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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 September 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
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(Address of principal executive offices) (Zip Code)
267-685-5000
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Registrant's telephone number, including area code.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock, $0.01 par value, 12,366,375 shares outstanding as of
October 21, 2002.
ICT GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months and nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
Nine months ended September 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
Item 4 CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS 16
Item 6 EXHIBITS 17
SIGNATURES 18
SARBANES-OXLEY SECTION 302(a) CERTIFICATION 19
EXHIBITS
2
PART I. FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,261 $ 12,875
Accounts receivable, net 51,200 48,058
Prepaid expenses and other 7,721 3,841
Deferred income taxes 916 916
-------- --------
Total current assets 75,098 65,690
-------- --------
PROPERTY AND EQUIPMENT
Communications and computer equipment 74,105 60,371
Furniture and fixtures 15,061 12,849
Leasehold improvements 12,022 7,549
-------- --------
101,188 80,769
Less: Accumulated depreciation and amortization (58,945) (47,533)
-------- --------
42,243 33,236
-------- --------
DEFERRED INCOME TAXES 1,529 1,529
OTHER ASSETS 2,075 2,131
-------- --------
$120,945 $102,586
======== ========
3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,000 $ 4,000
Accounts payable 11,721 9,050
Accrued expenses 11,817 10,561
Income taxes payable 2,183 3,314
-------- --------
Total current liabilities 29,721 26,925
-------- --------
LINE OF CREDIT 17,000 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,
12,366 and 12,233 shares issued and outstanding 124 122
Additional paid-in capital 51,034 50,331
Retained earnings 25,534 16,261
Accumulated other comprehensive loss (2,468) (3,053)
-------- --------
Total shareholders' equity 74,224 63,661
-------- --------
$120,945 $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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUE $74,121 $55,816 $221,299 $171,592
------- ------- -------- --------
OPERATING EXPENSES:
Cost of services 42,473 32,134 126,327 96,332
Selling, general and administrative 27,087 22,492 80,691 66,678
------- ------- -------- --------
69,560 54,626 207,018 163,010
------- ------- -------- --------
Operating income 4,561 1,190 14,281 8,582
INTEREST EXPENSE, net of interest
income of $46 and $97 for the three months
and $162 and $336 for the nine months 242 237 645 807
------- ------- -------- --------
Income before income taxes 4,319 953 13,636 7,775
INCOME TAXES 1,382 334 4,363 2,858
------- ------- -------- --------
NET INCOME $ 2,937 $ 619 $ 9,273 $ 4,917
======= ======= ======== ========
EARNINGS PER SHARE:
Basic earnings per share $0.24 $0.05 $0.75 $0.41
======= ======= ======== ========
Diluted earnings per share $0.23 $0.05 $0.71 $0.39
======= ======= ======== ========
Shares used in computing basic
earnings per share 12,340 12,183 12,296 12,129
======= ======= ======== ========
Shares used in computing diluted
earnings per share 13,009 12,733 13,023 12,659
======= ======= ======== ========
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,273 $ 4,917
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,227 8,174
Tax benefit of stock option exercises 336 375
Amortization of deferred financing costs 192 62
Increase in:
Accounts receivable (2,707) (3,077)
Prepaid expenses and other (3,496) (786)
Other assets (136) (219)
Increase (decrease) in:
Accounts payable 2,388 (719)
Accrued expenses 768 1,262
Income taxes payable (953) 665
------- ------
Net cash provided by operating activities 16,892 10,654
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,855) (6,428)
Proceeds from sale of property and equipment 9,605 -
------- ------
Net cash used in investing activities (19,250) (6,428)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 5,000 8,500
Payments on long-term debt - (10,000)
Payments on capitalized lease obligations - (221)
Debt issuance costs incurred - (773)
Proceeds from exercise of stock options 369 268
------- ------
Net cash provided by (used in) financing activities 5,369 (2,226)
------- ------
EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH
AND CASH EQUIVALENTS (625) (1,169)
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,386 831
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,875 8,539
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,261 $9,370
======= ======
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 Article 10 of Regulation S-X and the
instructions to Form 10-Q. 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, 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 September 30, 2002 and 2001, the dilutive
effect of Common Stock equivalents used in computing Diluted EPS was 669,000 and
550,000, respectively. For the nine months ended September 30, 2002 and 2001,
the dilutive effect of Common Stock equivalents used in computing Diluted EPS
was 727,000 and 530,000, respectively. For the three months ended September 30,
2002 and 2001, options to purchase 17,000 and 33,000 shares of Common Stock,
respectively, were outstanding but not included in the computation of Diluted
EPS as the result would be antidilutive. For the nine months ended September 30,
2002 and 2001, options to purchase 14,000 and 249,000 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 shareholders' equity section of the balance sheet.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Net income $2,937,000 $ 619,000 $9,273,000 $4,917,000
Foreign currency translation adjustments (574,000) 227,000 585,000 (1,169,000)
---------- ----------- ---------- ----------
Comprehensive income $2,363,000 $ 846,000 $9,858,000 $3,748,000
========== =========== ========== ==========
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 is considering pursuing a follow-on underwritten public
offering of its common stock. In connection therewith, the Company has incurred
approximately $550,000 of expenses through September 30, 2002, which have been
deferred pending the Company's further evaluation of such a transaction.
Note 5: LEGAL PROCEEDINGS
In 1998, William Shingleton filed a class action lawsuit against the Company in
the Circuit Court of Berkley County, West Virginia alleging that the Company had
violated the West Virginia Wage Payment and Collection Act for failure to pay
promised signing and incentive bonuses and wage increases, failure to compensate
employees for short breaks or "transition" periods 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
Company filed a response denying liability. In 2001, the Court granted
Plaintiffs' 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 as defendants. The
Plaintiffs have asserted a new allegation that, in addition to not paying
employees for break and "transition time", the Company failed to pay employees
for production hours worked. The Court has entered two separate orders granting
partial summary judgment against the Company and, in the case of one of the
orders, against three of the individual defendants, finding that employees were
not paid for all hours attributable to short breaks and idle time of less than
30 minutes in duration. In addition to compensatory claims for unpaid wages, the
Plaintiffs are seeking liquidated damages under the West Virginia Wage Payment
and Collection Act and punitive damages for allegedly fraudulent conduct on the
part of the Company and the individual defendants. The method of calculating
liquidated damages under the West Virginia Wage Payment and Collection Act is
one of the matters in dispute between the parties and there is a significant
difference in the amount of potential liquidated damages using the methods
Plaintiffs and the Company contend apply. On October 11, 2002 Plaintiffs filed a
Motion For Sanctions requesting the court to find certain evidentiary
presumptions and to order the defendants to obtain a surety bond in the initial
amount of approximately $11.3 million, reflecting Plaintiffs' contention of the
amount of compensatory and liquidated damages due. The Company is vigorously
defending the undecided issues in the suit, including the manner in which any
liquidated damages are to be calculated and the allegations of fraud. The
Company believes it has meritorious arguments that, if successful, would
significantly reduce the amount of any liquidated damages and that it has
meritorious defenses to the fraud allegations. If, however, the Plaintiffs'
method of calculating liquidated damages is followed by the Court, or if there
is a finding that the Company is liable for punitive damages as a result of
engaging in fraudulent conduct, it could result in a loss which significantly
exceeds the $900,000 that the Company has accrued for this litigation in its
financial statements and could have a material adverse impact on the Company's
operating results for the period in which such actual loss becomes known and on
its financial condition. A trial date has been set for March 2003.
Note 6: 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 Customer Relationship Management ("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's assets, depreciation and amortization and capital expenditures are used to
generate revenue and operating income for the Domestic CRM segment.
8
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue:
Domestic CRM $ 55,957 $ 41,403 $174,889 $124,479
International CRM 18,164 14,413 46,410 47,113
-------- -------- -------- --------
$ 74,121 $ 55,816 $221,299 $171,592
======== ======== ======== ========
Operating Income:
Domestic CRM $ 4,391 337 $ 13,426 $ 3,983
International CRM 170 853 855 4,599
-------- -------- -------- --------
$ 4,561 $ 1,190 $ 14,281 $ 8,582
======== ======== ======== ========
Total Assets:
Domestic CRM $ 75,148 $ 64,111
International CRM 35,470 28,253
Corporate 10,327 5,251
-------- --------
$120,945 $ 97,615
======== ========
Depreciation and Amortization:
Domestic CRM $ 1,430 $ 1,608 $ 4,932 $ 4,406
International CRM 1,313 820 3,481 2,130
Corporate 1,044 629 2,814 1,638
-------- -------- -------- --------
$ 3,787 $ 3,057 $ 11,227 $ 8,174
======== ======== ======== ========
Capital Expenditures:
Domestic CRM $ 3,107 $ 2,257 $ 13,926 $ 4,824
International CRM 3,171 951 10,287 751
Corporate 1,036 399 4,642 853
-------- -------- -------- --------
$ 7,314 $ 3,607 $ 28,855 $ 6,428
======== ======== ======== ========
The following table represents information about the Company by geographic area:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue:
United States $57,164 $44,124 $179,927 $133,802
Canada 9,857 6,102 25,353 20,958
Other foreign countries 7,100 5,590 16,019 16,832
-------- -------- -------- --------
$74,121 $55,816 $221,299 $171,592
======== ======== ======== ========
Long-lived Assets:
United States $25,996 $24,127
Canada 6,860 4,691
Other foreign countries 9,387 5,662
-------- --------
$42,243 $34,480
======== ========
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 revenue 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 revenue 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 revenue. Deferred revenue
totaled approximately $233,000 and $519,000 as of September 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 the SEC's 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 revenue
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 September 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, or from its relationships with its employees. 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. SFAS No. 5 further states that when there is a
range of loss and no amount within that range is a better estimate than any
other, that the minimum amount in the range shall be accrued. 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 September 30, 2002 and 2001:
Revenue. Revenue increased 33% to $74.1 million for the three months
ended September 30, 2002 from $55.8 million for the three months ended September
30, 2001 when revenue growth was constrained by the events of September 11th,
2001. Revenue from the Domestic CRM segment increased 35% to $56.0 million from
$41.4 million in the three months ended September 30, 2001 and accounted for 75%
of the Company's revenue compared to 74% 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 revenue increased 26% to $18.2
million in the three months ended September 30, 2002 from $14.4 million in the
three months ended September 30, 2001 and accounted for 25% of the Company's
revenue, versus 26% for the same period in the prior year. Most of this increase
resulted from business with new clients in 2002. Much of the Company's revenue
growth in the third quarter was driven by strong demand for CRM services. CRM
services revenue increased by 55% in the third quarter of 2002 versus the same
period in the prior year and accounted for 68% of the Company's total revenue
increase in the third quarter of 2002 compared to the third quarter of 2001.
Total CRM sales revenue grew 18% in the three months ended September 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 revenue in the third quarter of 2001 but
declined to 9% of the Company's revenue in the third 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 Canada. One customer, AOL,
accounted for 11% of the Company's revenue in the third quarter of 2002.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 32% to $42.5 million for the three
months ended September 30, 2002 from $32.1 million in the three months ended
September 30, 2001. This increase is primarily the result of an $8.0 million
increase in direct labor costs required to support the increased revenue volume.
As a percentage of revenue, cost of services decreased to 57% in the third
quarter of 2002 from 58% in the same quarter of 2001. The decrease was primarily
the result of a decrease in phone cost per production hour.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 20% to $27.1 million for the three months
ended September 30, 2002 from $22.5 million for the three months ended September
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. As a percentage of revenue, selling, general and administrative expenses
were 37% for the three months ended September 30, 2002 compared to 40% for the
three months ended September 30, 2001, as the Company leveraged its existing
infrastructure to support volume growth. Selling, general and administrative
expenses in the International CRM segment grew at a rate faster than the revenue
growth compared to the prior year due to higher infrastructure costs in Europe
associated with the new European headquarters, causing a reduction in operating
income when compared to the same period in the prior year.
Interest Expense, net. Interest expense, net of interest income, was
$242,000 for the three months ended September 30, 2002 compared to $237,000 for
the three months ended September 30, 2001 and reflects the interest expense
related to borrowings on 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 third quarter of 2002 as compared to the third
quarter of 2001, mostly offset by lower average interest rates in the third
quarter of 2002 as compared to the same period in 2001.
Provision for Income Taxes. Provision for income taxes increased $1.0
million to $1.4 million for the third quarter of 2002 from $334,000 in the third
quarter of 2001. For the third quarter of 2002, the provision for income taxes
was approximately 32% of income before income taxes. For the third quarter of
2001, the provision for income taxes was approximately 35% of income before
income 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 pre-tax income and continued utilization of work opportunity tax
credits.
12
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2002 and 2001:
Revenue. Revenue increased 29% to $221.3 million for the nine months
ended September 30, 2002 from $171.6 million for the nine months ended September
30, 2001. Revenue from the Domestic CRM segment increased 40% to $174.9 million
for the nine months ended September 30, 2002 from $124.5 million in the nine
months ended September 30, 2001 and accounted for 79% of the Company's revenue
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 revenue declined 1% to $46.4 million in the nine
months ended September 30, 2002 from $47.1 million in the nine months ended
September 30, 2001 and accounted for 21% of Company revenue versus 27% for the
same period in the prior year. Much of the growth in total revenue for the nine
months ended September 30, 2002 was driven by strong demand for CRM services
business. CRM services revenue increased by 58% in the first nine months of 2002
versus the same period in the prior year and accounted for 75% of the total
revenue increase in the first nine months of 2002 compared to the first nine
months of 2001. Total CRM sales revenue grew 12% in the nine months ended
September 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 revenue in the nine
months ending September 30, 2001 but declined to approximately 10% of the
Company's revenue in the first nine 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 Canada. Two other customers, Capital One and AOL accounted
for 12% and 10%, respectively, of the Company's revenue in the first nine months
of 2002.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 31% to $126.3 million for the nine
months ended September 30, 2002 from $96.3 million in the nine months ended
September 30, 2001. This increase was primarily the result of a $20.8 million
increase in direct labor costs required to support the increased revenue volume.
As a percentage of revenue, cost of services increased to 57% in the first nine
months of 2002 from 56% 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 $80.7 million for the nine months ended
September 30, 2002 from $66.7 million for the nine months ended September 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. As a percentage of revenue, selling, general and administrative expenses
were 36% for the nine months ended September 30, 2002 compared to 39% for the
nine months ended September 30, 2001, as the Company leveraged its existing
infrastructure to support volume growth. Selling, general and administrative
expenses in the International CRM segment grew at a rate faster than the revenue
growth compared to the prior year due to higher infrastructure costs in Europe
associated with the new European headquarters, causing a reduction in operating
income when compared to the same period in the prior year.
Interest Expense, net. Interest expense, net of interest income, was
$645,000 for the nine months ended September 30, 2002 compared to $807,000 for
the nine months ended September 30, 2001 and reflects the interest expense
related to borrowings on 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 nine 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
nine months of 2002 as compared to the same period in 2001.
13
Provision for Income Taxes. Provision for income taxes increased $1.5
million to $4.4 million for the first nine months of 2002 from $2.9 million in
the first nine months of 2001. For the first nine months of 2002, the provision
for income taxes was approximately 32% of income before income taxes. For the
first nine months of 2001, the provision for income taxes was approximately 37%
of income before income 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.
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 $16.9 million for the nine
months ended September 30, 2002 versus $10.7 million of cash provided by
operating activities for the nine months ended September 30, 2001. The $6.2
million increase in cash provided by operating activities was primarily due to a
$4.4 million increase in net income and a $3.1 million increase in depreciation.
These increases were partially offset by a net increase of approximately $1.3
million in working capital items. Accounts receivable and prepaid expenses grew
approximately $2.3 million more than the prior year but this growth was mostly
offset by a $1.0 million increase in accounts payable, accrued expenses and
income taxes payable.
Cash used in investing activities was $19.3 million for the nine months
ended September 30, 2002 compared to $6.4 million for the nine months ended
September 30, 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 nine months of
2002. Approximately $9.6 million of equipment was acquired under operating
leases in the first nine months of 2002 compared to approximately $6.2 million
of equipment acquired under operating leases in the first nine months of 2001.
The Company opened four new contact centers, closed one contact center, added
1,142 workstations in the first nine months of 2002, and operated 7,736
workstations at September 30, 2002. In the first nine months of 2001, the
Company added 255 workstations, and operated 6,176 workstations at September 30,
2001.
Cash provided by financing activities was $5.4 million for the nine
months ended September 30, 2002 compared to cash used in financing activities of
$2.2 million for the comparable 2001 period. The Company borrowed $5.0 million
under its line of credit during the first nine months of 2002 to help finance
capital expenditures. In the first nine months of 2001, the Company repaid debt
totaling $1.5 million under its line of credit and funded $773,000 of debt
issuance costs.
14
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 September 30, 2002, $21.0 million was outstanding under the
Company's line of credit with $64.0 million available to borrow.
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 is considering pursuing a follow-on underwritten public
offering of its common stock. In connection therewith, the Company has incurred
approximately $550,000 of expenses through September 30, 2002, which have been
deferred pending the Company's further evaluation of such a transaction.
On October 1, 2002, the Company acquired the assets of Grupo Teleinter,
S.A. de C.V., a 100-station contact center operation with headquarters in Mexico
City.
Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("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 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.
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, (viii) terrorist attacks and their aftermath, (ix) the Company's
capital and financing needs (including the incurrence of significant expenses of
a planned offering of common stock if the offering is abandoned) and (x) the
cost to defend or settle litigation against the Company or judgments, orders,
rulings and other developments in litigation against the Company.
15
Item 4. Controls and Procedures
a. Within the 90 days prior to the date of filing of this report, we carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chairman and Chief Executive
Officer along with Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's
Chairman and Chief Executive Officer along with the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in our
periodic SEC filings.
b. There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out this evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation incidental to
its business. Litigation can be expensive and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are difficult to
predict. Management believes that it has defenses in each of the cases set forth
below in which it is named as a defendant and is vigorously contesting each of
these matters. An unfavorable resolution of one or more of the following
lawsuits could adversely affect its business, results of operations, or
financial condition
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 to settle this
litigation. A definitive Stipulation and Agreement of Settlement has been signed
by both the Plaintiffs and the Company and submitted to the Court. The Court has
set a hearing date for December 3, 2002 for the purpose of determining whether
to approve the proposed settlement. If approved by the Court, 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 alleging that the
Company had violated the West Virginia Wage Payment and Collection Act for
failure to pay promised signing and incentive bonuses and wage increases,
failure to compensate employees for short breaks or "transition" periods 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 Company filed a response denying liability. In 2001, the
Court granted Plaintiffs' 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 as defendants.
The Plaintiffs have asserted a new allegation that, in addition to not paying
employees for break and "transition time", the Company failed to pay employees
for production hours worked. The Court has entered two separate orders granting
partial summary judgment against the Company and, in the case of one of the
orders, against three of the individual defendants, finding that employees were
not paid for all hours attributable to short breaks and idle time of less than
30 minutes in duration. In addition to compensatory claims for unpaid wages, the
Plaintiffs are seeking liquidated damages under the West Virginia Wage Payment
and Collection Act and punitive damages for allegedly fraudulent conduct on the
part of the Company and the individual defendants. The method of calculating
liquidated damages under the West Virginia Wage Payment and Collection Act is
one of the matters in dispute between the parties and there is a significant
difference in the amount of potential liquidated damages using the methods
Plaintiffs and the Company contend apply. On October 11, 2002 Plaintiffs filed a
Motion For Sanctions requesting the court to find certain evidentiary
presumptions and to order the defendants to obtain a surety bond in the initial
amount of approximately $11.3 million, reflecting Plaintiffs' contention of the
amount of compensatory and liquidated damages due. The Company is vigorously
defending the undecided issues in the suit, including the manner in which any
liquidated damages are to be calculated and the allegations of fraud. The
Company believes it has meritorious arguments that, if successful, would
significantly reduce the amount of any liquidated damages and that it has
meritorious defenses to the fraud allegations. If, however, the Plaintiffs'
method of calculating liquidated damages is followed by the Court, or if there
is a finding that the Company is liable for punitive damages as a result of
engaging in fraudulent conduct, it could result in a loss which significantly
exceeds the $900,000 that the Company has accrued for this litigation in its
financial statements and could have a material adverse impact on the Company's
operating results for the period in which such actual loss becomes known and on
its financial condition. A trial date has been set for March 2003.
Item 6. Exhibits
(a) Exhibits
Exhibit 10.5 - Employment Agreement between John J. Brennan and the
Company, dated August 1, 2002
Exhibit 99.1 - Chief Executive Officer Certification
Exhibit 99.2 - Chief Financial Officer Certification
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: October 24, 2002 By: /s/ John J. Brennan
------------------------------------------
John J. Brennan
Chairman and
Chief Executive Officer
Date: October 24, 2002 By: /s/ Vincent A. Paccapaniccia
----------------------------
Vincent A. Paccapaniccia
Executive Vice President Corporate Finance,
Chief Financial Officer and Assistant Secretary
18
Sarbanes-Oxley Section 302(a) Certification
I, John J. Brennan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 24, 2002 /s/ John J. Brennan
--------------------------------------
John J. Brennan
Chairman and Chief Executive Officer
19
Sarbanes-Oxley Section 302(a) Certification
I, Vincent A. Paccapaniccia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 24, 2002 /s/ Vincent A. Paccapaniccia
------------------------------------
Vincent A. Paccapaniccia
Executive Vice President, Corporate
Finance and Chief Financial Officer
20