<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 March 31,1997 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.
------------------------------------------
(Exact name of registrant as specified in its charger)
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, 11,542,300 shares outstanding as of May 13,
1997.
1
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ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
Three months ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 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 12
SIGNATURES 13
2
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ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,651 $18,298
Accounts receivable, net 15,404 13,539
Grant receivable 461 535
Prepaid expenses and other 907 348
Deferred income taxes -- 85
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Total current assets 33,423 32,805
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PROPERTY AND EQUIPMENT, net
Communications and computer equipment 19,496 16,753
Furniture and fixtures 3,220 2,936
Leasehold improvements 1,609 1,581
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24,325 21,270
Less Accumulated depreciation and amortization (10,446) (9,638)
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Net property and equipment 13,879 11,632
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DEFERRED INCOME TAXES 3,251 3,251
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OTHER ASSETS 1,427 1,424
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$51,980 $49,112
======= =======
</TABLE>
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)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $446 $284
Current portion of capitalized lease obligations 661 725
Accounts payable 3,481 2,807
Accrued expenses 3,113 1,923
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Total current liabilities 7,701 5,739
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LONG-TERM DEBT 1,650 1,057
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CAPITALIZED LEASE OBLIGATIONS 1,151 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,
11,554 and 11,538 shares issued and outstanding 116 115
Additional paid-in capital 49,355 49,339
Deferred compensation (148) (161)
Accumulated deficit (7,817) (8,290)
Cumulative translation adjustment (28) 17
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Total shareholders' equity 41,478 41,020
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$51,980 $49,112
======= =======
</TABLE>
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
March 31,
-----------------------------
1997 1996
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<S> <C> <C>
NET REVENUES $20,492 $16,220
OPERATING EXPENSES:
Cost of services 11,415 8,767
Selling, general and administrative 8,440 6,796
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19,855 15,563
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Operating income 637 657
INTEREST EXPENSE (INCOME), NET (138) 233
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Income before taxes 775 424
INCOME TAXES 302 --
------- -------
NET INCOME $473 $424
======= =======
PRO FORMA DATA:
Historical income before taxes $775 $424
Pro forma provision for income taxes 302 170
------- -------
Pro forma net income $473 $254
======= =======
Pro forma net income per share $0.04 $0.03
======= =======
Shares used in computing pro forma
net income per share 12,185 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>
Three Months Ended
March 31,
-----------------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $473 $424
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest in subsidiary earnings -- 10
Depreciation and amortization 831 556
(Increase) decrease in:
Accounts receivable (1,865) (1,750)
Prepaid expenses and other (559) (307)
Receivable from related party -- 133
Grant receivable 74 (110)
Deferred income taxes 85 --
Other assets (26) (156)
Increase (decrease) in:
Accounts payable 674 1,298
Accrued expenses 1,190 547
Deferred revenue -- (31)
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Net cash provided by operating activities 877 614
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,055) (1,259)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on lines of credit -- 652
Proceeds from long-term debt 813 --
Payments on long-term debt (58) (176)
Payments on capitalized lease obligations (209) (222)
Payments on subordinated notes -- (60)
Proceeds from exercise of stock options 30 --
Payments of deferred financing costs -- (13)
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Net cash provided by financing activities 576 181
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH (45) 20
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,647) (444)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,298 447
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $16,651 $3
======= =======
The accompanying notes are an integral part of these statements
</TABLE>
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 month periods ended March 31,
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 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 statement of operations for the three months ended
March 31, 1996 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 period. For the three months ended March 31, 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 three months ended March 31,
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 months ended March 31, 1997 and 1996 the
Company believes the effect of the application of SFAS No. 128 would be
immaterial.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1997
GENERAL
ICT is an independent 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, 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 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 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
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Net Revenues. Net revenues increased 26% to $20.5 million for the three
months ended March 31, 1997 from $16.2 million for the comparable period in 1996
primarily due to revenue growth in the Company's teleservice division.
Teleservice division revenues increased 29% from $13.1 million in the first
quarter of 1996 to $16.9 million in the first quarter of 1997 resulting from
continued strong growth throughout all international teleservice markets. ICT
International Teleservice revenues were $3.0 million in the three months ended
March 31, 1997, an increase of 166% over ICT International Teleservice revenues
in the same period in 1996. Domestic teleservice revenues increased 17% to $13.9
million in the first quarter of 1997 from $11.9 million in the first quarter of
1996 reflecting growth in insurance and telecommunication applications. Combined
net revenues from managed and marketing services divisions increased 14% to $3.6
million in the three months ended March 31, 1997 from $3.1 million in the three
months ended March 31, 1996. The marketing services division experienced a
decline in net revenues in the first quarter of 1997 compared to the first
quarter of 1996, due to reductions in financial marketing services projects.
This decline was more than offset by revenues from managed services operations,
which commenced operations in the second quarter of 1996.
Cost of Service. Cost of services increased 30% to $11.4 million for
the three months ended March 31, 1997 from $8.8 million in the three months
ended March 31, 1996 due to an increased direct labor force to support the
increased revenue volume over the first quarter of 1996 and a higher utilization
of more expensive temporary labor personnel as a component of the increased work
force.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 24% in the first quarter of 1997 to $8.4
million from $6.8 million in the first three months of 1996 due to the expansion
of call centers, internationally as well as domestically, since the first
quarter of 1996; the addition of a managed services business unit which began
operations in the latter part of the second quarter; and the addition of
customer sales and support for domestic and international operations.
Interest Expense (Income), net. Net interest income of $138,000 in the
first quarter reflects the investment of funds obtained through the Company's
initial public offering slightly offset by interest expense related to capital
leases and borrowings against the Company's equipment line of credit for capital
expansion. 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. In the
first quarter of 1997 the Company borrowed approximately $810,000 under its
equipment line.
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.
9
<PAGE>
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
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 line and, historically, has maintained
minimum cash balances.
Cash provided by operating activities was $877,000 for the three months
ended March 31, 1997 compared to $614,000 for the same period in 1996 which
resulted from increased earnings before depreciation and amortization and
reduced working capital requirements.
Cash provided by financing activities was $576,000 for the three months
ended March 31, 1997 compared to $181,000 for the same period in 1996.
In the first quarter of 1997 the Company's capital expenditures were
$3.1million reflecting an increase to 2,148 in the number of work stations at
March 31, 1997 from 2,068 at December 31, 1996, upgraded telephony equipment and
continued development and implementation of Informix and IMA/Edge Software.
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 and its equipment line of credit at March
31, 1997 were $3.9 million. The Company maintains an equipment line of credit of
$3.5 million with a bank. The line of credit expires in June 1997. The Company
is currently negotiating increases in its equipment line of credit and intends
to finance capital purchases under this line during 1997.
10
<PAGE>
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 March
31, 1997). At March 31, 1997, there were no borrowings outstanding under the
line of credit. The line of credit expires on June 30, 1997. 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 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 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 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's 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 telecommunications 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
<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: None.
(b) The registrant was not required to file any reports on Form 8-K for
the three months ended March 31, 1997.
12
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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 15, 1997 By: /s/ John J. Brennan
-------------------
Chairman, President and
Chief Executive Officer
Date: May 15, 1997 By: /s/ Carl E. Smith
------------------
Senior Vice President
Finance and Administration,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013149
<NAME> ICT GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 16,651 18,298
<SECURITIES> 0 0
<RECEIVABLES> 15,404 13,539
<ALLOWANCES> 262 212
<INVENTORY> 0 0
<CURRENT-ASSETS> 33,423 32,805
<PP&E> 24,325 21,270
<DEPRECIATION> 10,446 9,638
<TOTAL-ASSETS> 51,980 49,112
<CURRENT-LIABILITIES> 7,643 5,739
<BONDS> 0 0
0 0
0 0
<COMMON> 116 115
<OTHER-SE> 41,362 40,905
<TOTAL-LIABILITY-AND-EQUITY> 51,980 49,112
<SALES> 0 0
<TOTAL-REVENUES> 20,492 16,220
<CGS> 0 0
<TOTAL-COSTS> 11,415 8,767
<OTHER-EXPENSES> 8,381 6,754
<LOSS-PROVISION> 59 42
<INTEREST-EXPENSE> (138) 233
<INCOME-PRETAX> 775 424
<INCOME-TAX> 302 0
<INCOME-CONTINUING> 473 424
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 473 424
<EPS-PRIMARY> 0.04 0.03
<EPS-DILUTED> 0.04 0.03
</TABLE>
