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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002 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
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Brandywine Boulevard, Newtown, PA 18940
---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
267-685-5000
------------------------------------------------
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 Stock, $0.01 par value, 12,324,100 shares outstanding as of
August 7, 2002.
ICT GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months and Six months ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS 16
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 17
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBITS 19
2
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,956 $ 12,875
Accounts receivable, net 53,804 48,058
Prepaid expenses and other 7,312 3,841
Deferred income taxes 916 916
-------- --------
Total current assets 73,988 65,690
-------- --------
PROPERTY AND EQUIPMENT
Communications and computer equipment 75,214 60,371
Furniture and fixtures 17,735 12,849
Leasehold improvements 11,051 7,549
-------- --------
104,000 80,769
Less: Accumulated depreciation and amortization (55,698) (47,533)
-------- --------
48,302 33,236
-------- --------
DEFERRED INCOME TAXES 1,529 1,529
OTHER ASSETS 2,087 2,131
-------- --------
$125,906 $102,586
======== ========
The accompanying notes are an integral part of these financial statements.
3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,000 $ 4,000
Accounts payable 15,229 9,050
Accrued expenses 11,616 10,561
Income taxes payable 2,041 3,314
-------- --------
Total current liabilities 32,886 26,925
-------- --------
LINE OF CREDIT 21,000 12,000
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value 5,000 shares authorized,
none issued -- --
Common stock, $0.01 par value, 40,000 shares authorized,
12,324 and 12,233 shares issued and outstanding 123 122
Additional paid-in capital 51,194 50,331
Retained earnings 22,597 16,261
Accumulated other comprehensive loss (1,894) (3,053)
-------- --------
Total shareholders' equity 72,020 63,661
-------- --------
$125,906 $102,586
======== ========
The accompanying notes are an integral part of these financial statements.
4
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- ---------------
REVENUES $74,914 $58,004 $147,178 $115,776
-------------- -------------- --------------- ---------------
OPERATING EXPENSES:
Cost of services 42,395 32,139 83,854 64,198
Selling, general and administrative 27,515 22,058 53,604 44,186
-------------- -------------- --------------- ---------------
69,910 54,197 137,458 108,384
-------------- -------------- --------------- ---------------
Operating income 5,004 3,807 9,720 7,392
INTEREST EXPENSE, net of interest
income of $59 and $125 for the three months
and $116 and $238 for the six months 254 212 403 570
-------------- -------------- --------------- ---------------
Income before income taxes 4,750 3,595 9,317 6,822
INCOME TAXES 1,520 1,330 2,981 2,524
-------------- -------------- --------------- ---------------
NET INCOME $3,230 $2,265 $6,336 $4,298
============== ============== =============== ===============
EARNINGS PER SHARE:
Basic earnings per share $0.26 $0.19 $0.52 $0.36
============== ============== =============== ===============
Diluted earnings per share $0.25 $0.18 $0.49 $0.34
============== ============== =============== ===============
Shares used in computing basic
earnings per share 12,303 12,130 12,276 12,103
============== ============== =============== ===============
Shares used in computing diluted
earnings per share 13,066 12,684 13,034 12,611
============== ============== =============== ===============
The accompanying notes are an integral part of these financial statements.
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,336 $4,298
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,440 5,117
Tax benefit of stock option exercises 544 412
Amortization of deferred financing costs 128 -
(Increase) decrease in:
Accounts receivable (5,062) (928)
Prepaid expenses and other (3,145) (135)
Other assets (80) (175)
Increase (decrease) in:
Accounts payable 5,879 (2,082)
Accrued expenses 839 711
Income taxes payable (1,131) 474
------------- ------------
Net cash provided by operating activities 11,748 7,692
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,541) (2,821)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 9,000 8,500
Payments on long-term debt - (10,000)
Payments on capitalized lease obligations - (151)
Debt issuance costs incurred - (773)
Proceeds from exercise of stock options 320 214
------------- ------------
Net cash provided by (used in) financing activities 9,320 (2,210)
------------- ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH
AND CASH EQUIVALENTS (446) (1,396)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (919) 1,265
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,875 8,539
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,956 $9,804
============= ============
The accompanying notes are an integral part of these financial 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 accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-and six month
periods ended June 30, 2002 and 2001 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, 2001. Certain
reclassifications of prior year amounts have been made to conform to the current
year presentation.
Note 2: EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share". Basic earnings per share ("Basic EPS") is computed by
dividing net income by the weighted average number of shares of Common Stock
outstanding. Diluted earnings per share ("Diluted EPS") is computed by dividing
net income by the weighted average number of shares of Common Stock outstanding,
after giving effect to the potential dilution from the exercise of securities,
such as stock options, into shares of Common Stock as if those securities were
exercised. For the three months ended June 30, 2002 and 2001, the dilutive
effect of Common Stock equivalents used in computing Diluted EPS was 763,000 and
554,000, respectively. For the six months ended June 30, 2002 and 2001, the
dilutive effect of Common Stock equivalents used in computing Diluted EPS was
758,000 and 508,000, respectively. For the three months ended June 30, 2002 and
2001, options to purchase 0 and 30,500 shares of Common Stock, respectively,
were outstanding but not included in the computation of Diluted EPS as the
result would be antidilutive. For the six months ended June 30, 2002 and 2001,
options to purchase 13,000 and 50,500 shares of Common Stock, respectively, were
outstanding but not included in the computation of Diluted EPS as the result
would be antidilutive.
Note 3: COMPREHENSIVE INCOME (LOSS)
The Company follows SFAS No. 130, "Reporting Comprehensive Income". This
statement requires companies to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $3,230,000 $2,265,000 $6,336,000 $4,298,000
Foreign currency translation adjustments 1,331,000 (207,000) 1,159,000 (879,000)
---------- ---------- ---------- ----------
Comprehensive income $4,561,000 $2,058,000 $7,495,000 $3,419,000
========== ========== ========== ==========
7
Note 4: SECURITIES OFFERING
On May 9, 2002, the Company filed a shelf registration statement with the
Securities and Exchange Commission (the "SEC") to register 3,000,000 shares,
including 1,000,000 shares by selling shareholders, plus an allowance for over
allotments, to be sold in the future. On May 20, 2002, the Company amended the
registration statement and the SEC declared the shelf registration statement
effective. The Company has considered pursuing a follow-on underwritten public
offering of its common stock. In connection therewith, the Company has incurred
approximately $400,000 through June 30, 2002 which had been deferred pending the
Company's further evaluation of such a transaction. Subsequent to June 30, 2002
upon a review of current equity market conditions, the Company has decided not
to proceed with a follow-on underwritten public offering of its common stock at
this time.
Note 5: OPERATING AND GEOGRAPHIC INFORMATION
Under the disclosure requirements of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", the Company classifies its operations
into two business segments: Domestic CRM and International CRM. The operating
segments are managed separately because each operating segment represents a
strategic business unit that offers its services in different geographic
markets. Segment assets include amounts specifically identified to each segment.
Corporate assets consist primarily of property and equipment. The Domestic CRM
segment provides inbound and outbound CRM sales, and CRM services consisting of
database marketing, marketing research, contact center consulting, technology
hosting and ongoing customer care management services on behalf of customers
operating in the Company's target industries. The International CRM segment
provides the same services in Europe, Canada, Barbados and Australia and
includes business conducted by Spantel for the US Hispanic market. In addition,
a portion of International CRM assets, depreciation and amortization and capital
expenditures are used to generate revenue and operating income for the Domestic
CRM segment.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------
2002 2001 2002 2001
------------- ------------ ----------- ----------
Revenues:
Domestic CRM $ 59,690 $42,320 $ 118,932 $ 83,076
International CRM 15,224 15,684 28,246 32,700
-------- ------- ---------- --------
$ 74,914 $58,004 $ 147,178 $115,776
======== ======= ========== ========
Operating Income:
Domestic CRM $ 4,566 $ 1,847 $ 9,035 $ 3,646
International CRM 438 1,960 685 3,746
-------- ------- ---------- --------
$ 5,004 $ 3,807 $ 9,720 $ 7,392
======== ======= ========== ========
Total Assets:
Domestic CRM $ 81,237 $61,501
International CRM 33,591 28,179
Corporate 11,078 5,037
-------- -------
$125,906 $94,717
======== =======
Depreciation and Amortization:
Domestic CRM $ 1,785 $ 1,430 $ 3,502 $ 2,798
International CRM 1,219 786 2,168 1,310
Corporate 942 559 1,770 1,009
-------- ------- ---------- --------
$ 3,946 $ 2,775 $ 7,440 $ 5,117
======== ======= ========== ========
Capital Expenditures:
Domestic CRM $ 6,239 $ 1,126 $ 10,819 $ 2,567
International CRM 3,471 811 7,116 (200)
Corporate 552 199 3,606 454
-------- ------- ---------- --------
$ 10,262 $ 2,136 $ 21,541 $ 2,821
======== ======= ========== ========
8
The following table represents information about the Company by geographic
area:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------
2002 2001 2002 2001
------------- ------------- ----------- ----------
Revenues:
United States $61,467 $45,695 $122,763 $89,678
Canada 8,086 6,954 15,496 14,856
Other foreign countries 5,361 5,355 8,919 11,242
------- ------- -------- --------
$74,914 $58,004 $147,178 $115,776
======= ======= ======== ========
Long-lived Assets:
United States $32,327 $23,646
Canada 6,549 4,564
Other foreign countries 9,426 5,699
------- -------
$48,302 $33,909
======= =======
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 2002
GENERAL
ICT Group, Inc. (the "Company" or "ICT") is a leading global provider
of integrated customer relationship management (CRM) solutions. The Company
offers a comprehensive suite of integrated sales, service and marketing support
solutions designed to help its clients identify, acquire, retain, service,
measure and maximize the lifetime value of their customer relationships. ICT's
comprehensive, balanced mix of outsourced CRM solutions includes inbound and
outbound sales, up-selling/cross-selling, customer care and retention and
technical support/help desk services, as well as marketing research, including
telephone interviewing, coding and analysis and database design and marketing
analysis.
ICT also offers a comprehensive suite of CRM technologies on a hosted
basis, for use by clients at their own in-house facilities, or on a co-sourced
basis, in conjunction with its fully compatible, Web-enabled customer contact
centers. These include: automated call distribution (ACD), contact management,
automated e-mail management and processing, sales force and marketing
automation, interactive voice response services, alert notification and Web
self-help for the delivery of consistent, quality customer care in a
multi-channel environment.
The Company's growth strategy includes the following key elements:
|_| Expanding our value-added services;
|_| Continuing our focus on industry specialization;
|_| Increasing our international presence;
|_| Maintaining our commitment to improving our technologies;
|_| Continuing our commitment to quality service; and
|_| Pursuing complementary acquisitions
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Our significant accounting policies are described in our audited
consolidated financial statements for the year ended December 31, 2001, which
are included in our most recent Form 10-K filing. We believe that the following
discussion addresses our critical accounting policies, which are those that are
most important to the portrayal of our financial condition and results of
operations and require management's most difficult, subjective and complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Revenue Recognition
The Company recognizes revenues as services are performed, generally
based on hours of work performed. Amounts collected from customers prior to the
performance of services are recorded as deferred revenues. Deferred revenues
totaled approximately $188,000 and $519,000 as of June 30, 2002, and December
31, 2001, respectively, which are included in accrued expenses in the
accompanying consolidated balance sheets. Management believes that its revenue
recognition policies are in accordance with Staff Accounting Bulletin No. 101.
10
Accounts Receivable
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continually monitor collections and payments from our
customers and maintain an allowance for uncollectible accounts based upon our
historical experience and any specific customer collection issues that we have
identified. While we believe our reserve estimate to be appropriate, we may find
it necessary to adjust our allowance for doubtful accounts if our future bad
debt expense exceeds our estimated reserve. We are subject to concentration
risks as certain of our customers provide a high percentage of our total
revenues and corresponding receivables.
Long-Lived Assets
We continually evaluate whether events or circumstances have occurred
that would indicate that the remaining estimated useful life of long-lived
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, we use an estimate of the related undiscounted cash
flows over the remaining life of the long-lived assets to measure
recoverability. If impairment exists, the measurement of the impairment will be
based on generally accepted valuation methodologies. No such impairments were
recognized in any of the periods presented.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves an estimation of our
actual current tax exposure, together with our assessment of temporary
differences resulting from differing treatment of items, such as depreciation of
property and equipment, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income. The Company has
recorded no valuation reserves for deferred tax assets as of June 30, 2002.
Although realization is not assured, management believes it is more likely than
not that all of our deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near-term if estimates of future taxable income are reduced. On a quarterly
basis, management evaluates and assesses the realizability of deferred tax
assets and adjusts valuation allowances if required.
Accounting for Contingencies
In the ordinary course of business, the Company has entered into
various contractual relationships with strategic corporate partners, customers,
suppliers, vendors and other parties. As such, the Company could be subject to
litigation, claims or assessments arising from any or all of these
relationships. The Company accounts for contingencies such as these in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies". SFAS No. 5 requires the Company to record an
estimated loss contingency when information available prior to issuance of the
Company's financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies arising from contractual or legal proceedings requires Company
management to use its best judgment when estimating an accrual related to such
contingencies. As additional information becomes known, the Company's accrual
for a loss contingency could fluctuate, thereby creating variability in the
Company's results of operations from period to period. Likewise, an actual loss
arising from a loss contingency which significantly exceeds the amount accrued
for in the Company's financial statements could have a material adverse impact
on the Company's operating results for the period in which such actual loss
becomes known.
11
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001:
- ------------------------------------------
Revenues. Revenues increased 29% to $74.9 million for the three months
ended June 30, 2002 from $58.0 million for the three months ended June 30, 2001.
Revenues from the Domestic CRM segment increased 41% to $59.7 million from $42.3
million in the three months ended June 30, 2001 and accounted for 80% of Company
revenues compared to 73% for the same period in the prior year. Most of this
increase resulted from increased business with clients from which we generated
business in 2001. International CRM revenues declined 3% to $15.2 million in the
three months ended June 30, 2002 from $15.7 million in the three months ended
June 30, 2001 and accounted for 20% of Company revenues, versus 27% for the same
period in the prior year. Much of the total Company's revenue growth in the
second quarter was driven by strong demand for CRM services. CRM services
revenues increased by 65% in the second quarter of 2002 versus the same period
in the prior year and accounted for 79% of the Company's total revenue increase
in the second quarter of 2002 compared to the second quarter of 2001. Total CRM
sales revenues grew 10% in the three months ended June 30, 2002 versus the same
period in the prior year. The Company's largest client in recent years had been
Aegon Direct Marketing Services, Inc. which accounted for approximately 17% of
the Company's net revenues in the second quarter of 2001 but declined to just
under 10% of the Company's revenues in the second quarter of 2002. As previously
reported, the Company announced that it would no longer provide outbound
telesales services to Aegon in North America. The Company intends to continue
providing Aegon with telesales and customer service support in Europe and
Australia and customer service support in North America. Two other customers,
Capital One and AOL accounted for 13% and 10%, respectively, of the Company's
revenues in the second quarter of 2002.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 32% to $42.4 million for the three
months ended June 30, 2002 from $32.1 million in the three months ended June 30,
2001. This increase is primarily the result of a $7.2 million increase in direct
labor and telecommunication costs required to support the increased revenue
volume. As a percentage of revenues, cost of services increased to 56.6% in the
second quarter of 2002 from 55.4% in the same quarter of 2001. This increase was
primarily the result of an increase in labor cost per production hour due to
slightly higher wage rates and additional training costs incurred to support new
and expanded client programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 25% to $27.5 million for the three months
ended June 30, 2002 from $22.1 million for the three months ended June 30, 2001
due to costs associated with an increased number of contact centers and
increased workstation capacity and additional staff added to support business
growth in our Domestic CRM segment. As a percentage of revenues, selling,
general and administrative expenses were 37% for the three months ended June 30,
2002 compared to 38% for the three months ended June 30, 2001, as the Company
leveraged its existing infrastructure to support volume growth.
Interest Expense, net. Interest expense, net of interest income, was
$254,000 for the three months ended June 30, 2002 compared to $212,000 for the
three months ended June 30, 2001 and reflects the interest expense related to
borrowings against the Company's line of credit for capital expansion, partially
offset by investment income. The increase in net interest expense is the result
of increased average daily outstanding balances on the Company's line of credit
borrowings during the second quarter of 2002 as compared to the second quarter
of 2001, partially offset by lower average interest rates in the second quarter
of 2002 as compared to the same period in 2001.
Provision for Income Taxes. Provision for income taxes increased
$190,000 to $1.5 million for the second quarter of 2002 from $1.3 million in the
second quarter of 2001. For the second quarter of 2002, the provision for income
taxes was approximately 32% of income before taxes. For the second quarter of
2001, the provision for income taxes was approximately 37% of income before
taxes. The reduction in the effective income tax rate is primarily due to a
continued reduction in the income tax rate in Canada, a shift in the mix of the
Company's pretax income and continued utilization of work opportunity tax
credits.
12
RESULTS OF OPERATIONS
Six Months Ended June 30, 2002 and 2001:
- ----------------------------------------
Revenues. Revenues increased 27% to $147.2 million for the six months
ended June 30, 2002 from $115.8 million for the six months ended June 30, 2001.
Revenues from the Domestic CRM segment increased 43% to $118.9 million for the
six months ended June 30, 2002 from $83.1 million in the six months ended June
30, 2001 and accounted for 81% of the Company's revenues compared to 72% for the
same period in the prior year. Most of this increase resulted from increased
business with clients from which we generated business in 2001. International
CRM revenues declined 14% to $28.2 million in the six months ended June 30, 2002
from $32.7 million in the six months ended June 30, 2001 and accounted for 19%
of Company revenues versus 28% for the same period in the prior year. Much of
the growth in the six months ended June 30, 2002 was driven by strong demand for
CRM services business. CRM services revenues increased by 60% in the first six
months of 2002 versus the same period in the prior year and accounted for 79% of
the total revenue increase in the first six months of 2002 compared to the first
six months of 2001. Total CRM sales revenues grew 9% in the six months ended
June 30, 2002 versus the same period in the prior year. The Company's largest
client in recent years had been Aegon Direct Marketing Services, Inc, which
accounted for approximately 17% of the Company's revenues in the first half of
2001 but declined to approximately 11% of the Company's revenues in the first
six months of 2002. As previously reported, the Company announced that it would
no longer provide outbound telesales services to Aegon in North America. The
Company intends to continue providing Aegon with telesales and customer service
support in Europe and Australia and customer service support in North America.
Two other customers, Capital One and AOL accounted for 13% and 10%,
respectively, of the Company's revenues in the first six months of 2002.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 31% to $83.9 million for the six
months ended June 30, 2002 from $64.2 million in the six months ended June 30,
2001. This increase was primarily the result of a $13.2 million increase in
direct labor and telecommunication costs required to support the increased
revenue volume. As a percentage of revenues, cost of services increased to 57.0%
in the first six months of 2002 from 55.5% in the same period of 2001 which was
primarily the result of an increase in labor cost per production hour due to
slightly higher wage rates and additional training costs incurred to support new
and expanded client programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 21% to $53.6 million for the six months ended
June 30, 2002 from $44.2 million for the six months ended June 30, 2001 due to
costs associated with an increased number of contact centers and increased
workstation capacity and additional staff added to support business growth in
our Domestic CRM segment. As a percentage of revenues, selling, general and
administrative expenses were 36% for the six months ended June 30, 2002 compared
to 38% for the six months ended June 30, 2001, as the Company leveraged its
existing infrastructure to support volume growth.
Interest Expense, net. Interest expense, net of interest income, was
$403,000 for the six months ended June 30, 2002 compared to $570,000 for the six
months ended June 30, 2001 and reflects the interest expense related to
borrowings against the Company's line of credit for capital expansion, partially
offset by investment income. The decrease in net interest expense is the result
of lower average interest rates in the first six months of 2002 as compared to
the same period in 2001, partially offset by increased average outstanding
balances on the Company's line of credit borrowings during the first six months
of 2002 as compared to the same period in 2001.
Provision for Income Taxes. Provision for income taxes increased
$457,000 to $3.0 million for the first six months of 2002 from $2.5 million in
the first six months of 2001. For the first six months of 2002, the provision
for income taxes was approximately 32% of income before taxes. For the first six
months of 2001, the provision for income taxes was approximately 37% of income
before taxes. The reduction in the effective income tax rate is primarily due to
a continued reduction in the income tax rate in Canada, a shift in the mix of
the Company's pretax income and continued utilization of work opportunity tax
credits.
13
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 client programs, 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 existing and new business
units and competitive industry conditions.
Historically, the Company's business tended to be strongest in the
second and fourth quarters due to the high level of client sales activity in the
spring and prior to the holiday season. In the past, during the first quarter,
the Company's business generally leveled off or slowed from the previous quarter
as a result of reduced client sales activity and client transitions to new
marketing programs during the first quarter of the calendar year. Historically,
the Company had expanded its operations in the first quarter to support
anticipated business growth beginning in the second quarter. In the past, demand
for the Company's services typically slowed or decreased in the third quarter as
the volume of business decreased during the summer months. In addition, the
Company's operating expenses typically increased during the third quarter in
anticipation of higher demand for its services during the fourth quarter.
However, more recently, the Company has experienced quarterly fluctuations in
its business as a result of other factors, such as the timing of the demand for
the particular services the Company offers in the specific geographic areas the
Company services.
Liquidity and Capital Resources
Cash provided by operating activities was $11.7 million for the six
months ended June 30, 2002 versus $7.7 million of cash provided by operating
activities for the six months ended June 30, 2001. The $4.0 million increase was
primarily due to a $2.0 million increase in net income and a $2.3 million
increase in depreciation. These increases were partially offset by a net change
of approximately $600,000 in working capital items. Accounts receivable and
prepaid expenses grew approximately $7.1 million more than the prior year but
this growth was mostly offset by a $6.5 million higher increase in accounts
payable, accrued expenses and income taxes payable. Other noncash items
accounted for the remaining $300,000 increase.
Cash used in investing activities was $21.5 million for the six months
ended June 30, 2002 compared to $2.8 million for the first half of 2001. The
increase over the prior year is attributable to a significant investment in
capital expenditures, including costs incurred in connection with infrastructure
improvements during the first six months of 2002, and the decision to use bank
debt at attractive interest rates as a means to finance capital additions as
opposed to using operating leases to acquire the equipment. Approximately $4.8
million of equipment was acquired under operating leases in the first six months
of 2001 compared to no operating leases in the first six months of 2002. The
Company opened three new contact centers and added 812 workstations in the first
half of 2002, and operated 7,406 workstations at June 30, 2002. In the first six
months of 2001, the Company added 167 workstations, and operated 6,088
workstations at June 30, 2001.
Cash provided by financing activities was $9.3 million for the six
months ended June 30, 2002 compared to cash used in financing activities of $2.2
million for the comparable 2001 period. The Company borrowed $9.0 million under
its line of credit during the first six months of 2002 to help finance capital
expenditures. In the first six months of 2001, the Company repaid debt totaling
$1.5 million under its line of credit and funded $773,000 of debt issuance
costs.
The Company's operations will continue to require significant capital
expenditures. Historically, equipment purchases have been financed through cash
provided by operations, the Company's line of credit, operating leases, and
through capitalized lease obligations with various equipment vendors and lending
institutions. At June 30, 2002, $25 million was outstanding under the Company's
line of credit with $60 million available to borrow.
14
On May 9, 2002, the Company filed a shelf registration statement with
the Securities and Exchange Commission (the "SEC") to register 3,000,000 shares,
including 1,000,000 shares by selling shareholders, plus an allowance for over
allotments, to be sold in the future. On May 20, 2002, the Company amended the
registration statement and the SEC declared the shelf registration statement
effective. The Company has considered pursuing a follow-on underwritten public
offering of its common stock. In connection therewith, the Company has incurred
approximatelly $400,000 through June 30, 2002, which had been deferred pending
the Company's further evaluation of such a transaction. Subsequent to June 30,
2002 upon a review of current equity market conditions, the Company has decided
not to proceed with a follow-on underwritten public offering of its common stock
at this time. Given the strength of its business and its currently available
financing alternatives, the Company believes it has sufficient resources
available to finance its operations and capital requirements through 2003 with
its cash on hand, cash flow from operations, the availability of operating
leases and funds available under the Company's existing bank credit facility at
favorable interest rates.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
companies to cease amortizing goodwill, effective with fiscal years beginning
after December 15, 2001. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis, or at an interim period if certain
circumstances occur. The Company has adopted the provisions of SFAS No. 142
effective January 1, 2002. Adoption of this pronouncement did not have a
material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and resolves significant implementation issues related to SFAS
No. 121 and APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The Company is required to
adopt SFAS No. 144 for its year ending December 31, 2002, however, early
application is permitted. The Company adopted SFAS No. 144 on January 1, 2002.
The adoption had no impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 superseded Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," and is
effective for transactions initiated after December 31, 2002. Under SFAS No.
146, a company will record a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at fair
value. A liability is incurred when an event obligates the entity to transfer or
use assets. Management does not expect the adoption of this statement to have a
material impact on the Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include
statements relating to the Company's intention with regard to a follow-on
offering, the Company's beliefs with regard to its critical accounting policies,
managements belief that its revenue recognition policies are in accordance with
SAB 101, to the appropriateness of the Company's reserve for uncollectible
accounts, to the appropriateness of the Company's reserves for contingencies,
the realizability of the Company's deferred tax assets, the Company's continued
provision of services to Aegon, the Company's ability to finance its operations
and capital requirements through 2003, certain information relating to
outsourcing trends as well as other trends in the CRM services industry and the
overall domestic economy, the Company's business strategy including the markets
in which it operates, the services it provides, its ability to attract new
clients and the customers it targets, the benefits of certain technologies the
Company has acquired or plans to acquire and the investment it plans to make in
technology, the Company's plans regarding international expansion, the
implementation of quality standards, the seasonality of the Company's business,
variations in operating results and liquidity, as well as information contained
elsewhere in this document where statements are preceded by, followed by or
include the words "believes," "plans," "intends," "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.
15
Some factors that could prevent the Company from achieving its
goals--and cause the assumptions underlying the forward-looking statements and
the Company's actual results to differ materially from those expressed in or
implied by those forward-looking statements--include, but are not limited to,
the following: (i) equity market conditions; (ii) the competitive nature of the
CRM services industry and the ability of the Company to continue to distinguish
its services from other CRM service companies and other marketing activities on
the basis of quality, effectiveness, reliability and value; (iii) 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; (iv) 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; (v) risks associated with investments and operations in
foreign countries including, but not limited to, those related to relevant local
economic conditions, exchange rate fluctuations, relevant local regulatory
requirements, political factors, generally higher telecommunications costs,
barriers to the repatriation of earnings and potentially adverse tax
consequences; (vi) 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; (vii) the results of the Company's operations which depend on
numerous factors including, but not limited to, the timing of clients'
teleservices 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 CRM services industry and the overall
economy and (viii) terrorist attacks and their aftermath.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation incidental to
its business. In the opinion of management, no litigation to which the Company
is currently a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or liquidity, if decided
adversely to the Company.
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 effective June 14, 1996. The defendants believe the complaint is
without merit, 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. On May 19, 1998, the complaint was dismissed by a judge
for the United States District Court for the Eastern District of Pennsylvania
with leave to plaintiff to file an amended complaint on narrow accounting
allegations. On June 22, 1998, plaintiffs filed a First Amended Class Action
Complaint purporting to bring negligence claims in connection with the Company's
initial public offering. The defendants continue to deny all allegations of
wrongdoing, believe the amended complaint is without merit and are vigorously
defending the suit. On November 3, 1998, the court granted a motion appointing
Rowan Klein and Michael Mandat as lead plaintiffs. On February 2, 1999, the
court dismissed the case without prejudice, directing that the case remain in
status quo, that the statute of limitations be tolled and that the parties
continue with discovery and advise the court if assistance by the court is
needed. Since that time the defendants filed a motion for summary judgment
seeking to have the case dismissed on the grounds that there is no material
issue of fact. Plaintiffs filed a response in opposition to defendant's motion
and also filed a motion to have the matter certified as a class action. In
September 2000, the court entered orders dismissing the defendant's motion for
summary judgment and plaintiff's motion for class certification without
prejudice, with leave to re-file such motions upon the completion of discovery.
The Company and the plaintiffs have reached an agreement in principle to settle
this litigation. The finalization of the proposed settlement is subject to,
among other things, the parties agreeing upon and executing a definitive
settlement agreement having mutually agreeable terms and conditions. In
addition, as with any class action litigation, any settlement agreement among
the parties is not final until approved by the court. If approved, the
settlement amount would be covered in full by the Company's insurance.
16
In 1998, William Shingleton filed a class action lawsuit against the
Company in the Circuit Court of Berkley County, West Virginia. The suit was
filed on behalf of all current and former hourly employees of the Company's
facility in Martinsburg, West Virginia alleging that the Company had violated
the West Virginia Wage Payment and Collection Act with respect to certain of the
Company's pay practices. The allegations included failure to pay promised
signing and incentive bonuses and wage increases, failure to compensate
employees for short breaks or "transition" periods of less than 20 minutes and
improper deductions for the cost of purchasing telephone headsets. The complaint
also included a count for fraud, alleging that the failure to pay for short
break and transition time violated specific representations made by the Company
to its employees. The court certified the class and discovery commenced. In
2001, plaintiffs' counsel filed a motion to expand the class to include all
current and former hourly employees at all four of the Company's West Virginia
facilities and to add twelve current and former executives of the Company. The
court granted plaintiffs' request. The Company filed a response denying
liability and asserting numerous defenses. The Company is vigorously defending
the suit, which is now in the discovery process. Plaintiffs have moved for
summary judgment on their claims for failure to pay for short breaks and
transition time. The Company has filed a response. Discovery is expected to be
completed by the end of December 2002 with a scheduled trial date in March 2003.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2002 Annual Meeting of Shareholders was held on May 21,
2002. At the meeting, the following items were submitted to a vote of
shareholders.
(a) The following nominee was elected to serve on the Board of Directors:
Name of Nominee Votes Cast For Votes Withheld
--------------- -------------- --------------
Donald P. Brennan 11,205,875 13,135
John J. Brennan and John A. Stoops are directors continuing in
office with their terms expiring in 2003. Bernard Somers and
Seth J. Lehr are directors continuing in office with their
terms expiring in 2004.
(b) A proposal to amend the Company's 1996 Non-Employee Directors Plan to
increase the number of shares reserved for issuance thereunder from
50,000 to 100,000 was approved with 11,169,175 votes for, 40,237 votes
against and 9,598 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 - Chief Executive Officer Certification
Exhibit 99.2 - Chief Financial Official Certification
(b) Reports on Form 8-K.
On May 21, 2002, the Company filed a report on Form 8-K
disclosing it had dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent public accountant effective May
20, 2002. In addition, the Form 8-K disclosed that effective
May 21, 2002, the Company engaged KPMG LLP to serve as the
Company's independent public accountant for the Company's
2002 fiscal year. The decision to dismiss Arthur Andersen was
recommended by the Audit Committee of the Company's Board of
Directors and approved by the Company's Board of Directors.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ICT GROUP, INC.
Date: August 14, 2002 By: /s/ John J. Brennan
-------------------
John J. Brennan
Chairman and
Chief Executive Officer
Date: August 14, 2002 By: /s/ Vincent A. Paccapaniccia
----------------------------
Vincent A. Paccapaniccia
Executive Vice President Corporate Finance,
Chief Financial Officer and Assistant Secretary
18