10-Q 1 ten-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to ___________________. Commission File Number: 0-20807 ------- ICT GROUP, INC. ----------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2458937 --------------------------------------------- -------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 100 Brandywine Boulevard, Newtown PA 18940 --------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) 267-685-5000 -------------------------------------------------- Registrant's telephone number, including area code. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Shares, $0.01 par value, 12,310,025 shares outstanding as of May 3, 2002. ICT GROUP, INC. INDEX
PART I FINANCIAL INFORMATION PAGE Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3 Consolidated Statements of Operations - Three months ended March 31, 2002 and 2001 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II OTHER INFORMATION Item 1 LEGAL PROCEEDINGS 14 Item 6 EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 16
2 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
March 31, December 31, 2002 2001 --------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $11,737 $12,875 Accounts receivable, net 54,179 48,058 Prepaid expenses and other 4,559 3,841 Deferred income taxes 916 916 --------------- ----------------- Total current assets 71,391 65,690 --------------- ----------------- PROPERTY AND EQUIPMENT Communications and computer equipment 68,087 60,371 Furniture and fixtures 14,549 12,849 Leasehold improvements 9,380 7,549 --------------- ----------------- 92,016 80,769 Less: Accumulated depreciation and amortization (50,962) (47,533) --------------- ----------------- 41,054 33,236 --------------- ----------------- DEFERRED INCOME TAXES 1,529 1,529 OTHER ASSETS 2,109 2,131 --------------- ----------------- $116,083 $102,586 =============== =================
The accompanying notes are an integral part of these financial statements. 3 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
March 31, December 31, 2002 2001 --------------- ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $4,000 $4,000 Accounts payable 15,356 9,050 Accrued expenses 10,772 10,561 Income taxes payable 2,112 3,314 --------------- ------------------ Total current liabilities 32,240 26,925 --------------- ------------------ LINE OF CREDIT 17,000 12,000 --------------- ------------------ SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value 5,000 shares authorized, none issued -- -- Common stock, $0.01 par value, 40,000 shares authorized, 12,267 and 12,233 shares issued and outstanding 123 122 Additional paid-in capital 50,578 50,331 Retained earnings 19,367 16,261 Accumulated other comprehensive loss (3,225) (3,053) --------------- ------------------ Total shareholders' equity 66,843 63,661 --------------- ------------------ $116,083 $102,586 =============== ==================
The accompanying notes are an integral part of these financial statements. 4 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended March 31, ---------------------------------- 2002 2001 -------------- -------------- REVENUES $72,264 $57,772 -------------- -------------- OPERATING EXPENSES: Cost of services 41,459 32,059 Selling, general and administrative 26,089 22,128 -------------- -------------- 67,548 54,187 -------------- -------------- Operating income 4,716 3,585 INTEREST EXPENSE, net of interest income of $57 and $113 149 358 -------------- -------------- Income before income taxes 4,567 3,227 INCOME TAXES 1,461 1,194 -------------- -------------- NET INCOME $3,106 $2,033 ============== ============== EARNINGS PER SHARE: Basic earnings per share $0.25 $0.17 ============== ============== Diluted earnings per share $0.24 $0.16 ============== ============== Shares used in computing basic earnings per share 12,249 12,077 ============== ============== Shares used in computing diluted earnings per share 12,913 12,538 ============== ==============
The accompanying notes are an integral part of these financial statements. 5 ICT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 2002 2001 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,106 $2,033 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,505 2,342 Tax benefit of stock option exercises 187 32 Amortization of deferred financing costs 64 - (Increase) decrease in: Accounts receivable (6,207) 137 Prepaid expenses and other (736) 396 Other assets (42) (227) Increase (decrease) in: Accounts payable 6,316 (1,000) Accrued expenses 200 149 Income taxes payable (1,202) 557 ------------- ------------ Net cash provided by operating activities 5,191 4,419 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (11,279) (685) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit 5,000 - Payments on long-term debt - (1,000) Payments on capitalized lease obligations - (83) Proceeds from exercise of stock options 61 5 ------------- ------------ Net cash provided by (used in) financing activities 5,061 (1,078) ------------- ------------ EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS (111) (1,066) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,138) 1,590 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,875 8,539 ------------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $11,737 $10,129 ============= ============
The accompanying notes are an integral part of these financial statements. 6 ICT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month periods ended March 31, 2002 and 2001 are not necessarily indicative of the results that may be expected for the complete fiscal year. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2001. Certain reclassifications of prior year amounts have been made to conform to the current year presentation. Note 2: EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic earnings per share ("Basic EPS") is computed by dividing net income by the weighted average number of shares of Common stock outstanding. Diluted earnings per share ("Diluted EPS") is computed by dividing net income by the weighted average number of shares of Common stock outstanding, after giving effect to the potential dilution from the exercise of securities, such as stock options, into shares of Common stock as if those securities were exercised. For the three months ended March 31, 2002 and 2001, the dilutive effect of Common stock equivalents used in computing Diluted EPS was 664,000 and 461,000, respectively. For the three months ended March 31, 2002 and 2001, options to purchase 2,000 and 342,000 shares of Common stock, respectively, were outstanding but not included in the computation of Diluted EPS as the result would be antidilutive. Note 3: COMPREHENSIVE INCOME (LOSS) The Company follows SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet.
Three Months Ended March 31, ----------------------------- 2002 2001 ------------- ------------ Net Income $3,106,000 $2,033,000 Foreign currency translation adjustments (117,000) (672,000) ------------- ------------- Comprehensive income $2,989,000 $1,361,000 ============= =============
Note 4: OPERATING AND GEOGRAPHIC INFORMATION Under the disclosure requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company classifies its operations into two business segments: Domestic CRM Services and International CRM Services. The operating segments are managed separately because each operating segment represents a strategic business unit that offers its services in different geographic markets. Segment assets include amounts specifically identified to each segment. Corporate assets consist primarily of property and equipment. The Domestic CRM Services segment provides inbound and outbound telesales, database marketing, marketing research, contact center consulting, 7 technology hosting, and ongoing customer care management services on behalf of customers operating in the Company's target industries. The International CRM Services segment provides the same services in Europe, Canada, Barbados, and Australia and includes business conducted by Spantel for the US Hispanic market. Also, a portion of International CRM Services assets, depreciation and amortization and capital expenditures is used to generate revenue and operating income for the Domestic CRM Services segment.
Three Months Ended March 31, ---------------------------------- 2002 2001 ------------ -------------- Revenues: Domestic CRM Services $ 59,243 $ 40,756 International CRM Services 13,021 17,016 ------------ -------------- $ 72,264 $ 57,772 ============ ============== Operating Income: Domestic CRM Services $ 4,469 $ 1,798 International CRM Services 247 1,787 ------------ -------------- $ 4,716 $ 3,585 ============ ============== Total Assets: Domestic CRM Services $ 76,205 $ 58,989 International CRM Services 31,131 29,544 Corporate 8,747 4,831 ------------ -------------- $ 116,083 $ 93,364 ============ ============== Depreciation and Amortization: Domestic CRM Services $ 1,717 $ 1,368 International CRM Services 960 524 Corporate 828 450 ------------ -------------- $ 3,505 $ 2,342 ============ ============== Capital Expenditures: Domestic CRM Services $ 4,580 $ 1,441 International CRM Services 3,645 (1,011) Corporate 3,054 255 ------------ -------------- $ 11,279 $ 685 ============ ==============
8 The following table represents information about the Company by geographic area:
Three Months Ended March 31, ----------------------------------- 2002 2001 ------------ ------------ Revenues: United States $ 61,296 $ 43,983 Canada 7,410 7,902 Other foreign countries 3,558 5,887 ----------- ------------ $ 72,264 $ 57,772 =========== ============ Long-lived assets: United States $ 28,320 $ 24,294 Canada 5,352 4,307 Other foreign countries 7,382 5,924 ----------- ------------ $ 41,054 $ 34,525 =========== ============
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 2002 GENERAL ICT Group, Inc. (the "Company" or "ICT") is a leading global provider of integrated customer relationship management (CRM) solutions. The Company offers a comprehensive suite of integrated sales, service and marketing support solutions designed to help its clients identify, acquire, retain, service, measure, and maximize the lifetime value of their customer relationships. ICT's comprehensive, balanced mix of outsourced CRM solutions includes inbound and outbound sales, up-selling/cross-selling, customer care and retention and technical support/help desk services as well as marketing research, including telephone interviewing, coding and analysis, as well as database design and marketing analysis. ICT also offers a comprehensive suite of CRM technologies on a hosted basis, for use by clients at their own in-house facilities, or on a co-sourced basis, in conjunction with its fully compatible, Web-enabled customer contact centers. These include: automatic call distribution (ACD), contact management, automated e-mail management and processing, sales force and marketing automation, interactive voice response services, alert notification and Web self-help for the delivery of consistent, quality customer care in a multi-channel environment. The Company's growth strategy includes the following key elements: |_| Maintaining and Diversifying its Telesales Business |_| Expanding its Customer Care Business |_| Investing in New, Value-Added Marketing Services |_| Expanding International Capabilities and Markets |_| Improving Productivity and Reducing Costs by Adding New Technologies and Expanding Offshore Operations |_| Continuing to Invest in New Technology and Quality Initiatives Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our significant accounting policies are described in our audited consolidated financial statements for the year ended December 31, 2001, which are included in our most recent Form 10-K filing. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 10 Revenue Recognition The Company recognizes revenues as services are performed, generally based on hours of work incurred. Amounts collected from customers prior to the performance of services are recorded as deferred revenues. Deferred revenues totaled approximately $301,000 and $519,000 as of March 31, 2002, and December 31, 2001, respectively, which are included in accrued liabilities in the accompanying consolidated balance sheets. Management believes that its revenue recognition policies are in accordance with Staff Accounting Bulletin No. 101. Accounts Receivable Our accounts receivable balances are net of an estimated allowance for uncollectible accounts. We continuously monitor collections and payments from our customers and maintain an allowance for uncollectible accounts based upon our historical experience and any specific customer collection issues that we have identified. While we believe our reserve estimate to be appropriate, we may find it necessary to adjust our allowance for doubtful accounts if our future bad debt expense exceeds our estimated reserve. We are subject to concentration risks as certain of our customers provide a high percent of total revenues and corresponding receivables. Long-Lived Assets The Company continually evaluates whether events or circumstances have occurred that would indicate that the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets to measure recoverability. If impairment exists, measurement of the impairment will be based on generally accepted valuation methodologies. No such impairments were recognized in any of the periods presented. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. The Company has recorded no valuation reserves for deferred tax assets as of March 31, 2002. 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. On a quarterly basis, management evaluates and assesses the realizability of deferred tax assets and adjusts valuation allowances if required. RESULTS OF OPERATIONS Three Months Ended March 31, 2002 and 2001: ------------------------------------------- Revenues. Revenues increased 25% to $72.3 million for the three months ended March 31, 2002 from $57.8 million for the three months ended March 31, 2001. Revenues from the Domestic CRM Services segment increased 45% to $59.2 million from $40.8 million in the three months ending March 31, 2001 and accounted for 82% of Company revenues compared to 71% for the same period in the prior year. Almost all of this increase was from increased business with clients from which we generated business in 2001. International CRM Services revenues declined 23% to $13.0 million in the three months ending March 31, 2002 from $17.0 million in the three months ending March 31, 2001 and accounted for 18% of Company revenues versus 29% for the same period in the prior year. This decrease was primarily in Europe where we believe that the economic slowing began later than in the United States and we expect it will recover later. The Company's largest client in recent years has been Aegon Life Insurance Company, which accounted for approximately 17% of the Company's net revenues in 2001 and approximately 12% of the Company's net revenues in the first quarter of 2002. On March 18, 2002, the Company announced that it would no longer provide outbound telesales services to Aegon in North America. The Company currently anticipates that the revenue reduction associated with this announcement will be approximately $10 to $12 million, with the wind down commencing in the second quarter. The Company intends to continue providing Aegon with telesales and customer service support in Europe and Australia and customer service support in North America. 11 Cost of Services. Cost of services, which consist primarily of direct labor and telecommunications costs, increased 29% to $41.5 million for the three months ended March 31, 2002 from $32.1 million in the three months ended March 31, 2001. This increase is primarily the result of a $6.0 million increase in direct labor and telecommunication costs required to support the increased revenue volume. As a percentage of revenues, cost of services increased to 57% in the first quarter of 2002 from 55% in the same quarter of 2001 which was primarily the result of an increase in labor cost per production hour due to additional training costs incurred to support new and expanded client programs in our Domestic CRM Services segment. Also, the reduction in business in Europe mentioned above caused temporary labor inefficiencies leading to higher labor cost per production hour. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 18% to $26.1 million for the three months ended March 31, 2002 from $22.1 million for the three months ended March 31, 2001 due to increased number of contact centers and workstation capacity and additional sales and systems support staff costs added to support business growth in our Domestic CRM Services segment. As a percentage of revenues, selling, general and administrative expenses were 36% for the three months ended March 31, 2002 compared to 38% for the three months ended March 31, 2001 as the Company was able to leverage the existing infrastructure to support volume growth. Interest Expense, net. Interest expense, net of interest income, was $149,000 for the three months ended March 31, 2002 compared to $358,000 for the three months ended March 31, 2001 and reflects the interest expense related to borrowings against the Company's line of credit for capital expansion partially offset by investment income. The decrease in net interest expense is the result of decreased average daily outstanding balances on line of credit borrowings during the first quarter of 2002 as compared to the first quarter of 2001, and lower average interest rates in the first quarter of 2002 as compared to the same period in 2001. Provision for Income Taxes. Provision for income taxes increased $267,000 to $1.5 million for the first quarter of 2002 from $1.2 million in the first quarter of 2001. For the first quarter of 2002, the provision for income taxes was approximately 32% of income before taxes. For the first quarter of 2001, the provision for income taxes was approximately 37% of income before taxes. The reduction in the income tax rate is primarily due to a continued reduction in the income tax rate in Canada, a shift in the mix of the Company's pretax income and continued utilization of work opportunity tax credits. Quarterly Results and Seasonality The Company has experienced and expects to continue to experience significant quarterly variations in operating results, principally as a result of the timing of client programs, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of additional selling, general and administrative expenses to support the growth and development of existing and new business units and competitive industry conditions. Historically, the Company's business tends to be strongest in the second and fourth quarters due to the high level of client sales activity in the spring and prior to the holiday season. In the past, during the first quarter, the Company's business generally leveled off or slowed from the previous quarter as a result of reduced client sales activity and client transitions to new marketing programs during the first quarter of the calendar year. In the first quarter of 2002, however, strong growth in Domestic CRM services revenue drove a 7% increase in consolidated revenue from the fourth quarter of 2001 to the first quarter of 2002. Despite the increase in revenue, operating income in the first quarter of 2002 declined approximately 5% compared to the fourth quarter of 2001 as significant recruiting, hiring and training costs were incurred to support the first quarter revenue growth. Historically, the Company has expanded its operations in the first quarter to support anticipated business growth beginning in the second quarter. In the past, demand for the Company's services typically slowed or decreased in the third quarter as the volume of business decreased during the summer months. In addition, the Company's operating expenses typically decreased during the third quarter in anticipation of higher demand for its services during the fourth quarter. However, more recently the Company has experienced quarterly fluctuations in its business as a result of other factors, such as the timing of the demand for the particular services the Company offers in the specific geographic areas the Company services. 12 Liquidity and Capital Resources Cash provided by operating activities was $5.2 million for the three months ended March 31, 2002 versus $4.4 million of cash provided by operating activities for the three months ended March 31, 2001. The $772,000 increase is due to a $1.1 million increase in net income, a $1.2 million increase in depreciation and amortization and a $5.6 million increase in accounts payable, accrued expenses and income taxes payable. These positive factors were partially offset by a $6.3 million increase in accounts receivable and a $1.1 million increase in prepaid expenses and other current assets. The growth in accounts receivable was due to a $4.5 million increase in revenue in the first quarter of 2002 compared to the fourth quarter of 2001. Revenue in the first quarter of 2001 was flat with revenue in the fourth quarter of 2000; consequently, there was little change in accounts receivable in the prior year. Cash used in investing activities was $11.3 million for the three months ended March 31, 2002 compared to $685,000 for the first quarter of 2001. The increase over the prior year is attributable to a significant investment in capital expenditures, including costs incurred in connection with infrastructure improvements during the quarter, and the decision to use bank debt at attractive interest rates as opposed to using higher cost operating leases as a means to finance capital additions. Approximately $3.1 million of capital expenditures were financed by an operating lease in the first quarter of 2001 compared to no operating leases in the first quarter of 2002. The Company opened 2 new contact centers and added 524 workstations in the first quarter of 2002, and operates 7,118 workstations at March 31, 2002. In the first quarter of 2001 the Company added 135 workstations, and operated 6,056 workstations at March 31, 2001. Cash provided by financing activities was $5.1 million for the three months ended March 31, 2002 compared to cash used in financing activities of $1.1 million for the comparable 2001 period. The Company borrowed $5.0 million under its line of credit during the quarter to help finance capital expenditures. In the first quarter of 2001, the Company paid back debt totaling $1.0 million under its line of credit. The Company's operations will continue to require significant capital expenditures. Historically, equipment purchases have been financed through cash provided by operations, the Company's line of credit, operating leases, and through capitalized lease obligations with various equipment vendors and lending institutions. At March 31, 2002, $21.0 million was outstanding under the Company's line of credit with $64.0 million available to borrow. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to cease amortizing goodwill, effective with fiscal years beginning after December 15, 2001. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis, or at an interim period if certain circumstances occur. The Company has adopted the provisions of SFAS No. 142 effective January 1, 2002. Adoption of this pronouncement did not have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which establishes a single accounting model, based on the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and resolves significant implementation issues related to SFAS No. 121 and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company is required to adopt SFAS No. 144 for its year ending December 31, 2002, however, early application is permitted. The Company adopted SFAS No. 144 on January 1, 2002. The adoption had no impact on the Company's financial position or results of operations. 13 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 CRM services industry and the overall domestic economy, the Company's business strategy including the markets in which it operates, the services it provides, its ability to attract new clients and the customers it targets, the benefits of certain technologies the Company has acquired or plans to acquire and the investment it plans to make in technology, the Company's plans regarding international expansion, the implementation of quality standards, the seasonality of the Company's business, variations in operating results and liquidity, as well as information contained elsewhere in this document where statements are preceded by, followed by or include the words "believes," "plans," "intends," "expects," "anticipates" or similar expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. 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 CRM services industry and the ability of the Company to continue to distinguish its services from other CRM service companies and other marketing activities on the basis of quality, effectiveness, reliability and value; (ii) economic conditions which could alter the desire of businesses to outsource certain sales and service functions and the ability of the Company to obtain additional contracts to manage outsourced sales and service functions; (iii) the ability of the Company to offer value-added services to businesses in its targeted industries and the ability of the Company to benefit from its industry specialization strategy; (iv) risks associated with investments and operations in foreign countries including, but not limited to, those related to 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' teleservices campaigns, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of additional selling, general and administrative expenses and the general competitive conditions in the CRM services industry and the overall economy and (viii) terrorist attacks and their aftermath. PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is involved in litigation incidental to its business. In the opinion of management, no litigation to which the Company is currently a party is likely to have a material adverse effect on the Company's results of operations, financial condition or liquidity, if decided adversely to the Company. As previously reported by the Company, on October 23, 1997, a shareholder, purporting to act on behalf of a class of ICT shareholders filed a complaint in the United States District Court for the Eastern District of Pennsylvania against the Company and certain of its directors. The complaint alleges that the defendants violated the federal securities laws, and seeks compensatory and other damages, including rescission of stock purchases made by the plaintiff and 14 other class members in connection with the Company's initial public offering effective June 14, 1996. The defendants believe the complaint is without merit, deny all of the allegations of wrongdoing and are vigorously defending the suit. On February 2, 1998, the defendants filed a motion to dismiss the complaint. On May 19, 1998, the complaint was dismissed by a judge for the United States District Court for the Eastern District of Pennsylvania with leave to plaintiff to file an amended complaint on narrow accounting allegations. On June 22, 1998, plaintiffs filed a First Amended Class Action Complaint purporting to bring negligence claims in connection with the Company's initial public offering. The defendants continue to deny all allegations of wrongdoing, believe the amended complaint is without merit and are vigorously defending the suit. On November 3, 1998, the court granted a motion appointing Rowan Klein and Michael Mandat as lead plaintiffs. On February 2, 1999, the court dismissed the case without prejudice, directing that the case remain in status quo, that the statute of limitations be tolled and that the parties continue with discovery and advise the court if assistance by the court is needed. Since that time the defendants filed a motion for summary judgment seeking to have the case dismissed on the grounds that there is no material issue of fact. Plaintiffs filed a response in opposition to defendant's motion and also filed a motion to have the matter certified as a class action. In September 2000, the Court entered orders dismissing the defendant's motion for summary judgment and plaintiffs motion for class certification without prejudice, with leave to re-file such motions upon the completion of discovery. The Company and the plaintiffs have reached a verbal agreement to settle this litigation. The finalization of the proposed settlement is subject to, among other things, the parties agreeing upon and executing a definitive settlement agreement having mutually agreeable terms and conditions. In addition, as with any class action litigation, any settlement agreement among the parties is not final until approved by the court. If approved, the settlement amount would be covered in full by the company's insurance. In 1998, William Shingleton filed a class action lawsuit against the Company in the Circuit Court of Berkley County, West Virginia. The suit was filed on behalf of all current and former hourly employees of the Company's facility in Martinsburg, West Virginia alleging that the Company had violated the West Virginia Wage Payment and Collection Act with respect to certain of the Company's pay practices. The allegations included failure to pay promised signing and incentive bonuses and wage increases; failure to compensate employees for short breaks or "transition" periods of less than 20 minutes; and improper deductions for the cost of purchasing telephone headsets. The complaint also included a count for fraud, alleging that the failure to pay for short break and transition time violated specific representations made by the Company to its employees. The court certified the class and discovery commenced. In 2001, plaintiffs' counsel filed a motion to expand the class to include all current and former hourly employees at all four of the Company's West Virginia facilities and to add twelve current and former executives of the Company. The court granted plaintiffs' request. The Company filed a response denying liability and asserting numerous defenses. The Company is vigorously defending the suit, which is now in the discovery process. Plaintiffs have moved for summary judgment on their claims for failure to pay for short breaks and transition time on the basis that the Company's discovery responses establish a violation. The Company has filed a response asserting that it is premature for the Court to address this contention until further discovery has been completed. Item 6. Exhibits and Reports on Form 8-K (a) The registrant was not required to file any reports on Form 8-K for the three months ended March 31, 2002. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. ICT GROUP, INC. Date: May 9, 2002 By: /s/ John J. Brennan ----------------------------- John J. Brennan Chairman and Chief Executive Officer Date: May 9, 2002 By: /s/ Vincent A. Paccapaniccia ---------------------------- Vincent A. Paccapaniccia Senior Vice President, Finance and Administration, Chief Financial Officer and Assistant Secretary 16