3,007) (404)
Payments on capitalized lease obligations (680) (600)
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 36 --
-------- --------
Net cash provided by financing activities 23,911 2,524
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH 11 5
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,667 43
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 447 10
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,114 $ 53
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
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, 1996 and 1995, 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 by the selling Shareholders.
The balance sheet as of September 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 paid to the shareholders of the Company of
all taxed but undistributed S Corporation earnings, of approximately $ 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 nine months ended September 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. For the three months ended
September 30, 1996, the company had been fully subject to federal and state
income taxes.
7
<PAGE>
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 pro forma 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 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.
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.
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
<PAGE>
Three Months Ended September 30, 1996 and 1995
Net revenues increased 21% to $17.3 million for the three months ended
September 30, 1996 from $ 14.2 million for the comparable period in 1995
primarily due to increased revenues in the Company's teleservice business, which
was attributed to strong growth in ICT's international operations. International
revenues increased 274% to $ 2.1 million in 1996 from $550,000 in 1995 as a
result of increased business in Eurotel and Spantel and the opening of the
Canadian operations in the first quarter of 1996. Domestic teleservices revenues
were comparable to the third quarter 1995 due to slower growth in consumer
telemarketing programs coupled with delays in certain financial and
telecommunication projects. Revenues from the marketing and management services
operations increased 35% to $ 3.4 million in the third quarter of 1996 from
$2.6 million in the third quarter of 1995, as revenues from managed services
contracts offset a slowing of marketing services projects during the summer
months.
Cost of services increased 18% to $ 9.3 million in the three months
ended September 30, 1996 from $ 7.9 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% for the three months ended September
30, 1996 from 55% for the 1995 comparable period as a result of management
service contracts which have lower direct costs associated with the projects
offset by a higher concentration of non-insurance teleservice projects in 1996
which typically provide a lower revenue per hour.
Selling, general and administrative expenses increased 34% to $7.6
million for the three months ended September 30, 1996 from $ 5.7 million for the
three months ended September 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 1996;
and, increased sales, marketing, customer and data processing support both
internationally and domestically.
Net interest income was $ 178,000 for the third quarter of 1996, as
compared to net interest expense of $ 254,000 in the 1995 period, due to lower
average outstanding balances of bank and capitalized lease debt, more than
offset by interest earned on the proceeds from the Company's initial public
offering.
Nine Months Ended September 30, 1996 and 1995
Net revenues increased 44% to $ 51.9 million for the nine months ended
September 30, 1996 from $ 36.1 million for the nine months ended September 30,
1995 due to growth in domestic telemarketing services, increased revenues from
international teleservices and an increase in marketing and management services
revenues.
Costs of services increased 38% to $27.9 million in the nine months
ended September 30, 1996 from $ 20.2 million for the comparable period in 1995
primarily due to increased demand for domestic and international teleservices.
As a percentage of net revenues, cost of services decreased to 53.9% in the nine
months ended September 30, 1996 from 55.9% in the 1995 comparable period
primarily due to lower telecommunications costs and managed service contracts
which have lower direct costs associated with the projects.
10
<PAGE>
Selling, general and administrative expenses increased 52% to $ 22.0
million in the nine months ended September 30, 1996 from $ 14.6 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, in the second quarter
of 1996, 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.
Net interest expense decreased to $ 302,000 for the nine months ended
September 30, 1996 from $ 621,000 for the nine months ended September 30, 1995
due to lower average outstanding balances of debt offset by 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
minimum cash balances.
Cash used by operating activities was $680,000 for the nine months
ended September 30, 1996 compared to cash provided of $357,000 for the same
period in 1995. The increase in cash used resulted from higher net income before
depreciation, amortization, and the non-recurring compensation charge which was
more than 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 $23.9 million for the nine
months ended September 30, 1996 compared to $ 2.5 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 $ 34.6 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 $2.7
million as an S Corporation distribution.
From January 1, 1996 through September 30, 1996, the Company's capital
expenditures totalled $4.4 million. During the 1996 nine month period, the
Company increased its number of workstations by 668.
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 September 30, 1996 were $2.2 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
<PAGE>
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 September 30, 1996.
12
<PAGE>
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 13, 1996 By: /s/ John J. Brennan
-------------------------------
John J. Brennan
Chairman, President and
Chief Executive Officer
Date: November 13, 1996 By: /s/ Carl E. Smith
-------------------------------
Carl E. Smith
Senior Vice President,
Finance and Administration
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013149
<NAME> ICT GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<EXCHANGE-RATE> 1 1
<CASH> 19,114 53
<SECURITIES> 0 0
<RECEIVABLES> 12,987 9,627
<ALLOWANCES> 195 666
<INVENTORY> 0 0
<CURRENT-ASSETS> 33,211 10,630
<PP&E> 18,823 13,606
<DEPRECIATION> 8,825 6,545
<TOTAL-ASSETS> 48,681 19,636
<CURRENT-LIABILITIES> 6,241 13,213
<BONDS> 0 0
0 0
0 0
<COMMON> 115 90
<OTHER-SE> 40,509 2,937
<TOTAL-LIABILITY-AND-EQUITY> 48,681 19,636
<SALES> 0 0
<TOTAL-REVENUES> 51,887 36,079
<CGS> 0 0
<TOTAL-COSTS> 27,906 20,156
<OTHER-EXPENSES> 34,556 14,418
<LOSS-PROVISION> 180 132
<INTEREST-EXPENSE> 302 621
<INCOME-PRETAX> (11,057) 752
<INCOME-TAX> (3,208) 0
<INCOME-CONTINUING> (7,849) 752
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,849) 752
<EPS-PRIMARY> (0.71) 0.04
<EPS-DILUTED> (0.71) 0.04
</TABLE>
