-----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, EcrtLBdqt4D8KSlwP5QB46zFwCJG9ju91ixR5PgU2X4qf8ajCI7fJoFC/cUhKNZ7 n5Sf0HQ9dZSeskGz5IC3Pg== 0000950116-99-002059.txt : 19991115 0000950116-99-002059.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950116-99-002059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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-Q SEC ACT: SEC FILE NUMBER: 000-20807 FILM NUMBER: 99751203 BUSINESS ADDRESS: STREET 1: 800 TOWN CENTER DR CITY: LANGHORNE STATE: PA ZIP: 19047 BUSINESS PHONE: 2157570200 MAIL ADDRESS: STREET 1: 800 TOWN CENTER DR CITY: LANGHORNE STATE: PA ZIP: 19047-1748 10-Q 1 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 ------- ICT GROUP, INC. ----------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2458937 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 800 Town Center Drive, Langhorne PA 19047 ---------------------------------------- --------------- (Address of principal executive offices) (Zip Code) 215-757-0200 --------------------------------------------------- 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 ------- ------- 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 ------- ------- $75,133 $75,876 ======= ======= 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 ------- ------- Total current liabilities 14,592 15,258 ------- ------- LONG-TERM DEBT 11,000 14,000 ------- ------- CAPITALIZED LEASE OBLIGATIONS 385 833 ------- ------- 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) ------- ------- Total shareholders' equity 49,156 45,785 ------- ------- $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 ------- ------- 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 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,746) (12,978) ------- ------- Net cash used in investing activities (5,746) (12,978) ------- ------- 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 ------- ------- Net cash provided by (used in) financing activities (3,474) 9,264 ------- ------- 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 0001013149 ICT GROUP, INC. 1,000 U.S. DOLLARS 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 SEP-30-1999 SEP-30-1998 1 1 13,491 14,199 0 0 26,319 25,083 0 0 0 0 41,797 42,251 53,210 45,781 24,790 17,298 75,133 75,751 14,592 16,529 0 0 0 0 0 0 118 116 49,038 44,772 75,133 75,751 0 0 114,271 85,582 0 0 62,586 50,004 45,513 32,954 0 0 666 204 5,506 2,420 2,147 943 3,359 1,477 0 0 0 0 0 0 3,359 1,477 0.29 0.13 0.28 0.12
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