UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to ______________.
Commission File Number: 0-20807
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ICT GROUP, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2458937
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Town Center Drive, Langhorne PA 19047
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(Address of principal executive offices) (Zip Code)
215-757-0200
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Registrant's telephone number, including area code.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Shares, $0.01 par value, 11,780,325 shares outstanding as of
November 5, 1999.
1
ICT GROUP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS 16
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $13,491 $14,255
Accounts receivable, net 26,319 26,344
Prepaid expenses and other 1,792 1,558
Deferred income taxes 195 195
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Total current assets 41,797 42,352
PROPERTY AND EQUIPMENT, net 28,420 28,634
DEFERRED INCOME TAXES 3,155 3,155
OTHER ASSETS 1,761 1,735
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$75,133 $75,876
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The accompanying notes are an integral part of these statements.
3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $4,000 $4,000
Current portion of capitalized lease obligations 616 665
Accounts payable 5,726 6,884
Accrued expenses 4,250 3,709
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Total current liabilities 14,592 15,258
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LONG-TERM DEBT 11,000 14,000
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CAPITALIZED LEASE OBLIGATIONS 385 833
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value 5,000 shares authorized,
none issued -- --
Common Stock, $0.01 par value, 40,000 shares authorized,
11,780 and 11,642 shares issued and outstanding 118 116
Additional paid-in capital 49,355 49,334
Deferred compensation (13) (54)
Retained earnings (accumulated deficit) 168 (3,191)
Accumulated other comprehensive income (472) (420)
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Total shareholders' equity 49,156 45,785
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$75,133 $75,876
======= =======
The accompanying notes are an integral part of these statements.
4
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------- ------- -------- -------
NET REVENUES $37,084 $30,664 $114,271 $85,582
------- ------- -------- -------
OPERATING EXPENSES:
Cost of services 20,357 17,298 62,586 50,004
Selling, general and administrative 14,944 12,256 45,513 32,954
------- ------- -------- -------
35,301 29,554 108,099 82,958
------- ------- -------- -------
Operating income 1,783 1,110 6,172 2,624
INTEREST EXPENSE, NET 191 180 666 204
------- ------- -------- -------
Income before income taxes 1,592 930 5,506 2,420
INCOME TAXES 621 363 2,147 943
------- ------- -------- -------
NET INCOME $971 $567 $3,359 $1,477
======= ======= ======== =======
EARNINGS PER SHARE:
Basic earnings per share $0.08 $0.05 $0.29 $0.13
======= ======= ======== =======
Diluted earnings per share $0.08 $0.05 $0.28 $0.12
======= ======= ======== =======
Shares used in computing basic earnings per share 11,677 11,577 11,734 11,560
======= ======= ======== =======
Shares used in computing diluted earnings per share 12,232 12,014 12,194 11,998
======= ======= ======== =======
The accompanying notes are an integral part of these statements.
5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,359 $1,477
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,001 3,980
(Increase) decrease in:
Accounts receivable 25 (7,399)
Prepaid expenses and other (234) (923)
Other assets (26) (324)
Increase (decrease) in:
Accounts payable (1,158) 3,132
Accrued expenses 541 263
------- -------
Net cash provided by operating activities 8,508 206
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,746) (12,978)
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Net cash used in investing activities (5,746) (12,978)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 10,171
Payments on long-term debt (3,000) (356)
Payments on capitalized lease obligations (497) (557)
Proceeds from exercise of stock options 23 6
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Net cash provided by (used in) financing activities (3,474) 9,264
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EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH
AND CASH EQUIVALENTS (52) (4)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (764) (3,512)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,255 17,711
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,491 $14,199
======= =======
The accompanying notes are an integral part of these statements.
6
ICT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 and 1998 are not necessarily indicative of the results that
may be expected for the complete fiscal year. For additional information, refer
to the consolidated financial statements and footnotes thereto included in the
Form 10-K for the year ended December 31, 1998.
Note 2: EARNINGS PER SHARE
The Company has presented earnings per share pursuant to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," and the Securities
and Exchange Commission Staff Accounting Bulletin No. 98. Basic earnings per
share ("Basic EPS") is computed by dividing the net income for each period by
the weighted average number of shares of Common stock outstanding for each
period. Diluted earnings per share ("Diluted EPS") is computed by dividing the
net income for each period by the weighted average number of shares of Common
stock and Common stock equivalents outstanding for each period. For the nine
months ended September 30, 1999 and 1998, Common stock equivalents outstanding
used in computing Diluted EPS were 460,000 and 438,000, respectively. For the
three months ended September 30, 1999 and 1998, Common stock equivalents
outstanding used in computing Diluted EPS were 555,000 and 437,000,
respectively. For the nine months ended September 30, 1999 and 1998, options to
purchase 137,000 and 401,000 shares, respectively, of Common stock were
outstanding, but not included in the computation of Diluted EPS as the result
would be antidilutive. For the three months ended September 30, 1999 and 1998,
options to purchase 49,000 and 411,000 shares, respectively, of Common stock
were outstanding, but not included in the computation of Diluted EPS as the
result would be antidilutive.
Note 3: COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income".
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. For the
three and nine months ended September 30, 1999 and 1998, comprehensive income
was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 971,000 $ 567,000 $3,359,000 $1,477,000
Foreign currency translation adjustments,
net of tax 32,000 122,000 (32,000) (2,000)
---------- --------- ---------- ----------
Comprehensive income $1,003,000 $ 689,000 $3,327,000 $1,475,000
========== ========= ========== ==========
7
Note 4: OPERATING AND GEOGRAPHIC INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement establishes
additional standards for segment reporting in financial statements. Under the
disclosure requirements of SFAS No. 131, the Company classifies its operations
into three business segments: Domestic TeleServices, International Services, and
Customer Management Services. Previously, the Company reported disclosure for
four operating segments. The Company reassessed its operating segments and
determined that three operating segments more appropriately reflect the
Company's business operations. Specifically, the Company has combined the
previously reported Marketing Services and Management Services segments of its
business into a single segment called Customer Management Services. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services. Segment
assets include amounts specifically identified to each segment. Corporate assets
consist primarily of property and equipment. The Domestic TeleServices segment
provides inbound and outbound telemarketing services. The International Services
segment provides international multilingual inbound and outbound telemarketing
services, customer management services, marketing, research and other
value-added services and includes business conducted by Spantel for the U.S.
Hispanic market. The Customer Management Services segment provides marketing,
research, consulting teleservices, and ongoing customer care management on
behalf of customers operating in the Company's target industries.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Net Revenues:
Domestic TeleServices $18,788 $ 19,571 $ 65,320 $ 55,510
International Services 5,858 3,295 16,586 9,036
Customer Management Services 12,438 7,798 32,365 21,036
------- -------- -------- ---------
$37,084 $30,664 $114,271 $ 85,582
======= ======= ======== =========
Operating Income (loss):
Domestic TeleServices $ 215 $ 1,516 $ 3,447 3,174
International Services (90) (241) (390) (544)
Customer Management Services 1,658 (165) 3,115 (6)
-------- -------- -------- ---------
$ 1,783 $ 1,110 $ 6,172 $ 2,624
======== ======== ======== =========
Total Assets:
Domestic TeleServices $ 41,376 $ 41,717 $ 41,376 $ 41,717
International Services 13,223 13,334 13,223 13,334
Customer Management Services 15,838 15,970 15,838 15,970
Corporate 4,696 4,730 4,696 4,730
-------- -------- -------- ---------
$ 75,133 $ 75,751 $ 75,133 $ 75,751
======== ======== ======== =========
Depreciation and Amortization:
Domestic TeleServices $ 873 $ 638 $ 2,606 $ 1,729
International Services 399 257 1,145 645
Customer Management Services 420 277 1,217 780
Corporate 418 377 1,033 826
-------- -------- -------- ---------
$ 2,110 $ 1,549 $ 6,001 $ 3,980
======== ======== ======== =========
Capital Expenditures:
Domestic TeleServices $ 434 $ 1,870 $ 1,800 $ 3,996
International Services 813 1,891 2,094 3,540
Customer Management Services 207 1,945 1,280 3,807
Corporate 67 937 572 1,635
-------- -------- -------- ---------
$ 1,521 $ 6,643 $ 5,746 $ 12,978
======== ======== ======== =========
8
The following table represents information about the Company
by geographic area:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------
1999 1998 1999 1998
------- -------- ------- -------
Net Revenues:
United States $ 32,375 $ 28,322 $ 10,352 $78,776
Canada 2,071 1,153 6,051 3,232
Europe 2,251 1,189 6,117 3,574
Australia 387 - 751 -
-------- -------- -------- -------
$ 37,084 $ 30,664 $114,271 $85,582
======== ======== ======== =======
Operating Income (loss):
United States $ 1,882 $ 1,264 $ 7,136 3,093
Canada 213 518 418 1,230
Europe (252) (672) (1,140) (1,699)
Australia (60) - (242) -
-------- -------- -------- -------
$ 1,783 $ 1,110 $ 6,172 $ 2,624
======== ======== ======== =======
Identifiable Assets:
United States $ 61,699 $ 67,507 $ 61,699 $67,507
Canada 6,159 3,485 6,159 3,485
Europe 6,962 4,759 6,962 4,759
Australia 313 313 -
-------- -------- -------- -------
$ 75,133 $ 75,751 $ 75,133 $75,751
======== ======== ======== =======
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1999
GENERAL
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 domestic and
international businesses. 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.
The Company has broadened its market position from its original
outbound consumer telemarketing orientation to its present range of call center
services through both internal growth and a series of strategic acquisitions.
ICT has expanded beyond its traditional markets of insurance, financial
services, publishing and telecommunications to include the pharmaceutical,
health care services, energy services and computer software and hardware
industries, which are emerging as areas of rapid growth in the use and
outsourcing of call center teleservices. The Company intends to pursue continued
expansion through a combination of internal growth, strategic alliances, and
acquisitions of domestic and international businesses that provide teleservices
that are complementary to ICT's core telemarketing expertise.
With the increasing use of teleservices by businesses and the trend
toward outsourcing call center activities, ICT believes significant
opportunities exist to expand its business. The Company's growth strategy
includes the following key elements:
[ ] Pursue Outsourced Call Center Management Opportunities
[ ] Increase International Presence
[ ] Develop Strategic Alliances and Acquisitions
[ ] Expand Value-Added Marketing Services
[ ] Focus on Industry Specialization
[ ] Maintain Technology Investment
[ ] Continue Commitment to Quality Service
10
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998:
Net Revenues. Net revenues increased 21% to $37.1 million for the three
months ended September 30, 1999 from $30.7 million for the three months ended
September 30, 1998 resulting from strong growth from the insurance,
telecommunications, and health care industries. Domestic TeleServices revenues
declined 4% to $18.8 million in 1999 from $19.6 million in 1998. This was
largely caused by a slow down in telesales campaigns which utilized credit card
files. This resulted in reduced profitability in the Domestic TeleServices
division. International Services revenues were $5.9 million in 1999 representing
a 78% increase over the $3.3 million in 1998 due to rapid growth in Europe,
Canada, Spantel, and the Company's expansion into Australia. Customer Management
Services revenues increased 60% to $12.4 million in 1999 from $7.8 million in
1998 reflecting the addition and expansion of several customer care contracts.
Additionally, revenue includes approximately $900,000 that was recorded in
connection with a customer who moved one of their customer care projects
in-house resulting in a project termination fee. The margin from this
termination fee more than offset the initial costs incurred for the start-up of
the AOL Canada project. Excluding this revenue Customer Management revenue
growth would have been 48% when compared to the third quarter of 1998.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 18% to $20.4 million for the three
months ended September 30, 1999 from $17.3 million in the three months ended
September 30, 1998. This increase is primarily the result of increased direct
labor force required to support the increased revenue volume. As a percentage of
revenues, cost of services decreased to 55% in the third quarter of 1999 from
56% in the third quarter of 1998 primarily due to telecommunication costs per
hour decreasing 18% through reductions in rates paid to our domestic and
international carriers combined with the ability to pass through
telecommunication costs on many of our customer care contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 22% to $14.9 million for the three months
ended September 30, 1999 from $12.3 million for the three months ended September
30, 1998 due to increased numbers of call centers and workstation capacity and
additional sales and systems support implemented to support business growth. As
a percentage of revenues, selling, general and administrative expenses were 40%
in both the third quarter of 1999 and 1998.
Interest Expense, net. Net interest expense was $191,000 versus
$180,000 in the third quarter of 1999 and 1998, respectively, which reflects
interest expense related to capital leases and borrowings against the Company's
equipment line of credit for capital expansion offset by investment income. The
increase in net interest expense is the result of increased average outstanding
balances on the equipment line of credit partially offset by higher interest
income due to increased average invested funds in 1999 as compared to 1998.
Income Taxes. Income taxes increased $258,000 to $621,000 for the third
quarter of 1999 from $363,000 in the third quarter of 1998. For both 1999 and
1998, the provision for income taxes was approximately 39% of pre-tax income.
Nine Months Ended September 30, 1999 and 1998:
Net Revenues. Net revenues increased 34% to $114.3 million for the nine
months ended September 30, 1999 from $85.6 million for the nine months ended
September 30, 1998 resulting from strong growth from insurance, financial
services, telecommunications, and energy services sectors. Domestic TeleServices
revenues grew 18% to $65.3 million in 1999 from $55.6 million in 1998 primarily
as a result of growth in the financial services, telecommunications, and energy
services. International Services revenues grew 84% to $16.6 million in 1999,
from $9.0 million in 1998 primarily due to rapid growth in Europe, Canada,
Spantel and the Company's expansion into Australia. Customer Management Services
revenues increased 54% to $32.4 million in 1999 from $21.0 million in 1998
reflecting the addition and expansion of several customer care contracts.
11
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 25% to $62.6 million for the nine
months ended September 30, 1999 from $50.0 million in the nine months ended
September 30, 1998. This increase is primarily the result of increased direct
labor force and telecommunication costs required to support the increased
revenue volume. As a percentage of revenues, cost of services decreased to 55%
for the nine months ended September 30, 1999 from 58% for the nine months ended
September 30, 1998 primarily due to telecommunication costs per hour decreasing
16% through reductions in rates paid to our domestic and international carriers
combined with the ability to pass through telecommunication costs on many of our
customer care contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 38% to $45.5 million for the nine months ended
September 30, 1999 from $33.0 million for the nine months ended September 30,
1998 due to increased number of call centers and workstation capacity and
additional sales and systems support implemented to support business growth. As
a percentage of revenues, selling, general and administrative expenses were 40%
for the nine months ended September 30, 1999, increasing approximately 1% from
39% for the first nine months of 1998 as facilities, and systems and management
staff were added to ensure sufficient labor and capacity will be available to
meet the expected growth in call volume.
Interest Expense, net. Net interest expense was $666,000 versus
$204,000 in the first nine months of 1999 and 1998, respectively, which reflects
the interest expense related to capital leases and borrowings against the
Company's equipment line of credit for capital expansion offset by investment
income. The increase in net interest expense is the result of increased average
outstanding balances on the equipment line of credit and decreased average
invested funds in 1999 as compared to 1998.
Income Taxes. Income taxes increased $1.2 million to $2.1 million for
the first nine months of 1999 from $943,000 in the first nine months of 1998.
For both 1999 and 1998, the provision for income taxes was approximately 39% of
pre-tax income.
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 levels off or slows from the previous
quarter as a result of reduced telemarketing activities and client transitions
to new marketing programs during the first quarter of the calendar year. In
addition, the Company typically expands it's operations in the first quarter to
support anticipated business growth beginning in the second quarter. As a
result, selling, general and administrative costs typically increase in the
first quarter without a commensurate increase in revenues which results in
decreased profitability for the first quarter versus the previous fourth
quarter. Also, demand for the Company's services typically slows or decreases in
the third quarter as the volume of telemarketing projects decreases during the
summer months. In addition, the Company's operating expenses increase during the
third quarter in anticipation of higher demand for its services during the
fourth quarter.
Liquidity and Capital Resources
Cash provided by operating activities was $8.5 million for the nine
months ended September 30, 1999 versus $206,000 of cash provided by operating
activities for the nine months ended September 30, 1998. The $8.3 million
increase resulted from higher net income and non-cash charges, as well as strong
collections of accounts receivable.
12
Cash used in investing activities was $5.7 million for the nine months
ended September 30, 1999 compared to $13.0 million for the nine months ended
September 30, 1998. The $5.7 million of capital expenditures is primarily
attributable to an increase in the number workstations to 3,864 at September 30,
1999 from 3,416 at December 31, 1998, upgraded telephone equipment, and
continued development and implementation of Oracle and IMA/Edge Software. The
Company added 448 workstations in the first nine months of 1999 versus adding
700 in the first nine months of 1998.
Cash used in financing activities was $3.5 million for the nine months
ended September 30, 1999 versus cash provided by financing activities of $9.3
million for the comparable 1998 period. In 1999, the Company repaid $3.0 million
on its term debt and made no borrowings under its equipment line.
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, operating leases, and
through capitalized lease obligations with various equipment vendors and lending
institutions. The capitalized lease obligations are payable in varying
installments through 2001. Outstanding obligations under capitalized leases at
September 30, 1999 were $1.0 million. At September 30, 1999, term debt
obligations were $15.0 million.
The Company believes that cash on hand, together with cash flow
generated from operations and funds available under the 1998 Line of Credit will
be sufficient to finance its current operations and planned capital expenditures
into 2000.
Year 2000 Compliance
The "Year 2000 problem" describes the concern that certain computer
applications, which use two digits rather than four to represent dates, will
interpret the year 2000 as 1900 and malfunction on January 1, 2000. In this
section, ICT Group summarizes the expected impact of the Year 2000 problem on
the Company.
ICT Group's Internal Systems:
ICT Group has evaluated its information technology infrastructure and
has developed a plan to ensure its Year 2000 compliance. This plan includes,
among other things, retiring several systems to be replaced with new internally
developed Year 2000 compliant software systems, upgrading the remaining software
systems to be Year 2000 compliant and, if necessary, upgrading the Company's
hardware systems to be Year 2000 compliant. ICT Group believes that it has taken
the reasonable steps necessary to substantially complete this plan. ICT Group
also is evaluating information regarding its non-information technology
infrastructure (office building systems, copiers, etc.) for Year 2000 readiness.
Information received to date indicates that this infrastructure is expected to
be Year 2000 compliant by the end of 1999.
Readiness of Third Parties:
ICT Group has requested information from all its third party vendors on
their Year 2000 readiness to determine the extent to which their failure to
remedy their own Year 2000 problems will affect the Company. The information ICT
Group had received from its third party vendors to date indicates that they will
be Year 2000 compliant by the end of 1999.
Cost of Year 2000 Compliance:
As of September 30, 1999, the Company incurred approximately $850,000
of costs in addressing the Year 2000 issue. The Company also currently expects
the total costs to become Year 2000 compliant will not exceed $1.0 million.
Approximately half of these costs have been or will be charged to expense and
the balance will be for new equipment, which will be capitalized.
13
Risk Associated with the Year 2000:
The magnitude of the Company's Year 2000 problem, the costs of the
Company's Year 2000 project and the dates on which the Company believes it will
complete its Year 2000 compliance are based on management's knowledge to date
and its best estimates. The Company is not aware, at this time, of any Year 2000
non-compliance issues related to the Company that will not be fixed by the Year
2000 which would materially affect the Company. However, these estimates were
derived using numerous assumptions and some risks that the Company faces
include: the failure of internal information systems, defects in its work
environment, and an inability of telecommunications carriers to supply
telecommunication services. There can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel, the ability to identify and
correct all Year 2000 impacted areas, and other similar uncertainties.
Contingency Plans:
The Company has developed contingency plans to address a worst case
Year 2000 scenario.
14
FORWARD LOOKING STATEMENTS
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, its intention to expand
to meet the needs of multinational clients, its general expansion plans, the
seasonality of the Company's business, variations in operating results and
liquidity, as well as information contained elsewhere in this document where
statements are preceded by, followed by or include the words "believes,"
"plans," "intends," "expects," "anticipates" or similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The forward-looking statements in this document are subject to
risks and uncertainties that could cause the assumptions underlying such
forward-looking statements and the actual results to differ materially from
those expressed in or implied by the statements.
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 relevant local economic
conditions, exchange rate fluctuations, relevant local regulatory requirements,
political factors, generally higher telecommunications costs, barriers to the
repatriation of earnings and potentially adverse tax consequences; (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; (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; and (viii) other factors
identified in the various documents the Company have filed with the Securities
Exchange Commission.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation incidental to
its business. In the opinion of management, no litigation to which the Company
is currently a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or liquidity, if decided
adversely to the Company.
As previously reported by the Company, on October 23, 1997, a
shareholder, purporting to act on behalf of a class of ICT shareholders filed a
complaint in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its directors. The complaint
alleges that the defendants violated the federal securities laws, and seeks
compensatory and other damages, including rescission of stock purchases made by
the plaintiff and other class members in connection with the Company's initial
public offering effective June 14, 1996. The defendants believe the complaint is
without merit, deny all of the allegations of wrongdoing and are vigorously
defending the suit. On February 2, 1998, the defendants filed a motion to
dismiss the complaint. On May 19, 1998, the complaint was dismissed by a judge
for the United States District Court for the Eastern District of Pennsylvania
with leave to plaintiff to file an amended complaint on narrow accounting
allegations. On June 22, 1998, plaintiffs filed a First Amended Class Action
Complaint purporting to bring negligence claims in connection with the Company's
initial public offering. The defendants continue to deny all allegations of
wrongdoing, believe the amended complaint is without merit and are vigorously
defending the suit. On November 3, 1998, the court granted a motion appointing
Rowan Klein and Michael Mandat as lead plaintiffs. On February 2, 1999, the
court dismissed the case without prejudice, directing that the case remain in
status quo, that the statute of limitations be tolled and that the parties
continue with discovery and advise the court if assistance by the court is
needed. On June 18, 1999, defendants filed a motion for summary judgement. The
plaintiffs requested limited discovery to oppose the motion for summary
judgement. They seek the depositions of representatives from the Company and
certain outsiders most knowledgeable on certain topics. Depositions were taken
in August and October from Company representatives and certain outsiders.
On July 12, 1996, Main Street Marketing of America Incorporated (?Main
Street Marketing?) brought a demand for arbitration against the Company in the
state of Pennsylvania claiming damages as result of the Company's alleged breach
of a service agreement under which the Company agreed to provide Main Street
Marketing with various data entry and data processing services relating to Main
Street Marketing's magazine subscription program. Main Street Marketing alleges
that the Company committed various breaches of the service agreement and has
demanded an award in excess of $3 million. The Company has responded to this
demand for arbitration by denying liability and counterclaiming in an amount in
excess of $125,000. Discovery has progressed in this matter, but has not yet
been completed. It is not possible at this stage of the proceeding to evaluate
the probable outcome of this litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are furnished as exhibits and numbered
pursuant to Item 601 of Regulation S-K:
27 Financial Data Schedule
(b) The registrant was not required to file any reports on Form 8-K for
the three months ended September 30, 1999.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ICT GROUP, INC.
Date: November 12, 1999 By: /s/ John J. Brennan
-----------------------------
John J. Brennan
Chairman, President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ Vincent A. Paccapaniccia
----------------------------
Vincent A. Paccapaniccia
Senior Vice President,
Finance and Administration,
and Chief Financial Officer