-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TzBtrkfmlYTq8GVJsEosPNLMtiAacxOrk8NCiRwbT18vh0tYzJpHJmbWAazx3zFe XVjYqGGvIr7TJn+zO9Xpkw== 0000950116-98-000695.txt : 19980331 0000950116-98-000695.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950116-98-000695 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICT GROUP INC CENTRAL INDEX KEY: 0001013149 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 232458937 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20807 FILM NUMBER: 98579216 BUSINESS ADDRESS: STREET 1: 800 TOWN CENTER DR CITY: LANGHORNE STATE: PA ZIP: 19047 MAIL ADDRESS: STREET 1: 800 TOWN CENTER DR CITY: LANGHORNE STATE: PA ZIP: 19047-1748 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 ----------------- or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ___________ Commission File Number 0-20807 ICT GROUP, INC. (Exact name of registrant as specified in its charter.) Pennsylvania 23-2458937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Town Center Drive Langhorne, Pennsylvania (Address of principal executive offices) Registrant's telephone number, including area code: 215-757-0200 Title of each class: Name of each exchange on which registered: None None - -------------------------------- ------------------------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 ----------------------------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $24,384,125. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the National Market of The Nasdaq Stock Market on March 20, 1998. For purposes of this calculation only, the registrant has defined affiliates as including all directors and executive officers. In making such calculation, registrant is not making a determination of the affiliate or non-affiliate status of any holders of shares of Common Stock. The number of shares of the registrant's Common Stock outstanding as of March 20, 1998 was 11,542,300. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. ICT GROUP, INC. FORM 10-K ANNUAL REPORT For Fiscal Year Ended December 31, 1997 TABLE OF CONTENTS
PART I Page ---- Item 1. Business..................................................................................1 Item 2. Properties................................................................................9 Item 3. Legal proceedings.........................................................................9 Item 4. Submission of Matters to a Vote of Security Holders......................................10 PART II Item 5. Market for registrant's common equity and related stockholder matters....................11 Item 6. Selected financial data..................................................................12 Item 7. Management's discussion and analysis of financial condition and results of operations....13 Item 7A. Qualitative and quantitative disclosure about market risk................................16 Item 8. Financial statements and supplementary data..............................................16 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.....16 PART III Item 10. Directors and executive officers of the registrant.......................................17 Item 11. Executive compensation...................................................................17 Item 12. Security ownership of certain beneficial owners and management...........................17 Item 13. Certain relationships and related transactions...........................................17 PART IV Item 14. Exhibits, financial statement schedules, and reports on form 8-K.........................17
- i - This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to outsourcing trends as well as other trends in the telemarketing industry and the overall domestic economy, the Company's business strategy including the markets in which it operates, the services it provides, 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 Report where statements are preceded by, followed by or include the words "believes," "expects,""anticipates" or similar expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. The most important factors that could prevent the Company from achieving its goals--and cause the assumptions underlying the forward-looking statements and the actual results of the Company to differ materially from those expressed in or implied by those forward-looking statements--include, but are not limited to, the following: (i) The competitive nature of the telemarketing industry and the ability of the Company to continue to distinguish its services from other telemarketing companies and other marketing activities on the basis of quality, effectiveness, reliability and value; (ii) Economic conditions which could alter the desire of businesses to out source certain sales and service functions and the ability of the Company to obtain additional contracts to manage outsourced sales and service functions; (iii) The ability of the Company to offer value-added services to businesses in its targeted industries and the ability of the Company to benefit from its industry specialization strategy; (iv) Risks associated with investments and operations in foreign countries including, but not limited to, those related to local economic conditions, exchange rate fluctuations, local regulatory requirements, political factors, generally higher telecommunications costs, barriers to the repatriation of earnings and potentially adverse tax consequences; (v) Technology risks including the ability of the Company to select or develop new and enhanced technology on a timely basis, anticipate and respond to technological shifts and implement new technology to remain competitive; (vi) The ability of the Company to successfully identify, complete and integrate strategic acquisitions that expand or complement its business; and (vii) The results of operations which depend on numerous factors including, but not limited to, the timing of clients' telemarketing campaigns, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of additional selling, general and administrative expenses and the general competitive conditions in the telemarketing industry and the overall economy. PART I ITEM 1. BUSINESS ICT Group, Inc. (the "Company" or "ICT") is an independent provider of call center teleservices, which consist of outbound and inbound telemarketing and customer support services, together with related value-added services such as marketing, research, management and consulting services, to businesses domestically and internationally. The Company's call center management experience, technological leadership and expertise in target industries enable it to provide its clients with high quality, cost-effective call center services. In addition to supporting customers' teleservices programs from its own call centers, the Company believes there is a trend by businesses to outsource many of their internal telephone sales, customer service and product support functions, and is pursuing additional opportunities to manage clients' call centers on a contract basis. The Company believes it was among the first U.S. teleservices firms to establish international call centers with multilingual capabilities, which it intends to further expand to meet the global needs of multinational clients. Industry Overview The call center teleservices market includes traditional telemarketing activities such as outbound and inbound telephone marketing, as well as customer support, call center management and value-added marketing, research and consulting services. Telemarketing and other call center services have evolved significantly in recent years, as businesses have increasingly focused on utilizing highly personalized services to target consumer and business customers to create sales growth, provide customer support services and aid customer retention. Direct Marketing magazine estimates that - 1 - telemarketing industry expenditures in the United States grew to approximately $77 billion by 1995. The Company believes that all but a small percentage of this spending was incurred for services performed by in-house call centers; however, companies are increasingly outsourcing existing and new call center operations to specialists. In today's competitive marketplace, the Company believes that businesses are increasingly recognizing the competitive advantages of utilizing telemarketing and other call center services to reach and communicate with their customers. With response rates several times higher than those associated with direct mail activities, telemarketing provides an effective channel through which businesses are able to contact targeted customers. As a result, call centers have become robust channels for the marketing and sale of a wide variety of products and services, as sophisticated telemarketers are able to market effectively and collect valuable market and customer data. Moreover, businesses utilize call center services for a range of other functions, including providing customer support, generating customer leads, conducting direct sales activities, managing customer retention programs and testing telemarketing program effectiveness. Industries that have traditionally used teleservices for targeted marketing include insurance, financial services, publishing and telecommunications. As technology continues to improve the capabilities and productivity of call center representatives, companies in these industries are increasing their use of call centers and expanding the breadth of the applications they employ. For example, in the financial services industry, where telemarketing historically was used primarily for customer acquisition in the credit card business, call center services are now being employed to market a wide range of products and services, including consumer and business loans and mutual funds. In addition, businesses in industries that have not customarily utilized call center services are becoming significant users, as illustrated by the increasing use of call centers by pharmaceutical and health care services companies to perform direct marketing and database management functions; by information services companies for marketing and customer support activities and by energy services organizations which, as a result of deregulation, are reviewing customer retention and product marketing activities. Moreover, multinational companies in a variety of industries, including computer hardware and software, insurance and financial services have begun to utilize call center services on a global basis. The teleservices market has changed from a largely unregulated environment dominated by small, technologically unsophisticated companies to today's increasingly regulated and global marketplace in which technological sophistication is essential. At the same time, the use of telemarketing and other call center services is expanding into new applications and industries, and large corporations are increasingly seeking to partner with independent teleservices specialists for the management and enhancement of the call center aspects of their marketing, sales and customer service activities. The Company believes these trends present attractive opportunities for large, technologically sophisticated teleservices firms such as ICT that provide a full range of call center services. The ICT Approach ICT believes that it has distinguished itself in the call center teleservices industry by focusing on target industries and by providing its domestic and international customers with comprehensive support. With extensive experience in telemarketing, as well as other fields such as marketing, research and consulting, the Company's management team has emphasized call center management experience, economies of scale, technological leadership and expertise in target industries as a means of establishing ICT as a consistent provider of cost-effective call center teleservices. By focusing on a limited number of target industries, the Company has developed significant expertise marketing products and services for customers in those target industries. ICT believes this approach positions it to secure call center management relationships with businesses seeking to out source the management of existing or new call center operations. In addition, the Company continues to introduce value-added services, such as industry-focused marketing, research and consulting services, and to increase its international presence in order to provide multilingual teleservices domestically and internationally. Strategy With the increasing use of teleservices by businesses and the trend toward outsourcing call center activities, ICT believes significant opportunities exist to expand its business. The Company's growth strategy, includes the following key elements: o Pursue Outsourced Call Center Management Opportunities. ICT believes the current trend toward outsourcing call center activities will continue, and it intends to pursue additional opportunities to manage new or existing call center operations on an outsourced basis, either independently or through joint bids with strategic partners, such as staffing agencies - 2 - and systems integration firms. ICT Management Services accounted for approximately $5.9 million, or 6%, of consolidated revenues in 1997. o Increase International Presence. The Company plans to broaden its geographic reach and further develop its expertise in telemarketing in international markets by focusing on businesses with multinational operations. ICT currently provides multilingual telemarketing services in the United States, Europe, Latin America and Canada. ICT intends to expand its operations in these areas and to explore additional international operations in areas such as the Pacific Rim. The Company's international business operations represented approximately $12.9 million, or 14%, of consolidated revenues including revenues from telemarketing in the U.S. Hispanic market. o Develop Strategic Alliances and Acquisitions. ICT intends to continue pursuing strategic alliances with, and acquisitions of, domestic and international businesses that provide complementary call center teleservices. The Company initiated its international expansion in 1994 through the acquisition of the business of Spantel, which provides services to Spanish-speaking markets in the United States and Latin America, and the establishment of Eurotel to provide multilingual teleservices to pan-European markets. In May 1995, the Company acquired the business composing its ICT Financial Marketing Services division, which provides telebanking services. o Expand Value-Added Marketing Services. The Company will continue to complement its core telemarketing expertise with additional value-added services, such as marketing, research and consulting services, with the goal of providing comprehensive teleservices to businesses in its targeted industries. For example, through its ICT Financial Marketing Services division, ICT offers telebanking services to its financial services clients, allowing them to establish additional branch operations with minimal infrastructure investment. o Maintain Industry Specialization. The Company believes it has gained a significant competitive advantage by concentrating on servicing businesses in a limited number of select industries and intends to maintain its industry specialization. In addition, the Company believes that industry specialization will enable it to attract new clients because of its valuable industry expertise and reputation for delivering high-quality service. o Maintain Technology Leadership. The Company intends to continue making substantial investments in technology to maintain its technological leadership within the teleservices industry. ICT has been an industry leader in the implementation of innovative teleservices technologies to lower its effective cost per call and to improve its sales and customer service. The Company has made significant investments in information and communications technologies and believes it was among the first to offer fully automated teleservices and to implement predictive dialing equipment that it believes is now recognized industry-wide to be essential in handling consumer outbound telemarketing. o Continued Commitment to Quality Service. ICT has consistently emphasized quality service and extensive employee training by investing in quality assurance personnel and procedures. The Company's intends to continue its commitment to providing quality service, as illustrated by its strategy to achieve ISO 9002 certification, a quality standard that the Company plans to implement both domestically and internationally. ICT's Services ICT delivers its telemarketing, marketing and research, and call center management consulting services through four business divisions which are supported by the Company-wide marketing, sales and corporate units. ICT's domestic sales force is organized into a series of industry sectors focused on selling the full range of the Company's services to clients in their respective target industries. ICT believes this organizational structure allows the Company to provide comprehensive solutions to its clients' teleservices needs, since it enables ICT's sales and customer service personnel to develop in-depth knowledge of the needs of businesses in their designated industries. ICT's suite of services presently includes traditional telemarketing services, consisting of consumer outbound telemarketing, consumer inbound telemarketing and business-to-business telemarketing, as well as value-added services, consisting of marketing, research and consulting services. In addition, ICT pursues opportunities to manage third parties' call center activities on an outsourced basis, and offers domestic and international multilingual telemarketing services that provide sales and service support to non-English speaking markets in the United States, Europe, Latin America and Canada. - 3 - Domestic TeleServices Traditional domestic telemarketing services are offered through the Company's TeleServices division, which is comprised of the TeleDirect and TeleSolutions business units. ICT TeleDirect. ICT TeleDirect provides inbound and outbound direct sales telemarketing services to the insurance and financial products and services, credit card and endorsed products sectors. ICT TeleSolutions. ICT TeleSolutions provides teleservices support activities primarily for the telecommunications, information services, energy services, publishing and consumer goods industries. International TeleServices The Company offers domestic and international multilingual telemarketing services through ICT TeleServices International, which currently consists of Eurotel, Spantel and ICT Canada. These business units are designed to offer outbound and inbound services, customer care management services, marketing, research and other value-added services to clients. The growth of multinational corporations and the increase in non-English speaking residents in the United States has increased the demand for the multilingual capabilities that ICT provides. The division currently consists of the following units: ICT Eurotel. Eurotel provides pan-European, multilingual telephone marketing and information services to Europe from its call center in Dublin, Ireland. In August 1997, ICT opened a call center in London, U.K., providing services to the U.K. marketplace. ICT Spantel. Spantel provides tri-lingual English, Spanish and Portugese telemarketing services from its Miami, Florida call center to the rapidly growing marketplace of Spanish-speaking American and Latin American consumers and businesses. ICT Canada. The Company opened its first Canadian call center in January 1996 with service representatives who are fluent in French and English. As of December 31, 1997, ICT Canada has call centers located in Saint John and Moncton, New Brunswick, Canada. Value-Added Marketing, Research and Consulting Services ICT provides businesses in its target industries with marketing, research and consulting services thus leveraging its traditional telemarketing services and enabling it to offer comprehensive solutions for its clients' teleservices needs. These services presently consist of the following: ICT Marketing Services. As part of its growth strategy, ICT provides value-added marketing and consulting services to businesses in its target industries through the following divisions: ICT Financial Marketing Services, ICT Medical Marketing Services and ICT Reasearch Services. ICT Financial Marketing Services. This division's management team consists of professionals who have client-side banking experience in branch management and operations, marketing, advertising, research, electronic funds transfer, home and branchless banking, customer service and systems support. As of December 31, 1997, ICT Financial Marketing Services operated a dedicated inbound/outbound call center in Amherst, New York. ICT Research Services. The Company provides businesses in its target markets with value added market research survey design, data collection and consulting services. ICT's Research Services division makes extensive use of advanced technology, including integrated predictive dialing and Computer Assisted Telephone Interviewing ("CATI"), to obtain market and customer data cost effectively. As of December 31, 1997, ICT Research Services operated two call centers. ICT Medical Marketing Services. Through this business unit, ICT provides service for the increasingly complex needs of healthcare and pharmaceutical clients. ICT's dedicated call center is equipped with advanced computer and telecommunications software and hardware to service both outbound and inbound client applications. Work stations are staffed by dedicated medical professionals - 4 - to meet the sophisticated product and customer profiles of specific clients. As of December 31, 1997, ICT Medical Marketing Services operated a dedicated call center in Langhorne, Pennsylvania to support these industries. ICT Management Services ICT Management Services division was established in mid-1996 to pursue outsourcing opportunities that exist for customer care management. This division offers services such as site and system equipment selection, facility launch, program planning and implementation, staffing, technical support and ongoing customer care management. Depending on client needs, ICT will assume sole or shared responsibilities for the management of a call center's operations. Through ICT Management Services, ICT can either assume the management and operations of an in-house call center facility or move in-house operations to new or existing ICT facilities. ICT has bid on opportunities to manage new and existing customer care operations on an outsourced basis, both independently as well as jointly with staffing agencies, which have relationships with large national corporations, and systems integration firms. ICT has also established strategic alliances with Alltel, Systems and Computer Technology Corporation, Aspect Telecommunications and Information Management Associates, Inc. ("IMA") to expand opportunities for customer care service. Call Center Facilities The following table lists the Company's call center facilities as of December 31, 1997: - -------------------------------------------------------------------------------- Locations - -------------------------------------------------------------------------------- Chesapeake, VA(2); Martinsburg, WV; Norfolk, VA; Louisville, KY(2); Milford, OH; Sharonville, OH; Virginia Beach, VA; Cherry Hill, NJ; Fort Lauderdale, FL; Trevose, PA; Lancaster, OH; Newark, DE; Parkersburg, WV; Oxford, ME; Halifax, Canada; Eddystone, PA; Allentown, PA; Saint John, New Brunswick, Canada; Moncton, New Brunswick, Canada; Dublin, Ireland; London, U.K.; Miami, FL; Bethlehem, PA; Langhorne, PA(3); Amherst, NY and Tampa, FL. - -------------------------------------------------------------------------------- Target Industries ICT's domestic sales force is assigned to specific industry sectors, which enables its sales personnel to develop in-depth industry and product knowledge. They are supported by sales specialists resident within ICT's business units. Several of the industries that ICT serves are undergoing deregulation and consolidation, which provides the Company with additional opportunities as businesses search for low cost solutions for their marketing, sales and customer support needs. In 1997, business within the insurance and financial services industries accounted for 66% of the Company's revenues. The industries targeted by the Company and the principal services provided are described below. Insurance ICT works with large consumer insurance companies and their agents, marketing and providing customer support services for products such as life, accident, health and property, and casualty insurance. The Company's insurance group operates numerous dedicated call centers and in 1997, the Company sold approximately 2.1 million insurance policies on behalf of its clients. ICT employs approximately 350 agents collectively holding over 6,100 state or Canadian provincial insurance licenses. The Company has a full-service agent licensing and a continuing education department, which enables its agents to obtain licenses in 47 states and eight Canadian provinces and to maintain their compliance with insurance regulations. Clients include MMIG, JCPenney Life Insurance Company, Providian, American Security Group and Signature Group. - 5 - Financial Services ICT provides banks and other financial services clients with a wide range of services, including card-holder acquisition, active account generation, account balance transfer, account retention and customer service. ICT has dedicated and shared call centers to service these activities. With the acquisition in 1995 of its Financial Marketing Services operations, ICT began offering additional banking services, such as marketing and servicing home equity loans, lines of credit, loan-by-phone, checking and deposit account acquisition, mortgage loans and other traditional banking products. ICT Financial Marketing Services provides consulting and telebanking services to financial services clients from its dedicated inbound/outbound call center in Amherst, New York. Among ICT's financial services clients are Citibank, Key Corp, Fleet, CoreStates Bank, First USA, NationsBank, PNC, MBNA, Metris and Credentials. Publishing ICT provides services such as subscription sales, subscription renewals, book club membership sales and customer service to clients in the publishing industry. ICT's program management professionals with publishing experience also develop custom programs for assisting clients in their marketing and sales efforts. The publishing division clients are supported in ICT's TeleSolutions call centers. ICT's publishing clients include TV Guide, McGraw Hill, Publishers Clearinghouse, R.R. Donnelley and Cahners. Telecommunications ICT provides telemarketing programs for major telecommunications companies for long distance, cellular and cable products and services, as well as regional telecommunications companies marketing advanced telephone features. Through its various divisions, the Company is able to offer a range of services including customer service, sales and survey campaigns. Within the telecommunications industry, ICT presently provides services to Sprint, Bell Atlantic, Omnipoint, and L.A. Cellular. Consumer Products and Services ICT services its catalog and other consumer products and services clients through new customer acquisition, customer service and order entry applications, supporting inbound calls 24 hours per day and 365 days per year. ICT has established advanced call center capabilities to capture customers' orders and to make sales to these customers. During critical buying seasons, ICT provides clients with added capacity and a scalable work force on a variable cost basis. The consumer products and services clients are supported in ICT's TeleSolution's call centers. Clients in this category include the McKesson Corp, Lenox, Blair Corporation and the United States Army. Pharmaceuticals and Health Care Services Leveraging ICT's insurance market position into the managed care industry, the Company, through its ICT Medical Marketing Services unit, serves pharmaceutical manufacturers, medical advertising agencies, hospitals and other health care related suppliers, using telemarketing services for the sale and marketing of products to both health care professionals (hospitals, physicians, pharmacists and nurses) and health care consumers (patients and prospective patients). The applications consist of business-to-business, business-to-professional and business-to-consumer, utilizing inbound and outbound services to sell products, to conduct market research, develop marketing databases and provide customer service. Clients in this category include SmithKline Beecham, Teva Marion, Statlander, Aetna/U.S. Healthcare and Glaxo Wellcome. Computer Software and Hardware ICT provides sophisticated marketing resources for both outbound and inbound applications on behalf of clients in the computer software and hardware industries. Outbound applications include new customer acquisition, customer retention and lead generation. Inbound applications include customer service, first-level customer technical support and the sale of personal computer-related products. ICT's clients frequently integrate outbound and inbound call campaigns, seeking to achieve favorable compounding results. Computer industry clients include Sony Computer Entertainment, Elron, Intel and Digital. Technology ICT invests heavily in system and software technologies designed to improve call center production thereby lowering the effective cost per call made or received, and to improve sales and customer service effectiveness by providing its sales and service representatives with real-time access to customer and product information. Since January 1993, the Company has invested over $22.0 million in information and communications systems and software enabling it to be an industry leader in state of the art call center technology. ICT believes it was the first fully automated teleservices company and the first to implement predictive dialing - 6 - equipment, which the Company believes is now deemed essential by the teleservices industry in handling consumer outbound telemarketing. A predictive dialing system is an integrated computer and telephone switch that is used to dial a pre-programmed list of customers. The system will detect when a customer answers the call and will immediately transfer the call and the appropriate data to an available agent. ICT realizes significant cost savings through the use of innovative call handling technology, automatic call distributors ("ACD") and advanced scripting software, all of which optimize agent utilization. An ACD is a phone switch that accepts an inbound call from the public network and routes that call to the most advantageous, available resource to handle the call. Scripting software is used in call centers to provide the agent with the appropriate information to use during the call and to specify the content and sequence of the information captured from the customer. The Company utilizes a scalable set of UNIX processors to support its outbound and inbound call center operations. The term scalable in the computer industry generally means that a system or product line is configured to work cost-effectively at both low and high volume. The Company migrated to an open systems environment to take advantage of the diversity of software and hardware available for use with this technology. Dedicated UNIX processors are used for inbound call centers while predictive dialing systems, networked to UNIX processors at the Company's corporate data center, are used at each outbound call center. The predictive dialing systems support local call and data management: the UNIX processors provide centralized list management, data consolidation, report generation and interfaces with client order processing systems. ICT's proprietary call transaction management system ("CTMS") telemarketing software is used to prepare outbound and inbound scripts, manage, update and reference client data files, collect statistical transaction and performance data and assist in the preparation of internal and client reports. Service agency clients have changing needs that require a flexible operating system, such as CTMS, which is easily customizable and has the abilities to interface with a variety of proprietary data bases and software systems. In 1998, ICT intends to implement call center technology utilizing Oracle data base management and IMA's Edge TeleBusiness Software systems. The Company believes that the use of this new technology will enable it to better manage its list management and data base maintenance capabilities, resulting in more easily adaptable program and scripting requirements as well as more flexible and controlled data analysis. The implementation of this technology is intended to improve the overall direct marketing program performance for the Company's clients. With the use of an Oracle data base management system and Edge TeleBusiness scripting software, clients will have access to a common, universal data base platform, decreased training costs, increased technical staffing flexibility, faster program development and turnaround time and more easily compiled sales and marketing information. The Company believes that the addition of this technology will enhance both inbound and outbound client applications as well as improve the Company's call center management capabilities. ICT has recently initiated the evaluation of technologies that will allow integration of its application and telephony technology with the Internet. The Company intends to take advantage of these technologies to provide a totally integrated inbound and outbound solution to clients. Quality Assurance, Personnel and Training ICT emphasizes quality service and extensive employee training as a way to compete effectively and invests heavily in quality assurance personnel and practices. ICT's quality assurance and training departments are responsible for the development and enforcement of call center policies and procedures, the selection and training of telephone service representatives, the training and professional development of call center management personnel, monitoring of calls and verification and editing of all sales. Through the Company's quality assurance department, both the Company and its clients are able to perform real time on-site and remote call monitoring to maintain quality and efficiency. Sales confirmations are recorded (with the customer's consent) in order to verify the accuracy and authenticity of transactions. Additionally, ICT is able to provide to its clients immediate updates on the progress of an ongoing telemarketing effort. Access to this data allows ICT and its clients to identify potential campaign shortfalls and to immediately modify or enhance a telemarketing effort. In 1998 the Company will install digital recording and digital monitoring technologies in its call centers, which is expected to increase the efficiency of ICT's internal verification and monitoring processes. The Company's commitment to providing quality service is further illustrated by its current effort toward certification with ISO 9002 standards, which are administered by the International Organization for Standardization and represent an international consensus on the essential features of a quality system to ensure the effective operation of a business. The systems and operations departments are currently in - 7 - the process of reviewing and documenting the quality procedures required for ISO 9002 certification. Upon completion of this initial process, the Company intends to complete the manuals required for certification. The Company plans to implement the ISO 9002 standards both domestically and internationally and expects to apply for domestic certification in 1998. Management believes that a key driver of ICT's success is the quality of its employees. The Company tailors its recruiting and training techniques toward the industries it serves. All service representatives receive a detailed review of each program in which they are to participate along with training regarding the background, structure and philosophy of the client that is sponsoring the program. As is typical in the telemarketing industry, over 90% of the Company's service representatives are part-time employees. As of March 20, 1998, ICT employed 5,144 persons, of which more than 4,400 were service representatives. None of ICT's employees is represented by a labor union. The Company considers its relations with its employees to be good. Clients The Company generally operates under month-to-month contractual relationships with its clients. The pricing component of a contract often comprises an initial fee, a base service charge and separate charges for ancillary services. Service charges are usually based upon an hourly rate for outbound calls and per-minute rates for inbound calls. On occasion, the Company performs services for which it is paid commissions based on completed sales under contracts terminable by the Company with 30 or fewer days notice. ICT's Management Services operations typically enter into longer term, multi-year contractual relationships that may contain provisions for premature contract terminations. The Management Services division's revenues represented approximately $5.9 million, or 6%, of consolidated revenues in 1997. ICT targets those companies which it believes have the greatest potential to generate recurring revenues based on their ongoing direct sales and customer service needs. At December 31, 1997, ICT provided direct sales and customer service to 268 clients. The Company's largest client in recent years has been MMIG and JCPenney Life Insurance Company, which together accounted for approximately 31% of the Company's net revenues in 1997. No other client accounted for more than 9% of the Company's net revenues in 1997. Competition The teleservices industry is intensely competitive and the Company's principal competition in its primary markets comes from large telemarketing service organizations, including MATRIXX Marketing Inc., SITEL Corporation, ITI Marketing Services, Inc., APAC TeleService, Inc. and West Telemarketing Corporation. The Company competes with numerous independent telemarketing firms, many of which are as large or larger than ICT, as well as the in-house telemarketing and customer service operations of many of its clients or potential clients. In addition, most businesses that are significant consumers of telemarketing service utilize more than one teleservice firm at a time and reallocate work among various firms from time to time. A significant amount of such work is contracted on an individual project basis, with the effect that the Company and other firms seeking such business are required to compete with each other frequently as individual projects are initiated. Furthermore, the Company believes there is a trend among businesses with telemarketing operations toward outsourcing the management of those operations to others and that this trend may attract new competitors, including competitors that are substantially larger and better capitalized than ICT, into the Company's market. Government Regulation Both federal and state governments regulate telemarketing sales practices. The Federal Telephone Consumer Protection Act of 1991 (the "TCPA,"), enforced by the Federal Communications Commission, imposes restrictions on unsolicited telephone calls to residential telephone subscribers. Under the TCPA, it is unlawful to initiate telephone solicitations to residential telephone subscribers before 8:00 a.m or after 9:00 p.m. local time at the subscriber's location, or to use automated telephone dialing systems or artificial or prerecorded voices to certain subscribers. Additionally, the TCPA requires telemarketing firms to develop a written policy implementing a "do-not-call" list, and to train its telemarketing personnel to comply with these restrictions. The TCPA creates a right of action for both consumers and state attorneys general. A court may award actual damages or minimum statutory damages of $500 for certain violations, which may be trebled for willful or knowing violations. Currently, the Company trains its service - 8 - representatives to comply with the regulations of the TCPA and programs its call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on an applicable do-not-call list. The Federal Trade Commission (the "FTC") regulates both general sales practices and telemarketing specifically. Under the Federal Trade Commission Act (the "FTC Act"), the FTC has broad authority to prohibit a variety of advertising or marketing practices that may constitute "unfair or deceptive acts and practices." Pursuant to its general enforcement powers, the FTC can obtain a variety of types of equitable relief, including injunctions, refunds, disgorgement, the posting of bonds, and bars from continuing to do business, for a violation of the acts and regulations it enforces. The FTC also administers the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA"). Under the TCFAPA, the FTC has issued regulations prohibiting deceptive, unfair or abusive practices in telemarketing sales. Generally, these rules prohibit misrepresentations of the cost, quantity, terms, restrictions, performance or characteristics of products or services offered by telephone solicitation or of refund, cancellation or exchange policies. The regulations also regulate the use of prize promotions in telemarketing to prevent deception and require that a telemarketer identify promptly and clearly the seller on whose behalf the telemarketer is calling, the purpose of the call, the nature of the goods or services offered and, if applicable, that no purchase or payment is necessary to win a prize. The regulations also require that telemarketers maintain records on various aspects of their business. Analogous restrictions apply to industries regulated by the SEC. The Company believes that it is in compliance with the TCPA and its implementing regulations, as well as with the regulations promulgated pursuant to the TCFAPA. Most states have enacted statutes similar to the FTC Act generally prohibiting unfair or deceptive acts and practices. Additionally, some states have enacted laws and others are considering enacting laws targeted directly at telemarketing practices. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and such a contract often may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit card payment, and several other states require certain telemarketers to obtain licenses, post bonds or submit sales scripts to the states attorneys general. Under the more general statutes, depending on the willfulness and severity of the violation, penalties can include imprisonment, fines and a range of equitable remedies such as consumer redress or the posting of bonds before continuing in business. Many of the statutes directed specifically at telemarketing practices provide for a private right of action for the recovery of damages or provide for enforcement by state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys' fees. There can be no assurance that any such laws, if enacted, will not adversely affect or limit the Company's current or future operations. ITEM 2. PROPERTIES The Company's corporate headquarters are located in Langhorne, Pennsylvania in leased facilities consisting of approximately 29,500 square feet of office space rented under leases that expire in December 2000. The Company also leases all of the facilities used in its call center operations, as well as office space in Chicago, Illinois, Seattle, Washington and London, England for its sales offices. The leases for the Company's facilities expire generally between March 1998 and April 2003 and typically contain renewal options. The Company believes that its existing facilities are suitable and adequate for its current operations, but additional facilities will be required to support growth. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation incidental to its business. In the opinion of management, no such 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. On October 23, 1997, a shareholder, purporting to act on behalf of a class of ICT shareholders, filed a complaint in the United States District Court for the Eastern District of Pennsylvania against the Company and certain of its directors. The complaint alleges that the defendants violated the federal securities laws, and seeks compensatory and other damages, including rescission of stock purchases made by the plaintiff and other class members in connection with the Company's initial public offering. The defendants believe the complaint is without merit and deny all of the allegations of wrongdoing and are vigorously defending the suit. On February 2, 1998, the defendants filed a motion to dismiss the complaint. The motion has the effect of a stay of discovery - 9 - and all other proceedings while it is pending. A pretrial conference is scheduled for March 30, 1998, at which time the court is expected to hear oral arguments on the motion. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - 10 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the National Market segment of the Nasdaq Stock Market under the symbol "ICTG." The following table sets forth, for the periods indicated, the high and low sales prices as quoted on the Nasdaq Stock Market. Period High Low - ------ ---- --- Fiscal 1996: Second Quarter (beginning on June 14, 1996) $23 $16 3/4 Third Quarter 23 3/4 9 Fourth Quarter 13 4 Fiscal 1997: First Quarter 5 7/8 4 1/4 Second Quarter 5 1/4 3 3/8 Third Quarter 6 3/8 4 Fourth Quarter 6 5/8 3 1/2 As of March 20, 1998 there were 42 holders of record of the Company's Common Stock. On March 20, 1998, the closing sale price of the Common Stock as reported by the Nasdaq Stock Market was $4.75. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain its earnings to finance future growth and working capital needs and therefore does not anticipate paying any cash dividends in the foreseeable future. - 11 - ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the financial statements of the Company. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the consolidated financial statements and related notes thereto included in Item 8.
For Year Ended December 31, ---------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------------------------------------------------------------------- (In thousands, except per share amounts) Statement of Operations Data: Net revenues...................................... $ 22,271 $ 34,123 $52,116 $ 71,599 $91,653 -------- -------- ------- -------- ------- Operating expenses: Cost of services................................ 12,746 19,593 28,639 38,537 50,662 Selling, general and administrative............. 8,630 13,121 21,073 30,708 37,009 Nonrecurring compensation expense............... -- -- -- 12,689 -- -------- -------- ------- -------- ------- Total operating expenses...................... 21,376 32,714 49,712 81,934 87,671 -------- -------- ------- -------- ------- Operating income (loss)....................... 895 1,409 2,404 (10,335) 3,982 Interest expense (income), net.................... 326 511 834 180 (398) -------- -------- ------- -------- ------- Income (loss) before taxes........................ $ 569 $ 898 $ 1,570 $(10,515) 4,380 Income taxes...................................... 1,708 ------- Net income........................................ $ 2,672 ======= Diluted earnings per share........................ $ .22 ======= Shares used in computing diluted earnings per share............................ 12,044 ======= Pro Forma data: Historical income (loss) before income taxes.............................. $ 569 $ 898 $ 1,570 $(10,515) Pro forma income tax expense (benefit) (1) 257 406 667 (3,767) -------- -------- ------- -------- Pro forma net income (loss) (1)............... $ 312 $ 492 $ 903 $ (6,748) ======== ======== ======= ======== Pro forma diluted earnings (loss) per share (1) $ .03 $ .05 $ .10 $ (.65) ======== ======== ======= ======== Shares used in the computing pro forma diluted earnings (loss) per share......... 9,490 9,490 9,490 10,407 ========= ======== ======= ======== As of December 31, ---------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------------------------------------------------------------- (In thousands) Balance Sheet Data: Cash and cash equivalents.......................... $ 72 $ 11 $ 447 $18,298 $17,711 Working capital (deficit).......................... (461) (462) (1,601) 27,066 25,530 Total assets....................................... 7,410 12,044 18,481 49,112 61,578 Long-term debt, less current maturities............ 625 941 881 1,057 4,799 Capitalized lease obligations, less current maturities........................ 512 807 1,632 1,296 1,498 Shareholders' equity............................... 1,371 2,270 3,843 41,020 43,368
- ----------- (1) A pro forma provision for taxes for periods prior to the effective date of the Company's offering has been computed as if the Company had been fully subject to federal and state income taxes. - 12 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth statement of operations data as a percentage of net revenues for the periods indicated: Year Ended December 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- Net revenues 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses Cost of services 55.3 53.8 55.0 Selling, general and administrative 40.4 42.9 40.4 Nonrecurring compensation expense -- 17.7 -- ----- ----- ----- Total operating expense 95.7 114.4 95.4 ----- ----- ----- Operating income (loss) 4.3 (14.4) 4.6 Interest expense .5 .9 1.6 Interest income (1.0) (.6) -- ----- ----- ----- Income (loss) before income taxes 4.8 (14.7) 3.0 Income tax expense (benefit) (1) 1.9 (5.3) 1.3 ----- ----- ----- Net income (loss) (1) 2.9% (9.4%) 1.7% ===== ===== ===== - --------- (1) Reflects pro forma income tax expense (benefit) for the years ended December 31, 1996 and 1995 prior to the termination of the Company's S Corporation status. See Note 3 to Consolidated Financial Statements for information concerning the computation of the pro forma income tax expense (benefit) and pro forma net income (loss). - 13 - Years Ended December 31, 1997 and 1996 Net Revenues. Net revenues increased 28% in 1997 to $91.7 million from $71.6 million in 1996 primarily due to growth in TeleServices revenues. TeleService division revenues increased 30% to $71.4 million in 1997 from $54.9 million in 1996 resulting from continued strong growth in both international and domestic markets. International TeleService revenues grew 77% to $12.9 million in 1997 from $7.3 million in 1996. Domestic TeleService revenues grew 23% to $58.5 million in 1997 from $47.6 million in 1996 as a result of growth in the insurance, financial services and telecommunications industries. Marketing services revenues increased 15% to $14.4 million in 1997 from $12.5 million in 1996 as a result of growth in the healthcare and pharmaceutical industries. The Marketing Services unit results have been restated to include the Medical Marketing Services division which was formerly included as a part of Domestic TeleServices. Management Services revenues increased 43% to $5.9 million in 1997 from $4.1 million in 1996 as a result of the Management Services division commencing operations in the latter half of the second quarter of 1996. Cost of Services. Cost of services increased 31% to $50.7 million in 1997 from $38.5 million in 1996, resulting from increased business activity in each of the business units. As a percentage of revenues, cost of services increased to 55.3% in 1997 from 53.8% in 1996 primarily due to the mix in the structure of call center management projects in 1997 compared to 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 21% to $37.0 million in 1997 from $30.7 million in 1996 due to an increased number of call centers and related workstation capacity and additional sales and systems support. As a percentage of revenues, selling, general and administrative expenses declined to 40% in 1997 from 43% in 1996 as the Company has better managed the timing of opening additional call centers and adding workstation capacity; consolidated certain call centers into larger centers, spread fixed costs of operations over the larger centers and generally managed fixed expenses to support a larger revenue base. Interest Expense (Income). Interest income increased $402,000 to $877,000 in 1997 from $475,000 in 1996 as a result of the investment of funds obtained through the Company's initial public offering in June 1996. Interest expense decreased $176,000 to $479,000 in 1997 from $655,000 in 1996. Subsequent to the Company's initial public offering in June 1996, the Company repaid all indebtedness under its revolving line of credit and term loans with its bank and subordinated debt. During 1997, the Company financed certain capital equipment purchases under its equipment line of credit. For the year ended December 31, 1997, borrowings under the equipment line of credit were approximately $5.5 million. Income Taxes. Prior to the effective date of the Company's initial public offering, the Company was subject to taxation under Subchapter S of the Internal Revenue Code. As a result, the net income of the Company, for federal and state tax purposes, had been reported by and taxed directly to the Company's shareholders. Subsequent to its initial public offering, the Company has been fully subject to federal and state income taxes. For the year ended December 31, 1997, the provision for income taxes was $1.7 million or approximately 39% of income before taxes. For the year ended December 31, 1996, the pro forma income tax benefit was $3.8 million or approximately 35.8% of the loss before taxes. Year Ended December 31, 1996 and 1995 Net Revenues. Net revenues increased 37% in 1996 to $71.6 million from $52.1 million in 1995 primarily due to growth in TeleServices revenues. Teleservice division revenues increased 25% to $54.9 million in 1996 from $43.8 million in 1995. This increase in teleservices business resulted from moderate growth domestically and increasing demand for international teleservices. International Teleservice revenues grew from $2.4 million in 1995 to $7.3 million in 1996, or 204%. International TeleService revenues reflect the addition of call center operations within the Canadian market in early 1996 and increasing revenues in European and Hispanic markets. Domestic TeleService revenues increased 15% to $47.6 million in 1996 from $41.4 million in 1995. Marketing services revenues increased 51% to $12.5 million in 1996 from $8.3 million in 1995 reflecting a full year's revenues in 1996 from its telebanking operations which were acquired in May 1995, from increased revenues in its market research operations and as a result of growth in the healthcare and pharmaceutical industries. The Marketing Services unit results have been restated to include the Medical Marketing Services division which was formerly included as a part of Domestic TeleServices. ICT Management Services began operating in the second quarter of 1996 and contributed $4.1 million in revenues in 1996. - 14 - Cost of Services. Cost of services increased 34.6% in 1996 to $38.5 million from $28.6 million in 1995, resulting from increased business activity in each of the business units. As a percentage of revenues, costs of services decreased to 53.8% in 1996 from 55.0% in 1995 due principally to management service contracts which have lower direct costs. Selling, General and Administrative. Selling, general and administrative expenses increased 45.7% in 1996 to $30.7 million from $21.1 million in 1995 due principally to increased call center operations, as the Company added two call centers in its domestic teleservices operations, expanded its international presence with a call center in Canada and commenced operations in its management services business unit. In addition, the Company increased its sales and support for both international and domestic operations during the latter part of the third quarter of 1996. As a percentage of revenues, selling, general and administrative expenses increased to 42.9% in 1996 from 40.4% in 1995 as a result of increased call center capacity and support during 1996 while revenue growth slowed in the latter half of 1996 primarily as a result of delayed start-up of consumer financial marketing projects. Nonrecurring Compensation Expense. The nonrecurring, non-cash compensation expense of $12.7 million relates to the extension of certain previously granted stock options for an additional five-year period and the accelerated vesting of certain other options, all in connection with the Company's initial public offering in June 1996. Interest Expense (Income). Net interest expense decreased in 1996 as compared to 1995 due to lower average outstanding balances in 1996 of bank and capitalized lease debt. In addition, interest expense was partially offset by interest earned on the proceeds of the Company's initial public offering. Income Taxes. Prior to the effective date of the Company's initial public offering, the Company was subject to taxation under Subchapter S of the Internal Revenue Code. As a result, the net income of the Company, for federal and state tax purposes, had been reported by and taxed directly to the Company's shareholders. Subsequent to its initial public offering, the Company has been fully subject to federal and state income taxes. In addition, as a result of the Company's termination of its S Corporation status, the Company recorded a net deferred income tax liability and corresponding income tax expense of approximately $1.0 million. Quarterly Results and Seasonality The Company has experienced and expects to continue to experience significant quarterly variations in operating results, principally as a result of the timing of clients' telemarketing campaigns, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of additional selling, general and administrative expenses to support the growth and development of existing and new business units and the competitive conditions in the telemarketing industry. The Company's business tends to be strongest in the fourth quarter due to the high level of client telemarketing activity prior to the holiday season. In the first quarter, business generally slows as a result of reduced telemarketing activities and client transitions to new marketing programs. In addition, the Company typically expands its operations in the first quarter to support anticipated business growth for the remainder of the year. As a result, selling, general and administrative costs typically increase in the first quarter without a commensurate increase in revenues, which results in decreased profitability for the first quarter versus the previous fourth quarter. Also, demand for the Company's services typically slows or decreases in the third quarter, as the volume of telemarketing projects decreases during the summer months. In addition, the Company's operating expenses increase during the third quarter in anticipation of higher demand for its services during the fourth quarter. Liquidity and Capital Resources Prior to the Company's initial public offering in June 1996, ICT's primary sources of liquidity had been cash flow from operations and borrowings on its bank revolving line of credit. Acquisitions and capital expenditures had been financed through bank term loans and capitalized lease obligations. Cash provided by operations in 1997 was $6.2 million compared to $444,000 for 1996. The approximate $5.7 million increase resulted from increased earnings before noncash charges and reduced working capital requirements. - 15 - Cash used in investing activities in 1997 was $10.6 million as compared to $7.0 million in 1996. The approximate $3.6 million increase is primarily attributable to an increase in the number of workstations to 2,520 at December 31, 1997 from 2,068 at December 31, 1996, related call center buildout, upgraded telephony equipment and continued development and implementation of data base management software and IMA/Edge Software. Cash provided by financing activities was $4.1 million in 1997 as compared to $24.4 million in 1996. In 1997, the Company financed approximately $5.5 million of capital expenditures through bank term loans. These proceeds were partially offset by payment of approximately $1.4 million under the bank term loans and capitalized lease obligations. In 1996, the Company raised $34.5 million in net proceeds from its initial public offering and repaid certain indebtedness. The Company used a portion of the proceeds to repay outstanding indebtedness under its revolving line of credit, repay certain term debt and distribute $2.7 million as an S Corporation distribution to its founding shareholders. The Company's telemarketing activities will continue to require significant capital expenditures. Historically, equipment purchases have been financed through the Company's equipment line of credit and through capitalized lease obligations with various equipment vendors and lending institutions. The lease obligations are payable in varying installments through 2001. Outstanding obligations under capitalized leases at December 31, 1997 were $2.2 million. The Company maintains an equipment line of credit of $8.5 million that is scheduled to expire on April 30, 1998. Amounts borrowed under the equipment line of credit convert to term loans with durations determined at conversion by the borrower in accordance with the agreement. At December 31, 1997, the Company had outstanding obligations under the equipment line of $6.2 million. The Company maintains a revolving line of credit with a local bank in the amount of $15.0 million. Borrowings on the line of credit are limited to 80% of eligible accounts receivable and bear interest at the bank's prime rate (8.5% at December 31, 1997) less three-quarters of a percent. At December 31, 1997 and 1996, there were no borrowings outstanding under the line of credit. The line of credit expires on April 30, 1998. In March 1998, the Company signed a commitment letter for a three-year $45.0 million credit facility with two banks. The Company believes that the funds generated from operations, together with the remaining net proceeds to the Company from the initial public offering and available bank financing, will be sufficient to fund its current operations and planned capital expenditures at least through 1998. Year 2000 Compliance The Company is currently in the process of evaluating its information technology infrastructure for any Year 2000 impact. The Company does not expect that the cost to modify its information technology infrastructure to become Year 2000 compliant will be material to its financial condition or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. The Company is beginning to receive information concerning the Year 2000 compliance status from its suppliers and customers. In the event that any of the Company's significant suppliers or customers do not successfully and timely complete Year 2000 compliance, the Company's business or operations could be adversely affected. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Non-applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are filed under this Item 8, beginning on page F-1 of this report. - 16 - ICT GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page ------ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 CONSOLIDATED BALANCE SHEETS F-3 CONSOLIDATED STATEMENTS OF OPERATIONS F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 FINANCIAL STATEMENT SCHEDULE: II. VALUATION AND QUALIFYING ACCOUNTS F-20 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ICT Group, Inc.: We have audited the accompanying consolidated balance sheets of ICT Group, Inc. (a Pennsylvania corporation) and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICT Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index of Consolidated Financial Statements and Financial Statement Schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Philadelphia, Pa., February 13, 1998 F-2 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 --------------------------------- ASSETS 1997 1996 ------ --------------- --------------- CURRENT ASSETS: Cash and cash equivalents $ 17,711,028 $ 18,298,031 Accounts receivable, net of allowance for doubtful accounts of $345,897 and $354,524 17,684,071 13,539,085 Grant receivable 788,183 534,495 Prepaid expenses and other 1,079,344 347,873 Deferred income taxes 178,876 84,982 --------------- --------------- Total current assets 37,441,502 32,804,466 PROPERTY AND EQUIPMENT, net 19,443,611 11,631,885 DEFERRED INCOME TAXES 3,314,999 3,251,325 OTHER ASSETS 1,377,658 1,424,101 --------------- --------------- $ 61,577,770 $ 49,111,777 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 1,385,691 $ 283,878 Current portion of capitalized lease obligations 744,333 724,693 Accounts payable 5,822,638 2,806,639 Accrued expenses 3,959,202 1,923,199 --------------- --------------- Total current liabilities 11,911,864 5,738,409 --------------- --------------- LONG-TERM DEBT 4,799,289 1,057,480 --------------- --------------- CAPITALIZED LEASE OBLIGATIONS 1,498,418 1,295,544 --------------- --------------- COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 40,000,000 shares authorized, 11,542,300 and 11,538,300 shares issued and outstanding 115,423 115,383 Additional paid-in capital 49,257,879 49,338,490 Deferred compensation (107,428) (161,140) Accumulated deficit (5,617,828) (8,289,634) Cumulative translation adjustment (279,847) 17,245 ---------------- --------------- Total shareholders' equity 43,368,199 41,020,344 --------------- --------------- $ 61,577,770 $ 49,111,777 =============== ===============
The accompanying notes are an integral part of these statements. F-3 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31 --------------------------------------------------- 1997 1996 1995 --------------- ---------------- --------------- NET REVENUES $ 91,652,978 $ 71,599,435 $ 52,115,819 ------------- --------------- --------------- OPERATING EXPENSES: Cost of services 50,662,062 38,536,578 28,638,687 Selling, general and administrative 37,008,848 30,707,788 21,073,590 Nonrecurring compensation expense -- 12,689,651 -- ------------- --------------- -------------- 87,670,910 81,934,017 49,712,277 ------------- --------------- --------------- Operating income (loss) 3,982,068 (10,334,582) 2,403,542 INTEREST EXPENSE 478,726 655,207 833,483 INTEREST INCOME (876,668) (475,325) -- ------------- --------------- -------------- Income (loss) before income taxes 4,380,010 (10,514,464) 1,570,059 INCOME TAXES (BENEFIT) 1,708,204 (2,997,748) -- ------------- --------------- -------------- NET INCOME (LOSS) $ 2,671,806 $ (7,516,716) $ 1,570,059 ============= =============== =============== EARNINGS PER SHARE: Basic earnings (loss) per share $ 0.23 $ (0.72) $ 0.17 ============= =============== ============== Diluted earnings (loss) per share $ 0.22 $ (0.72) $ 0.17 ============= =============== ============== Shares used in computing basic earnings (loss) per share 11,542,234 10,407,271 9,000,000 ============= =============== =============== Shares used in computing diluted earnings (loss) per share 12,044,341 10,407,271 9,489,723 ============= =============== =============== PRO FORMA DATA (unaudited): Historical income (loss) before income taxes $ (10,514,464) $ 1,570,059 Pro forma income tax expense (benefit) (3,766,748) 667,275 --------------- --------------- Pro forma net income (loss) $ (6,747,716) $ 902,784 =============== =============== Pro forma basic earnings (loss) per share $ (0.65) $ 0.10 =============== =============== Pro forma diluted earnings (loss) per share $ (0.65) $ 0.10 =============== =============== Shares used in computing pro forma basic earnings (loss) per share 10,407,271 9,000,000 =============== =============== Shares used in computing pro forma diluted earnings (loss) per share 10,407,271 9,489,723 =============== =============== The accompanying notes are an integral part of these statements. F-4 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional ------------------------ Paid-in Shares Amount Capital ----------- --------- ------------- BALANCE, DECEMBER 31, 1994 9,000,000 $ 90,000 $ 310,000 Currency translation adjustment -- -- -- Net income -- -- -- ------------ ---------- ------------- BALANCE, DECEMBER 31, 1995 9,000,000 90,000 310,000 Deferred compensation related to grants of stock options -- -- 268,565 Amortization of deferred compensation -- -- -- Issuance of stock options -- -- 12,689,651 Distribution to S Corporation shareholders -- -- -- Termination of S Corporation status -- -- 1,493,837 Sale of Common stock in initial public offering, net of offering costs 2,411,552 24,116 34,522,799 Exercise of stock options, including tax benefit 126,748 1,267 53,638 Currency translation adjustment -- -- -- Net loss -- -- -- ------------ ---------- ------------- BALANCE, DECEMBER 31, 1996 11,538,300 115,383 49,338,490 Cancellation of stock options -- -- (84,648) Amortization of deferred compensation -- -- -- Exercise of stock options 4,000 40 4,037 Currency translation adjustment -- -- -- Net income -- -- -- ------------ ---------- ------------- BALANCE, DECEMBER 31, 1997 11,542,300 $ 115,423 $ 49,257,879 ============ ========== ============= Deferred Retained Cumulative Total Compen- Earnings Translation Shareholders' sation (Deficit) Adjustment Equity ----------- ------------ ------------- ----------- BALANCE, DECEMBER 31, 1994 $ -- $ 1,868,853 $ 1,180 $ 2,270,033 Currency translation adjustment -- -- 2,942 2,942 Net income -- 1,570,059 -- 1,570,059 ----------- ------------ ----------- ------------- BALANCE, DECEMBER 31, 1995 -- 3,438,912 4,122 3,843,034 Deferred compensation related to grants of stock options (268,565) -- -- -- Amortization of deferred compensation 107,425 -- -- 107,425 Issuance of stock options -- -- -- 12,689,651 Distribution to S Corporation shareholders -- (2,717,993) -- (2,717,993) Termination of S Corporation status -- (1,493,837) -- -- Sale of Common stock in initial public offering, net of offering costs -- -- -- 34,546,915 Exercise of stock options, including tax benefit -- -- -- 54,905 Currency translation adjustment -- -- 13,123 13,123 Net loss -- (7,516,716) -- (7,516,716) ----------- ------------ ----------- ------------- BALANCE, DECEMBER 31, 1996 (161,140) (8,289,634) 17,245 41,020,344 Cancellation of stock options -- -- -- (84,648) Amortization of deferred compensation 53,712 -- -- 53,712 Exercise of stock options -- -- -- 4,077 Currency translation adjustment -- -- (297,092) (297,092) Net income -- 2,671,806 -- 2,671,806 ----------- ------------ ----------- ------------- BALANCE, DECEMBER 31, 1997 $ (107,428) $ (5,617,828) $ (279,847) $ 43,368,199 =========== ============ =========== =============
The accompanying notes are an integral part of these statements. F-5 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31 ------------------------------------------------- 1997 1996 1995 ------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,671,806 $ (7,516,716) $ 1,570,059 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Nonrecurring compensation expense -- 12,689,651 -- Minority interest in subsidiary's earnings -- 37,316 3,718 Depreciation and amortization 3,859,914 2,792,231 1,877,133 Deferred income tax benefit (242,216) (3,329,922) -- (Increase) decrease in- Accounts receivable (4,144,986) (4,558,453) (2,349,113) Receivable from related party -- 132,977 52,952 Prepaid expenses and other (731,471) (13,940) (135,595) Grant receivable (253,688) 2,554 (87,652) Other assets (38,438) (323,535) 33,319 Increase (decrease) in- Accounts payable 3,015,999 1,074,134 (50,128) Accrued expenses 2,036,003 (121,301) (246,795) Deferred revenues -- (421,209) 421,209 -------------- -------------- -------------- Net cash provided by operating activities 6,172,923 443,787 1,089,107 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (10,585,839) (6,893,311) (2,372,873) Purchase of minority interest in subsidiary -- (129,420) -- Payments for business acquisitions -- -- (468,487) -------------- -------------- -------------- Net cash used in investing activities (10,585,839) (7,022,731) (2,841,360) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) on lines of credit -- (6,201,152) 2,609,995 Proceeds from long-term debt 5,515,066 2,919,390 1,000,000 Payments on long-term debt (671,444) (3,044,282) (580,000) Payments on capitalized lease obligations (724,694) (834,752) (807,109) Payments on subordinated notes -- (300,000) -- Distribution to S Corporation shareholders -- (2,717,993) -- Net proceeds from initial public offering -- 34,546,915 -- Proceeds from exercise of stock options 4,077 48,520 -- Payments of deferred financing costs -- -- (36,999) -------------- -------------- -------------- Net cash provided by financing activities 4,123,005 24,416,646 2,185,887 -------------- -------------- -------------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (297,092) 13,123 2,942 -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (587,003) 17,850,825 436,576 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,298,031 447,206 10,630 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,711,028 $ 18,298,031 $ 447,206 ============== ============== ==============
The accompanying notes are an integral part of these statements. F-6 ICT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND: ICT Group, Inc. and Subsidiaries (the "Company") is an independent provider of call center teleservices, which consist of outbound and inbound telemarketing and customer support services, together with related value-added services such as marketing, research, management and consulting services, to business domestically and internationally. The Company provides these services to customers in an increasing array of industries including but not limited to insurance and financial services, publishing, telecommunications, consumer products and services, pharmaceuticals, health care services and computer software and hardware. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of ICT Group, Inc. and its subsidiaries. All material intercompany balances and transactions have been eliminated. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 52, substantially all assets and liabilities of the Company's foreign subsidiaries are translated at the period-end currency exchange rate and revenues and expenses are translated at an average currency exchange rate for the period. The resulting translation adjustment is accumulated in a separate component of shareholders' equity. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company recognizes revenues on programs as services are performed, generally based on hours incurred. Amounts collected from customers prior to the performance of services are recorded as deferred revenues. F-7 Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of three months or less. Cash equivalents at December 31, 1997 consist of an overnight repurchase agreement, money market accounts and investment-grade commercial paper. Property and Equipment
December 31 --------------------------------- 1997 1996 --------------- --------------- Communications and computer equipment $ 26,076,846 $ 16,752,914 Furniture and fixtures 4,579,251 2,935,688 Leasehold improvements 2,146,640 1,581,088 --------------- --------------- 32,802,737 21,269,690 Less- Accumulated depreciation and amortization (13,359,126) (9,637,805) --------------- --------------- $ 19,443,611 $ 11,631,885 =============== ===============
Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the applicable assets using the straight-line method. The lives used are as follows: Communications and computer equipment 5 years Furniture and fixtures 5-7 years Leasehold improvements Lease term Depreciation expense was $3,721,321, $2,599,051 and $1,750,921 for the years ended December 31, 1997, 1996 and 1995, respectively. Repairs and maintenance are charged to expense as incurred. Additions and betterments are capitalized. Gains or losses on the disposition of property and equipment are charged to operations. Equipment under capital leases included in property and equipment is $5,946,468 and $4,999,260, related accumulated amortization is $3,367,301 and $2,504,185 as of December 31, 1997 and 1996, respectively. F-8 Other Assets
December 31 ----------------------------- 1997 1996 ------------- ------------ Deposits $ 549,807 $ 476,202 Goodwill, net of accumulated amortization of $157,455 and $95,660 750,480 772,965 Other 77,371 174,934 ------------- ------------- $ 1,377,658 $ 1,424,101 ============= =============
Goodwill is amortized over 15 years on a straight-line basis. The Company evaluates the realizability of goodwill based on estimates of undiscounted future cash flows over the remaining useful life of the assets acquired. If the amount of such estimated undiscounted future cash flows is less than the net book value of the assets acquired, the assets are written down to the amount of the estimated undiscounted cash flows. Accrued Expenses
December 31 ----------------------------- 1997 1996 ------------- ------------ Payroll and related benefits $ 1,942,455 $ 1,061,438 Telecommunications expense 890,243 311,537 Income tax payable 755,285 -- Other 371,219 550,224 ------------- ------------- $ 3,959,202 $ 1,923,199 ============= =============
Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," the objective of which is to recognize the amount of current and deferred income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements as measured by enacted tax laws. Prior to the closing of the Company's initial public offering, the Company had elected to be taxed under Subchapter S of the Internal Revenue Code. As a result, the Company was not subject to federal and state income taxes, and the taxable income of the Company was included in the shareholders' tax returns. Shortly before the closing of the initial public offering, the Company terminated its status as an S corporation and is now subject to federal and state income taxes. For the year ended December 31, 1996, the Company recorded a tax expense of $1,015,386 as a result of establishing a net deferred tax liability upon its conversion to a C corporation. F-9 Supplemental Cash Flow Information For the years ended December 31, 1997, 1996 and 1995, the Company paid interest of $440,660, $748,591 and $848,810, respectively. Capital lease obligations of $947,208, $475,067 and $1,714,958 were incurred on equipment leases entered into in 1997, 1996 and 1995, respectively. For the year ended December 31, 1997, the Company paid income taxes of $919,637. Major Customers and Concentration of Credit Risk In 1997, 1996 and 1995, one customer accounted for approximately 31%, 35% and 43% of net revenues, respectively. In 1997, 1996 and 1995, net revenues from customers within the insurance industry accounted for 42%, 42% and 46% of total net revenues, respectively, and customers within the financial services industry accounted for 24%, 26% and 22% of total net revenues, respectively. The loss of the Company's major customer or a downturn in the insurance or financial services industries could have a material adverse effect on the Company's business. Concentration of credit risk is limited to trade receivables and is subject to the financial conditions of certain major customers. The Company does not require collateral from its customers. Recapitalization In June 1996, the Company effected a nine-for-one stock split in the form of a stock dividend, authorized 5,000,000 shares of undesignated preferred stock and increased its authorized common stock to 40,000,000 shares. All references in the accompanying financial statements to the number of common shares and per-share amounts have been retroactively restated to reflect the stock split. Initial Public Offering The Company completed an initial public offering (the "Offering") of its Common stock effective June 14, 1996. The Company sold 2,411,552 shares of Common stock at an initial public offering price of $16 per share. An additional 463,448 shares of Common stock (including 375,000 shares purchased by the underwriters upon the exercise of an overallotment option) were sold by certain shareholders of the Company. The net proceeds to the Company, after underwriting discounts and commissions, were approximately $34,500,000. Earnings Per Share The Company has presented earnings per share pursuant to SFAS No. 128, "Earnings Per Share," and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. Basic earnings (loss) per share ("Basic EPS") is computed by dividing the net income (loss) for each year by the weighted average number of shares of Common stock outstanding for F-10 each year. Diluted earnings (loss) per share ("Diluted EPS") is computed by dividing net income (loss) for each year by the weighted average number of shares of Common stock and Common stock equivalents outstanding during each year. For the years ended December 31, 1997 and 1995, Common stock equivalents outstanding used in computing Diluted EPS were 502,107 and 489,723, respectively. For the year ended December 31, 1996, Common stock equivalents are not included, as their effect is antidilutive. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued 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 a statement of financial position. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management believes that SFAS 130 will not have a material effect on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information". This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management is currently evaluating the need to make additional disclosures under SFAS 131. However, this statement will not have any effect on the Company's reported financial position or results of operations. 3. PRO FORMA INCOME TAX PROVISION (UNAUDITED): Shortly before the closing of the Offering, the Company terminated its status as an S corporation and, as a result, the Company is now subject to federal and state income taxes. Accordingly, for informational purposes, the accompanying statements of operations for the years ended December 31, 1996 and 1995, include an unaudited pro forma adjustment for the income taxes that would have been recorded if the Company had not been an S corporation, based on the tax laws in effect during the respective periods. 4. GRANT REIMBUSEMENTS: The Company's wholly-owned subsidiary, Eurotel Marketing Limited ("Eurotel"), which provides multilingual pan-european telemarketing services, is reimbursed by the Irish Industrial Development Authority ("IDA") for certain capital expenditures, employment and training costs, and rent. The Company records a grant receivable for qualified expenditures made, but not yet reimbursed. For the years ended December 31, 1997, 1996 and 1995, the Company recorded $384,831, $470,545, and $260,013, respectively, as expense reductions. The Company is required to maintain certain employment levels specified under the grants. If the Company fails to maintain these levels, a portion of the grant could be payable to the IDA for that portion of the employment targets not maintained. F-11 5. DEBT:
December 31 ---------------------------------- 1997 1996 --------------- --------------- Equipment line of credit, interest at prime less one-half point, principal payments of $12,509 per month through January, 2002 $ 612,945 $ 750,545 Equipment line of credit, interest at prime less one-half point, principal payments of $11,147 per month through April, 2001 457,044 590,813 Equipment line of credit, interest at prime less one-half point, principal payments of $13,547 per month through April, 2002 704,422 -- Equipment line of credit, interest at prime less one-half point, principal payments of $15,173 per month through May, 2002 804,188 -- Equipment line of credit, interest at prime less one-half point, principal payments of $43,333 per month through October, 2002 2,513,333 -- Equipment line of credit, interest at prime less one-half point, principal payments of $19,764 per month through August, 2002 1,093,048 -- --------------- --------------- 6,184,980 1,341,358 Less- Current portion (1,385,691) (283,878) --------------- --------------- $ 4,799,289 $ 1,057,480 =============== =============== Future maturities of long-term debt are as follows at December 31, 1997: 1998 $ 1,385,691 1999 1,385,691 2000 1,385,691 2001 1,307,659 2002 720,248 --------------- $ 6,184,980 ===============
F-12 In April 1996, the Company entered into an Amended and Restated Loan Agreement (the "Agreement") with its bank, which provides for a $15,000,000 line of credit and a $8,500,000 equipment line of credit. Borrowings on the line of credit are limited to 80% of eligible accounts receivable, as defined. The line bears interest at the bank's base rate (8.5% at December 31, 1997) less three quarters of a point, as defined, and expires on March 31, 1998. The equipment line of credit is to be used to finance 90% of the cost of equipment purchases. Individual borrowings must be at least $200,000 and, once drawn, become, at the option of the Company, three- to five-year term loans due in equal monthly installments. Borrowings under the equipment line bear interest at either the bank's base rate less one half of a point or a fixed rate set at the U.S. Treasuries Reference Rate plus 2.75%, at the option of the Company. The term loans and the line of credit are cross-collateralized and cross-defaulted. The Company may, at any time, fix the interest rate on the term loans at the bank's current fixed rate. If the fixed rate option is selected, any principal prepayments could be subject to penalties, as defined. The Company incurred interest expense of $255,304 and $472,632 at average interest rates of 8.5% and 9.3% for the years ended December 31, 1996 and 1995, respectively. The Company did not utilize the line of credit during 1997. The highest outstanding borrowing during 1996 was $8,716,505. At December 31, 1997 and 1996, the Company had no borrowings outstanding under the line of credit. At December 31, 1997, the full amount of the line, subject to the stated limits, is available. Borrowings under the Agreement are secured by substantially all of the Company's assets. Under the more restrictive covenants of the Agreement, the Company is required to maintain certain financial ratios and a specified level of net worth, as defined, and payments of dividends and repurchases of stock are limited. 6. CAPITALIZED LEASE OBLIGATIONS: The Company leases certain equipment under capital leases. The Company's weighted average interest rate was 10.6% for the year ended December 31, 1997. Future minimum lease payments as of December 31, 1997, are as follows: 1998 $ 946,661 1999 794,070 2000 599,824 2001 308,107 ---------------- Total minimum lease payments 2,648,662 Less- Amount representing interest (405,911) ---------------- Present value of minimum lease payments 2,242,751 Less- Current portion (744,333) ---------------- $ 1,498,418 ================ F-13 7. INCOME TAXES: Effective June 11, 1996, the Company terminated its status as an S corporation and was subject to federal and state income taxes from the date of termination to December 31, 1996. The components of the income (loss) before income taxes were as follows: Year Ended December 31 ---------------------------------- 1997 1996 --------------- ----------------- Domestic $ 3,192,559 $ (10,997,820) Foreign 1,187,451 483,356 --------------- ---------------- $ 4,380,010 $ (10,514,464) =============== ================ The components of the provision (benefit) for income taxes are as follows: Year Ended December 31 -------------------------------- 1997 1996 -------------- -------------- Current: Federal $ 1,339,098 $ -- State 10,540 -- Foreign 462,831 173,342 -------------- -------------- 1,812,469 173,342 -------------- -------------- Deferred: Federal (90,898) (3,759,300) State (13,367) (427,176) Foreign -- -- -------------- -------------- (104,265) (4,186,476) -------------- -------------- Reinstatement of deferred -- 1,015,386 income tax liability -------------- -------------- $ 1,708,204 $ (2,997,748) ============== ============== F-14 The approximate income tax effect of each type of temporary difference is as follows: December 31 ------------------------------- 1997 1996 -------------- -------------- Gross deferred tax assets: Nonrecurring compensation expense $ 4,036,870 $ 4,081,260 Net operating loss carryforwards -- 237,745 Accruals and reserves not currently deductible for tax 178,876 134,602 Deferred compensation 63,955 -- -------------- -------------- $ 4,279,701 $ 4,453,607 ============== ============== Gross deferred tax liabilities: Cash basis of accounting $ (584,897) $ (877,345) Depreciation methods (59,921) (132,709) Other (141,008) (107,246) -------------- -------------- $ (785,826) $ (1,117,300) ============== ============== The Company has recorded no valuation reserve for deferred tax assets as of December 31, 1997. Although realization is not assured, management believes it is more likely than not that all of the 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. The reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: Year Ended December 31 -------------------------- 1997 1996 ------------ ----------- Federal statutory tax rate 34.0% (34.0)% Income not subject to corporate taxes due to S Corporation status -- 2.3 Reinstatement of deferred taxes upon conversion to C Corporation status -- 9.7 State income taxes, net of federal tax benefit 4.0 (5.2) Other 1.0 (1.3) ---------- --------- 39.0% (28.5)% ========== ========= F-15 8. PROFIT SHARING PLAN: The Company maintains a trusteed profit sharing plan (Section 401(k)) for all qualified employees, as defined. The Company matches 50% of employee contributions, up to a maximum of 6% of the employee's compensation; however, it may also make additional contributions to the Plan based upon profit levels and other factors. No such additional contributions were made in 1997, 1996 or 1995. Employees are fully vested in their contributions, while full vesting for the Company's contributions occurs upon death, disability, retirement or completion of five years of service. In 1997, 1996 and 1995, the Company's contributions were $296,529, $289,499 and $174,585, respectively. The Plan's trustees are the management of the Company. 9. EQUITY PLANS: Stock Option Plans The Company's 1996 Equity Compensation Plan authorizes up to 1,120,000 shares of Common Stock for issuance in connection with the granting to employees and consultants of incentive and nonqualified stock options, restricted stock, stock appreciation rights and other awards based on the Company's Common Stock. The options to be granted and the option prices are established by the Board of Directors or a committee composed of two or more of its members. Incentive stock options are granted at prices not less than fair market value. Options are exercisable for periods not to exceed ten years, as determined by the Board of Directors or its committee. As of December 31, 1997, 946,000 shares of Common Stock were available for grant under the plan. The Company's 1996 Non-Employee Director Plan authorizes up to 30,000 shares of Common Stock for issuances of nonqualified stock options to non-employee directors. As of December 31, 1997, 26,000 shares of Common Stock are available for grant under this plan. As of December 31, 1997, there were options to purchase 831,375 shares of Common Stock outstanding in connection with the Company's 1987 Stock Option Plan. No future grants will be made under this plan. In April 1987, the Company issued outside the plan an option to purchase 90,000 shares at an exercise price of $.04 per share. This option vested upon the Offering resulting in compensation expense of $1,436,000. This option expired in December 1996. Equity Incentive Plan In December 1995, the Company adopted an Equity Incentive Plan that provided for the issuance of up to 270,000 Equity Incentive Units ("Units"). In December 1995, the Company awarded 159,300 Units with a purchase price of $1.02 per Unit. Each Unit allows the holder the right to purchase one share of Common Stock at a specified price. Units are exercisable for a period not to exceed ten years from the date of grant. Concurrent with the Offering, the Units vested resulting in compensation expense of $2,386,491. As of December 31, 1997, F-16 there were 111,150 Units outstanding. No more Units will be granted under the Equity Incentive Plan. Information with respect to the options granted under the stock option plans and Units is as follows:
Aggregate Price Shares Price Per Share Outstanding, December 31, 1994, 855,000 $ 38,140 $ .04 - $ .06 Granted 305,550 311,322 1.02 ----------- ------------ ---------------- Outstanding, December 31, 1995 1,160,550 349,462 $ .04 - $ 1.02 Granted 79,000 531,685 1.57 - 16.25 Exercised (126,748) (48,522) .04 - 1.57 Canceled (101,925) (18,150) .04 - 1.57 ----------- ------------ ---------------- Outstanding, December 31, 1996 1,010,877 $ 814,475 $ .04 - $16.25 Granted 148,500 962,500 4.125 - 16.00 Exercised (4,000) (4,076) 1.02 Canceled (34,852) (38,012) 1.02 - 1.57 ----------- ------------ ---------------- Outstanding, December 31, 1997 1,120,525 $ 1,734,887 $ .04 - $16.25 =========== ============ ================
At December 31, 1997, there were outstanding presently exercisable options and Units to purchase an aggregate of 945,025 shares at exercise prices ranging from $.04 to $16.25 per share, with an aggregate exercise price of $594,370. In January 1996, the Company granted options to employees and recorded deferred compensation for the difference between the deemed value per share for accounting purposes and the exercise price per share. The deferred compensation is being amortized over the four-year vesting period. Extension of Option Terms; Compensation Expense During 1996, the Company extended the exercise period for options to purchase an aggregate of 555,750 shares to 2001 and 2002, resulting in compensation expense of $8,867,160. This charge and the expense from the Units and the option to purchase 90,000 shares that vested upon the closing of the Offering resulted in a compensation expense of $12,689,651 in 1996. F-17 Company Option Plans The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations in accounting for its stock option plans. The disclosure requirement of SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the Company in 1996. Had compensation cost for the Company's common stock option plan been determined under SFAS No. 123, the Company's net income (loss) would have been as follows:
Year Ended December 31 ----------------------------------------------- 1997 1996 1995 ------------ --------------- ------------ Net income (loss), as reported $ 2,671,806 $ (6,747,716) $ 902,784 Pro forma net income (loss) $ 2,497,235 $ (6,880,891) $ 873,916 Diluted EPS (loss), as reported $ .22 $ (.65) $ .10 Pro forma Diluted EPS $ .21 $ (.66) $ .09
The weighted average fair value of the options granted in 1997, 1996 and 1995 is estimated at $3.64, $5.35 and $.82 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions: no expected dividend yield, volatility of 85%, weighted average risk-free interest rate of 6% in 1997 and 1996 and 8% in 1995, and an expected life of 7 years. Because the SFAS No. 123 method of accounting is not required to be applied to options granted prior to January 1, 1995, the resulting pro forma compensation charge may not be representative of that to be expected in future years. 10. COMMITMENTS AND CONTINGENCIES: The Company leases facilities and certain equipment under operating leases. Rent expense was $4,951,149, $3,627,630 and $2,529,856 for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum rentals for all operating leases are as follows: 1998 $ 3,679,874 1999 3,309,864 2000 2,727,317 2001 1,834,203 2002 1,447,737 2003 and thereafter 763,441 The Company enters into agreements with its telephone long-distance carriers ranging from one to three years, which provide for, among other things, annual minimum purchases and termination penalties. On October 23, 1997, a shareholder filed suit in the United States District Court for the Eastern District of Pennsylvania against the Company, alleging violations of the federal securities laws arising out of the Company's June 1996 initial public offering. The Company denies all allegations of wrongdoing. On February 2, 1998, the Company filed a motion to F-18 dismiss the suit, asserting that the complaint fails to state a claim against them as a matter of law. The motion is still pending. From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In the Company's opinion, the outcome of such actions will not have a material adverse effect on the Company's financial position or results of operations. The Company has renewable employment agreements with six key executives with terms ranging from one to three years. The agreements provide for, among other things, severance payments ranging from six months to three years. 11. SEGMENT DATA: The following table presents information about the Company's operations by segment. International operations represent multilingual telemarketing services provided by Eurotel, ICT Canada and Spantel.
Year Ended December 31 --------------------------------------------------------- 1997 1996 1995 ----------------- ----------------- ----------------- Revenues: Domestic $ 78,755,621 $ 64,280,772 $ 49,695,767 International 12,897,357 7,318,663 2,420,052 ----------------- ----------------- ----------------- $ 91,652,978 $ 71,599,435 $ 52,115,819 ================= ================= ================= Operating income (loss): Domestic $ 3,861,649 $ (9,936,565) $ 3,327,339 International 120,419 (398,017) (923,797) ----------------- ----------------- ----------------- $ 3,982,068 $ (10,334,582) $ 2,403,542 ================= ================= ================= Identifiable assets: Domestic $ 55,305,265 $ 44,999,321 $ 16,402,580 International 6,272,505 4,112,456 2,078,163 ----------------- ----------------- ----------------- $ 61,577,770 $ 49,111,777 $ 18,480,743 ================= ================= =================
12. SUBSEQUENT EVENTS (unaudited): On March 26, 1998, the bank extended the line of credit and equipment line of credit facility (see Note 6) to April 30, 1998. On February 27, 1998, the Company received a commitment letter from a group of banks which provides for a three-year $45 million revolving credit facility. F-19 ICT GROUP, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance Beginning of Charged to Balance, Description Year Expense Deduction End of Year ----------- --------------- ---------------- --------------- --------------- Allowances for doubtful accounts: 1997 $ 354,524 $ 315,539 $ (324,166) $ 345,897 1996 211,773 446,289 (303,538) 354,524 1995 600,691 547,166 (936,084) (a) 211,773
(a) Includes $554,051 of write-offs related to a service no longer offered by the Company. F-20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item will be contained in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders (the "Proxy Statement"), which is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Financial Statement Schedules See Index to Financial Statements at page F-1. Reports on Form 8-K The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report. Exhibits The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically except for in those situations where the exhibit number was the same as set forth below.
3.1 Articles of Incorporation. (2) 3.2 Bylaws. (2) 9.1 Voting Trust Agreement among John J. Brennan, Donald P. Brennan and the Company, dated February 2, 1996. (1) (Exhibit 10.11) 9.2 Amendment No. 1 to Voting Trust Agreement among John J. Brennan, Donald P. Brennan and the Company, dated May 9, 1996. (2) (Exhibit 10.17) 9.3 Form of Voting Agreement between the Company and certain option holders. (1) (Exhibit 10.13) 10.1 ICT Group, Inc. 1987 Stock Option Plan. (1) (2)+ 10.2 ICT Group, Inc. Equity Incentive Plan. (1)+
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10.3 ICT Group, Inc. Equity Compensation Plan. (2)+ 10.4 ICT Group, Inc. 1996 Non-Employee Directors Plan. (2)+ 10.5 Employment Agreement between John J. Brennan and the Company, dated May 8, 1996.(2)+ 10.6 Employment Agreement between Carl E. Smith and the Company, dated October 3, 1994, as amended. (2)+ 10.7 Employment Agreement between John L. Magee and the Company, dated April 1, 1987. (1)+ 10.8 Employment Agreement between John D. Campbell and the Company, dated October 1, 1987. (1)+ 10.9 Employment Agreement between Maurice J. Kerins and the Company, dated April 1, 1987. (1)+ 10.10 Employment Agreement between Robert F. Small and the Company, dated April 1, 1987. (1)+ 10.11 Shareholders Agreement among John J. Brennan, Donald P. Brennan and the Company, dated February 2, 1996. (1) (Exhibit 10.12) 10.12 Amended and Restated Loan Agreement between the Company and First Valley Bank, dated April 11, 1996. (1) (Exhibit 10.14) 21 List of Subsidiaries* 23 Consent of Independent Public Accountants* 27 Financial Data Schedule*
- ---------- * Filed herewith. + Compensation plans and arrangements for executives and others. (1) Filed as an exhibit to the Company's Registration Statement on Form S-1 on April 26, 1996 (Registration No. 333-4150). (2) Filed as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-1 on June 4, 1996 (Registration No. 333-4150). - 18 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ICT GROUP, INC. (Registrant) Dated: March 27, 1998 By: /s/ John J. Brennan ----------------------------------------- John J. Brennan Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- By: /s/ John J. Brennan Chairman, President, Chief March 27, 1998 ---------------------------- Executive Officer and Director John J. Brennan (principal executive officer) By: /s/ Carl E. Smith Senior Vice President, Finance and March 27, 1998 --------------------------- Administration, Chief Financial Officer Carl E. Smith and Secretary (principal financial and accounting officer) By: /s/ Donald P. Brennan Director March 27, 1998 ---------------------------- Donald P. Brennan By: /s/ Bernard Somers Director March 27, 1998 ---------------------------- Bernard Somers By: /s/ John Stoops Director March 27, 1998 ---------------------------- John Stoops
EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 21 List of Subsidiaries 23 Consent of Independent Public Accountants 27 Financial Data Schedule EX-21 2 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES Name of Subsidiary State/Country of Incorporation/Organization - ------------------ ------------------------------------------- ICT/Canada Marketing, Inc. Canada Eurotel Marketing Limited Ireland Harvest Resources, Inc. Delaware Yardley Enterprises, Inc. Delaware EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement (File No. 333-32623) filed with the Securities and Exchange Commission on August 1, 1997. ARTHUR ANDERSEN LLP Philadelphia, Pa. March 25, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 0001013149 ICT GROUP, INC 1 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 1 1 17,711,028 18,298,031 0 0 17,684,071 13,539,085 345,897 354,525 0 0 37,441,502 32,804,466 32,802,737 21,269,690 13,359,126 9,637,805 61,577,770 49,111,777 11,911,864 5,738,409 0 0 0 0 0 0 115,423 115,383 43,252,778 40,904,961 61,577,770 49,111,777 0 0 91,652,978 71,599,435 0 0 50,662,062 38,536,578 37,008,848 42,951,150 315,539 446,289 (397,942) 179,882 4,380,010 (10,514,464) 1,708,204 (2,997,748) 2,671,806 (7,516,716) 0 0 0 0 0 0 2,671,806 (7,516,716) 0.23 (0.72) 0.22 (0.72)
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