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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
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or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
Commission File Number 0-20807
ICT GROUP, INC.
(Exact name of registrant as specified in its charter.)
Pennsylvania 23-2458937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Brandywine Boulevard
Newtown, PA 18940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 267-685-5000
Title of each class: Name of each exchange on which registered:
None None
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $116,627,160. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the National Market of The Nasdaq Stock Market on March 15, 2002. For purposes
of this calculation only, the registrant has defined affiliates as including all
directors and executive officers. In making such calculation, registrant is not
making a determination of the affiliate or non-affiliate status of any holders
of shares of Common Stock.
The number of shares of the registrant's Common Stock outstanding as of March
15, 2002 was 12,267,125.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
ICT GROUP, INC.
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 8
Item 3. Legal proceedings................................................................................ 8
Item 4. Submission of matters to a vote of security holders.............................................. 9
PART II
Item 5. Market for registrant's common equity and related stockholder matters............................10
Item 6. Selected financial data..........................................................................11
Item 7. Management's discussion and analysis of financial condition and results of operations............12
Item 7A. Qualitative and quantitative disclosure about market risk........................................17
Item 8. Financial statements and supplementary data......................................................17
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.............17
PART III
Item 10. Directors and executive officers of the registrant...............................................17
Item 11. Executive compensation...........................................................................17
Item 12. Security ownership of certain beneficial owners and management...................................17
Item 13. Certain relationships and related transactions...................................................18
PART IV
Item 14. Exhibits, financial statement schedules, and reports on form 8-K.................................18
-i-
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to outsourcing trends as well as other trends in the 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; and (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.
PART I
ITEM 1. BUSINESS
ICT Group, Inc. (the "Company" or "ICT") is a leading global provider of
integrated customer relationship management (CRM) solutions. The Company
provides integrated sales, marketing and customer care 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 full-service 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.
1
Industry Overview:
The CRM services market includes traditional activities such as inbound and
outbound telesales and customer care, e-business support and marketing services
including market research and database marketing and analysis. Customer contact
center outsourcing has evolved significantly in recent years. Competitive
pressures, advancements in technology and an accelerating trend toward
outsourcing customer care has resulted in the demand for more complex,
interactive and multi-channel CRM solutions. Outsourced CRM service providers
are now expected to serve more as a business "partner," offering clients
value-added contact center strategies rather than traditional commodity-based
sales and service applications.
ICT is ahead of the competition in responding to this trend and has already
expanded its portfolio of value-added services to include niche,
industry-specialized sales, customer care and marketing support services
designed to improve clients' profitability and maximize their per-customer
revenue. As an example, ICT recently introduced Direct Response Medical
Detailing (DrMD(SM)), a data modeling, multi-channel detailing program designed
to influence prescribing activity and increase pharmaceutical clients' ROI for
certain prescription products.
ICT Approach:
ICT believes that it has distinguished itself in the CRM solutions industry by
having a balanced growth strategy, vertical market and customer-centric focus,
comprehensive portfolio of services, and substantial resources to support future
expansion. The Company continues to expand its worldwide network of
state-of-the-art CRM contact centers in order to deliver globally integrated,
multi-channel CRM sales and service solutions to meet the specific needs of its
large, multinational clients.
With extensive experience providing outsourced sales, marketing and customer
care services, the Company is well-positioned for continued success in a large
and growing market. By leveraging its strong management team, proven business
model, global infrastructure, CRM operating and technology investments, and
expertise in target industries, ICT intends to advance its leadership position
as a global supplier of integrated CRM solutions.
The Company also plans to:
o Introduce additional cost-effective, off-shore CRM solutions
o Continue investing in its outsourced customer care services
o Further develop its value-added marketing services
o Deepen relationships with existing customers
o Further expand its international presence
Strategy
The Company's growth strategy includes the following key elements:
o Expand Value-Added Services. The Company will continue to complement
its core telesolutions expertise with additional value-added services, such as
database marketing, research and consulting services, as well as a complete
suite of comprehensive CRM services. The Company's goal is to offer a robust,
integrated suite of telesolutions, e-solutions and market solutions to help its
clients maximize the lifetime value of their customer relationships.
o Develop Strategic Alliances and Acquisitions. ICT intends to continue
pursuing strategic alliances with, and acquisitions of, domestic and
international businesses that provide complementary CRM services. The Company is
currently utilizing state-of-the-art CRM software and Internet platform
technologies from leading edge suppliers such as Aspect Communications
Corporation, Siebel Systems, Inc., Oracle and Cisco.
o Increase International Presence. The Company plans to broaden its
geographic reach and further develop its expertise in CRM services in
international markets by focusing on businesses with multinational operations.
ICT currently provides multilingual services to customers in the United States,
Europe, Latin America, Canada and Australia. ICT intends to expand its
operations in these areas, as well as others.
o Focus on Industry Specialization. Management believes it has gained
a competitive advantage by concentrating on servicing businesses in a limited
number of targeted industries and intends to maintain its industry
specialization. In addition, management believes that this specialization will
enable it to attract new clients because of its industry expertise.
2
o Maintain Technology Investment. The Company intends to continue
making substantial investments in technology to maintain its technological
strength within the CRM services industry. ICT has been an industry leader in
the implementation of innovative CRM technologies to lower its effective cost
per contact and to improve its sales and customer service. The Company has made
significant investments in information and communications technologies
and management believes it was among the first to offer fully automated CRM
services, collaborative web browsing services and to implement predictive
dialing equipment.
o Continue Commitment to Quality Service. ICT has consistently
emphasized quality service and extensive employee training by investing in
quality assurance personnel and procedures. The Company intends to continue its
commitment to providing quality service, as illustrated by its achieving ISO
9002 certification in all its domestic and international sales and service
focused business units.
ICT's Services
ICT delivers its telesolution, e-solution and market solution CRM
services through two business segments that are supported by the Company-wide
marketing, sales, systems and corporate units. ICT's sales force and operating
units are organized into a series of industry sectors focused on selling and
supporting the full range of the Company's services to clients in their
respective target industries. ICT believes this organizational structure allows
the Company to provide comprehensive solutions to its clients' CRM service
needs, since it enables ICT's sales and customer service personnel to develop
in-depth knowledge of the needs of businesses in their designated industries.
Domestic CRM Services
Traditional teleservices, as well as marketing, research and consulting
services, and ongoing customer care services are offered in the United States
through the Company's Domestic CRM Services segment, which is comprised of the
following business units.
ICT TeleServices. ICT TeleServices provides telesales support
activities primarily for clients in the insurance, financial services,
telecommunications, information services, energy services and media industries.
ICT Financial Marketing Services. This business unit's management team
consists of professionals who have client-side banking experience in branch
management and operations, marketing, advertising, research, electronic funds
transfer, home and branchless banking, customer service and systems support. As
of December 31, 2001, ICT Financial Marketing Services operated dedicated
inbound/outbound contact centers in Amherst, New York and Morrilton, Arkansas.
ICT Medical Marketing Services. Through this business unit, ICT
provides service for the increasingly complex needs of healthcare and
pharmaceutical clients. This unit is staffed by dedicated personnel to meet the
sophisticated product and customer profiles of specific clients. As of December
31, 2001, ICT Medical Marketing Services operated a dedicated contact center in
Langhorne, Pennsylvania.
ICT Research and Database Marketing Services. This business unit
provides businesses across a wide range of industries with value added market
research and database marketing services. This unit makes extensive use of
advanced technology, including integrated predictive dialing and Computer
Assisted Telephone Interviewing software, to obtain market and customer data
cost effectively. As of December 31, 2001, ICT Research Services conducted
surveys from centers in Depew, New York and Conway, Arkansas.
Customer Care Management Services. This business unit was established
to pursue outsourcing opportunities for customer care management. Depending on
client needs, ICT will assume sole or shared responsibilities for the management
of a client's customer care operations. As of December 31, 2001, this business
unit operated contact centers in Lakeland, Florida, Langhorne, Pennsylvania, and
Spokane, Washington.
3
International CRM Services
The Company offers multilingual teleservices and customer care services
through four business units comprising ICT International Services. The growth of
multinational corporations and the increase in non-English speaking residents in
the United States has increased the demand for the multilingual capabilities
that ICT provides. The segment currently consists of the following business
units:
ICT Eurotel. Eurotel provides pan-European, multilingual teleservices
and customer care services to Europe from its contact centers in Athlone,
Ireland, Dublin, Ireland and London, England.
ICT Spantel. Spantel provides bi-lingual English and Spanish
teleservices from its Miami, Florida contact center to the rapidly growing
marketplace of Spanish-speaking American and Latin American consumers and
businesses.
ICT Canada. ICT Canada provides service representatives who are fluent
in French and English. As of December 31, 2001, ICT Canada has contact centers
located in Miramichi, Moncton and Riverview, New Brunswick, Canada; Halifax, New
Glasgow and Sydney, Nova Scotia, Canada; and Cornerbrook and Carbonear,
Newfoundland, Canada.
ICT Australia. This unit was formed in 1999 to provide telemarketing
services for multinational companies in the Pacific Rim. As of December 31,
2001, ICT Australia operated a contact center in Sydney, Australia.
Contact Center Facilities
The following table lists the Company's contact center facilities as of
December 31, 2001:
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Locations
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Conway, AR; Morrilton, AR; Newark, DE; Fort Lauderdale, FL; Lakeland, FL; Miami,
FL; Louisville, KY; Calais, ME; Lewiston, ME; Oxford, ME; Pittsfield, ME;
Wilton, ME; Amherst, NY; Depew, NY; Lancaster, OH; Allentown, PA; Bensalem, PA;
Bloomsburg, PA; Burnham, PA; Dubois, PA; Langhorne, PA (2); Lockhaven, PA;
Trevose, PA; Chesapeake, VA; Christiansburg, VA; Norfolk, VA; Spokane, WA;
Falling Waters, WV; Martinsburg, WV; Parkersburg, WV; Westover, WV; Carbonear,
Newfoundland, Canada, Cornerbrook, Newfoundland, Canada; Halifax, Nova Scotia,
Canada; Miramichi, New Brunswick, Canada; Moncton, New Brunswick, Canada; New
Glasgow, Nova Scotia, Canada; Riverview, New Brunswick, Canada; Sydney, Nova
Scotia, Canada; Athlone, Ireland; Dublin, Ireland; London, U.K.; and Sydney,
Australia.
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Target Industries
ICT's domestic sales force is assigned to specific industry sectors,
which enables its sales personnel to develop in-depth industry and product
knowledge. Several of the industries that ICT serves are undergoing deregulation
and consolidation, which provides the Company with additional opportunities as
businesses search for low cost solutions for their marketing, sales and customer
support needs. In 2001, business within the insurance and financial services
industries accounted for 62% of the Company's revenues. The industries targeted
by the Company and the principal services provided are described below.
Insurance
ICT works with large consumer insurance companies to market and provide
sales and customer support services for products such as life, accident, health,
and property and casualty insurance. The Company's insurance group operates
numerous dedicated contact centers and in 2001, the Company sold approximately
1.6 million insurance policies on behalf of its clients. ICT employs
approximately 400 agents licensed in life, A&H and P&C, including bilingual
agents, in the U.S. and Canada. The Company has a full-service agent licensing
and a continuing education department, which enables the Company and its agents
to obtain licenses in 48 states and 8 Canadian provinces and to maintain their
compliance with insurance regulations. Significant insurance clients in 2001
include, but are not limited to, Aegon, Prudential, Canadian Premier LIC and
Sears Life Alliance.
4
Financial Services
ICT provides banks and other financial services clients with a wide
range of services, including card-holder acquisition, active account generation,
account balance transfer, account retention and customer service. ICT's
Financial Marketing Services operations offers banking services, such as
marketing and servicing home equity loans, lines of credit, loan-by-phone,
checking and deposit account acquisition, mortgage loans and other traditional
banking products. Among ICT's financial services clients in 2001 are Chase,
Fleet, Discover, Capital One, Washington Mutual and Wells Fargo.
Telecommunications/Utilities
ICT provides teleservices and customer care management services for
major telecommunications companies for long distance, cellular and cable
products and services, regional telecommunications companies marketing advanced
telephone features, and companies which provide billing support services to
telecommunications carriers. Within the telecommunications/utilities industry,
ICT clients in 2001 include, but are not limited to, Verizon, Integretel, and
Rogers Wireless/AT&T.
Pharmaceuticals and Health Care Services
Leveraging ICT's insurance market position into the managed care
industry, the Company, through its ICT Medical Marketing Services business unit,
serves pharmaceutical manufacturers, health insurance companies, and other
health care related suppliers, for the sale and marketing of products to both
health care professionals (hospitals, physicians, pharmacists and nurses) and
health care consumers (patients and prospective patients). The services the
Company offers in this market segment consist of business-to-business,
business-to-professional and business-to-consumer, utilizing inbound and
outbound services to sell products, to conduct market research, develop
marketing databases and provide customer care service. Clients in this category
in 2001 include Pfizer, Blue Cross/Blue Shield and Therasense.
Information Technology
ICT provides sophisticated marketing resources primarily for inbound
applications on behalf of clients in the computer software and hardware
industries. These applications include, but are not limited to, customer
service, first-level customer technical support and customer retention. ICT's
clients frequently integrate outbound and inbound call campaigns, seeking to
achieve favorable compounding results. Information technology clients in 2001
include, but are not limited to, AOL and AOL Canada.
Technology
ICT invests heavily in system and software technologies designed to
improve contact center production thereby lowering the effective cost per
contact made or received, and to improve sales and customer service
effectiveness by providing its sales and service representatives with real-time
access to customer and product information. Since January 1995, the Company has
invested over $81 million in information and communications systems and software
enabling it to use state-of-the-art contact center technology. ICT believes it
was one of the first fully automated teleservices companies and among the first
to implement predictive dialing equipment for outbound telemarketing and market
research and to provide collaborative web browsing services.
The Company utilizes a scalable set of UNIX and NT processors to
support its outbound and inbound contact center operations. The term scalable in
the computer industry generally means that a system or product line is
configured to work cost-effectively at both low and high volume. Dedicated UNIX
and NT processors are used for inbound contact centers while predictive dialing
systems, networked to UNIX and NT processors at the Company's corporate data
center, are used at each outbound contact center. The predictive dialing systems
support local call and data management: the UNIX and NT processors provide
centralized list management, data consolidation, report generation and
interfaces with client order processing systems.
5
ICT Group uses a series of CRM software to prepare outbound and inbound
scripts, manage, update and reference client data files, collect statistical
transaction and performance data and assist in the preparation of internal and
client reports. This CRM software includes ICT Group's proprietary list
management system ("LMS") as well as Siebel's Contact Management system. The use
of the Siebel suite applications as well as Oracle's database management system
provides a scalable and robust suite of applications to support our client's
business needs. Continued deployment of the Siebel vertical market offerings and
thin client solutions will be a focus for ICT.
Quality Assurance, Personnel and Training
ICT emphasizes quality service and extensive employee training as a way
to compete effectively and invests heavily in quality assurance personnel and
practices. ICT's quality assurance and training departments are responsible for
the development and enforcement of contact center policies and procedures, the
selection and training of telephone service representatives, the training and
professional development of contact center management personnel, monitoring of
calls and verification and editing of all sales. Through the Company's quality
assurance department, both the Company and its clients are able to perform real
time on-site and remote call monitoring to maintain quality and efficiency.
Sales confirmations are recorded (with the customer's consent) in order to
verify the accuracy and authenticity of transactions. Additionally, ICT is able
to provide to its clients immediate updates on the progress of an ongoing
program. Access to this data allows ICT and its clients to identify potential
campaign shortfalls and to immediately modify or enhance the program. In 1998
the Company completed the installation of digital recording technology in all US
outbound centers. This installation allows the consolidation of all verification
activities into geographically centralized locations and effectively created a
"third party" verification center. Verification results are now available to
Operations and Client Services by the end of the calling day. Also, each center
can access the recordings for review with supervisory staff or the service
representative.
ICT continued this commitment to excellence by piloting digital
recording for verification purposes in one of its inbound centers. As a result
of this implementation, digital recording was rolled out to all other inbound
sales programs. As with outbound data, inbound sales data will be consolidated
into the existing Central Verification Center. The Company's commitment to
providing quality service is further illustrated by its certification with ISO
9002 standards, which are administered by the International Organization for
Standardization and represent an international consensus on the essential
features of a quality system to ensure the effective operation of a business.
All domestic and international sales and service focused business units were ISO
9002 registered as of December 31, 1999.
Management believes that a key driver of ICT's success is the quality
of its employees. The Company tailors its recruiting and training techniques
toward the industries it serves. As part of the setup of each client program,
service representatives receive a detailed review of each program in which they
are to participate along with training regarding the background, structure and
philosophy of the client that is sponsoring the program. As is typical in the
teleservices industry, over 90% of the Company's service representatives are
part-time employees. As of February 22, 2002, ICT employed approximately 10,900
people, of which approximately 10,300 were service representatives. None of
ICT's employees are currently represented by a labor union. The Company
considers its relations with its employees to be good.
Clients
The Company generally operates under month-to-month contractual
relationships with its teleservices clients. The pricing component of a contract
is often comprised of a base service charge and separate charges for ancillary
services. Services are generally based upon an hourly rate for outbound calls
and per-minute rates for inbound calls. On occasion, the Company performs
services for which it is paid incentives based on completed sales. ICT's
Customer Care Management Services unit typically enter into longer term,
contractual relationships that may contain provisions for early contract
terminations.
6
ICT targets those companies which it believes have the greatest
potential to generate recurring revenues to the Company based on their ongoing
direct sales and customer service needs. At December 31, 2001, ICT provided
direct sales and customer service to approximately 130 clients. 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. 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. One other client accounted for 12% of the Company's net revenues
in 2001.
Competition
The CRM services industry is very competitive and the Company's
principal competition in its primary markets comes from large service
organizations, including, but not limited to, Convergys Corporation, SITEL
Corporation, TeleTech Holdings, Inc., APAC TeleService, Inc. and West
Corporation. The Company competes with numerous independent firms, some of which
are as large or larger than ICT, as well as the in-house operations of many of
its clients or potential clients. In addition, most businesses that are
significant consumers of these services utilize more than one teleservice firm
at a time and reallocate work among various firms from time to time. Some of
this work is contracted on an individual project basis, with the effect that the
Company and other firms seeking such business are required to compete with each
other frequently as individual projects are initiated. Furthermore, the Company
believes there is a trend among businesses with in-house contact center
operations toward outsourcing the management of those operations to others and
that this trend may attract new competitors, including, but not limited to,
competitors that are substantially larger and better capitalized than ICT, into
the Company's market. Additionally, ICT faces competitors in its hosted CRM
offerings.
Government Regulation
Both the federal and state governments regulate telemarketing sales
practices. The Federal Telephone Consumer Protection Act of 1991 (the "TCPA,"),
enforced by the Federal Communications Commission, imposes restrictions on
unsolicited telephone calls to residential telephone subscribers. Under the
TCPA, it is unlawful to initiate telephone solicitations to residential
telephone subscribers before 8:00 a.m or after 9:00 p.m. local time at the
subscriber's location, or to use automated telephone dialing systems or
artificial or prerecorded voices to certain subscribers. Additionally, the TCPA
requires telemarketing firms to develop a written policy implementing a
"do-not-call" list, and to train its telemarketing personnel to comply with
these restrictions. The TCPA creates a right of action for both consumers and
state attorneys general. A court may award actual damages or minimum statutory
damages of $500 for certain violations, which may be trebled for willful or
knowing violations. Currently, the Company trains its service representatives to
comply with the regulations of the TCPA and programs its call management system
to avoid initiating telephone calls during restricted hours or to individuals
maintained on an applicable do-not-call list.
The Federal Trade Commission (the "FTC") regulates both general sales
practices and telemarketing specifically. Under the Federal Trade Commission Act
(the "FTC Act"), the FTC has broad authority to prohibit a variety of
advertising or marketing practices that may constitute "unfair or deceptive acts
and practices." Pursuant to its general enforcement powers, the FTC can obtain a
variety of types of equitable relief, including injunctions, refunds,
disgorgement, the posting of bonds, and bars from continuing to do business, for
a violation of the acts and regulations it enforces.
The FTC also administers the Federal Telemarketing and Consumer Fraud
and Abuse Prevention Act of 1994 (the "TCFAPA"). Under the TCFAPA, the FTC has
issued regulations prohibiting deceptive, unfair or abusive practices in
telemarketing sales. Generally, these rules prohibit misrepresentations of the
cost, quantity, terms, restrictions, performance or characteristics of products
or services offered by telephone solicitation or of refund, cancellation or
exchange policies. The regulations also regulate the use of prize promotions in
telemarketing to prevent deception and require that a telemarketer identify
promptly and clearly the seller on whose behalf the telemarketer is calling, the
purpose of the call, the nature of the goods or services offered and, if
applicable, that no purchase or payment is necessary to win a prize. The
regulations also require that telemarketers maintain records on various aspects
of their business. Analogous restrictions apply to industries regulated by the
SEC. Management believes that it is in compliance with the TCPA and its
implementing regulations, as well as with the regulations promulgated pursuant
to the TCFAPA. Failure to comply with either the TCPA or the TCFAPA could
adversely affect or limit the Company's current or future operations.
7
Most states have enacted statutes similar to the FTC Act generally
prohibiting unfair or deceptive acts and practices. Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
telemarketing practices. For example, telephone sales in certain states are not
final until a written contract is delivered to and signed by the buyer, and such
a contract often may be canceled within three business days. At least one state
also prohibits telemarketers from requiring credit card payment, and several
other states require certain telemarketers to obtain licenses, post bonds or
submit sales scripts to the state's attorney general. Under the more general
statutes, depending on the willfulness and severity of the violation, penalties
can include imprisonment, fines and a range of equitable remedies such as
consumer redress or the posting of bonds before continuing in business. Many of
the statutes directed specifically at telemarketing practices provide for a
private right of action for the recovery of damages or provide for enforcement
by state agencies permitting the recovery of significant civil or criminal
penalties, costs and attorneys' fees. There can be no assurance that any such
laws, if enacted, will not adversely affect or limit the Company's current or
future operations.
Activity at the state level regarding laws that impact the teleservices
industry has intensified over the past several years. States have enacted a
variety of laws regulating marketing via telephone. Do Not Call Lists,
restricted hours or days, registration, request to continue solicitation and no
rebuttal laws are common in many states. At this writing twenty states have
enacted Do Not Call legislation. ICT Group, Inc. complies with all of these
laws. The Quality Assurance department is responsible for compliance.
Participation on the Direct Marketing Association and the American Telemarketing
Associates Legislative Committees ensure timely notification of proposed
legislation.
ITEM 2. PROPERTIES
As of December 31, 2001, the Company's corporate headquarters were
located in Langhorne, Pennsylvania in leased facilities consisting of
approximately 29,500 square feet of office space rented under leases that expire
in 2002. In January 2001 the Company signed a lease for a new corporate and
divisional headquarters facility. The lease commenced in February 2002, is for
approximately 105,000 square feet and has a term of 15 years. In addition to the
corporate headquarters staff, certain other divisional and operations personnel
will be located in the new facility. The Company also leases all of the
facilities used in its contact center operations, as well as office space in
Chicago, Illinois, and Saddlebrook, New Jersey for its sales offices. The leases
for the Company's facilities expire generally between January 2002 and March
2017 and typically contain renewal options. Management believes that its
existing facilities are suitable and adequate for its current operations, but
additional facilities will be required to support growth. Management believes
that suitable additional or alternative space will be available as needed on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to
its business. In the opinion of management, no 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.
8
As previously reported by the Company, on October 23, 1997, a
shareholder, purporting to act on behalf of a class of ICT shareholders filed a
complaint in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its directors. The complaint
alleges that the defendants violated the federal securities laws, and seeks
compensatory and other damages, including rescission of stock purchases made by
the plaintiff and other class members in connection with the Company's initial
public offering effective June 14, 1996. The defendants believe the complaint is
without merit, deny all of the allegations of wrongdoing and are vigorously
defending the suit. On February 2, 1998, the defendants filed a motion to
dismiss the complaint. On May 19, 1998, the complaint was dismissed by a judge
for the United States District Court for the Eastern District of Pennsylvania
with leave to plaintiff to file an amended complaint on narrow accounting
allegations. On June 22, 1998, plaintiffs filed a First Amended Class Action
Complaint purporting to bring negligence claims in connection with the Company's
initial public offering. The defendants continue to deny all allegations of
wrongdoing, believe the amended complaint is without merit and are vigorously
defending the suit. On November 3, 1998, the court granted a motion appointing
Rowan Klein and Michael Mandat as lead plaintiffs. On February 2, 1999, the
court dismissed the case without prejudice, directing that the case remain in
status quo, that the statute of limitations be tolled and that the parties
continue with discovery and advise the court if assistance by the court is
needed. Since that time the defendants filed a motion for summary judgement
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 judgement 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 among other
things, to 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.
As previously reported by the Company on July 12, 1996, Main Street
Marketing of America Incorporated ("Main Street Marketing") brought a demand for
arbitration against the Company in the Commonwealth of Pennsylvania before the
American Arbitration Association claiming damages as a 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, data processing and customer
support services relating to Main Street Marketing's magazine subscription
program during 1995 and 1996. Main Street Marketing alleges that the Company
committed various breaches of the service agreement and had demanded an award in
excess of $15 million. The Company responded to this demand for arbitration by
denying liability and counterclaiming in an amount in excess of $125,000. The
arbitration hearing in this matter commenced on July 30, 2001. Prior to the
completion of the hearing, Main Street Marketing and the Company agreed to
settle and finally resolve all claims of the parties and to release each other
from any further liability with respect thereto.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock trades on the National Market segment of The
Nasdaq Stock Market under the symbol "ICTG." The following table sets forth, for
the periods indicated, the high and low sales prices as quoted on The Nasdaq
Stock Market.
Period High Low
------ ---- ---
Fiscal 2000:
First Quarter $12.875 $6.500
Second Quarter 10.000 4.500
Third Quarter 12.125 9.500
Fourth Quarter 11.875 8.000
Fiscal 2001:
First Quarter 11.375 8.125
Second Quarter 17.400 9.563
Third Quarter 17.990 8.070
Fourth Quarter 18.990 8.870
As of March 15, 2002, there were 47 holders of record of the Company's
Common Stock. On March 15, 2002, the closing sale price of the Common Stock as
reported by The Nasdaq Stock Market was $20.80.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain its earnings to finance
future growth and working capital needs and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Additionally, the Company's
bank agreements limits the payment of dividends.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 and the consolidated financial statements and related
notes thereto included in Item 8.
For Year Ended December 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001
-------------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues $91,653 $120,982 $153,049 $198,609 $239,324
------- -------- -------- -------- --------
Operating expenses:
Cost of services 50,662 69,588 84,390 111,545 133,816
Selling, general and administrative 37,002 47,012 60,080 74,826 91,945
------- -------- -------- -------- --------
87,671 116,600 144,470 186,371 225,761
------- -------- -------- -------- --------
Operating income 3,982 4,382 8,579 12,238 13, 563
Interest expense (income), net (398) 406 801 1,207 1,079
------- -------- -------- -------- --------
Income before income taxes 4,380 3,976 7,778 11,031 12,484
Income taxes 1,708 1,550 3,033 4,302 4,506
------- -------- -------- -------- --------
Net income $ 2,672 $ 2,426 $ 4,745 $ 6,729 $ 7,978
======= ======== ======== ======== ========
Diluted earnings per share $ 0.22 $ 0.20 $ 0.39 $ 0.54 $ 0.63
======= ======== ======== ======== ========
Shares used in computing diluted
earnings per share 12,044 12,023 12,261 12,454 12,682
======= ======== ======== ======== ========
As of December 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001
-------------------------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $17,711 $ 14,225 $ 12,239 $ 8,539 $ 12,875
Working capital 25,530 27,093 26,767 23,277 38,766
Total assets 61,578 75,876 78,073 93,737 102,586
Long-term debt, less current maturities 6,297 14,833 10,308 6,000 12,000
Shareholders' equity 43,368 45,785 50,340 56,683 63,661
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
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 Note 2 to our
consolidated financial statements. 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.
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 $519,000 and $0 as of December 31, 2001 and 2000,
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 estiamted 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 December 31, 2001. 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.
12
Results of Operations
The following table sets forth statement of operations data as a
percentage of net revenues for the periods indicated:
Year Ended December 31,
---------------------- ----------------- -----------------
2001 2000 1999
---------------------- ----------------- -----------------
Revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses
Cost of services 55.9 56.2 55.1
Selling, general and administrative 38.4 37.6 39.3
---- ---- ----
94.3 93.8 94.4
---- ---- ----
Operating income 5.7 6.2 5.6
Interest expense .6 .8 .8
Interest income (.1) (.2) (.3)
---- ---- ----
Income before income taxes 5.2 5.6 5.1
Income taxes 1.9 2.2 2.0
--- --- ---
Net income 3.3% 3.4% 3.1%
==== ==== ====
Year Ended December 31, 2001 and 2000
Revenues. Revenues increased 20% to $239.3 million from $198.6 million
in 2000. Revenues from the Domestic CRM Services segment increased 20% to $175.5
million from $146.4 million in the prior year and accounted for 73% of revenues
versus 74% in the prior year. Business from existing clients grew $12.4 million,
or 43% of the total growth, and new business accounted for $16.7 million, or 57%
of the growth. International CRM Services revenues grew 22% to $63.8 million
from $52.2 million in the prior year and accounted for 27% of revenues versus
26% in the prior year. Most of the increase was from expanded business with
existing customers.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 20% to $133.8 million in 2001 from
$111.5 million in 2000. This increase is primarily the result of increased
direct labor required to support the increased revenue volume. As a percentage
of revenues, cost of services was approximately 56% in both 2001 and 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 23% to $91.9 million in 2001 from $74.8
million in 2000 due to increased numbers of contact centers and workstation
capacity and additional sales and systems support implemented to support
business growth. As percentage of revenues, selling, general and administrative
expenses was approximately 38% in both 2001 and 2000.
Interest Expense, net. Interest expense, net of interest income, was
$1.1 million in 2001 compared to $1.2 million in 2000 and reflects interest on
borrowings against the Company's line of credit and capital leases for capital
expansion offset by investment income. The decrease in net interest expense is
the result of lower average outstanding balances under the Company's line of
credit facility and lower interest rates in 2001 as compared to 2000.
13
Income Taxes. Provision for income taxes increased $204,000 to $4.5
million in 2000 from $4.3 million in 2000. During 2001, the provision for income
taxes was approximately 36% of income before income taxes compared to
approximately 39% in 2000. The reduction in the income tax rate was due to a
shift in the mix of the Company's pretax income. In 2001, a greater percentage
of pretax income was generated in Ireland, where the income tax rate is 10%, and
in Canada, where income tax rates were decreased from approximately 46% in 2000
to approximately 38% in 2001.
Year Ended December 31, 2000 and 1999
Revenues. Revenues increased 30% to $198.6 million from $153.0 million
in 1999. Approximately 60% of the increase came from new customers, with
existing customers accounting for 40% of the increase. Revenues from the
Domestic CRM Services segment increased 13% to $146.4 million from $129.0
million in 1999. Growth in this segment was constrained by a slowing of growth
in telesales campaigns that utilize credit card files, as privacy concerns
restrained marketing activities in the early part of 2000. Strong growth in the
International CRM Services segment drove the revenue growth for the year.
International Services revenues grew 117% to $52.2 million from $24.0 million in
1999 with new customers accounting for approximately 60% of the increase.
Cost of Services. Cost of services, which consist primarily of direct
labor and telecommunications costs, increased 32% to $111.5 million in 2000 from
$84.4 million in 1999. This increase is primarily the result of increased direct
labor required to support the increased revenue volume. As a percentage of
revenues, cost of services increased to 56% in 2000 from 55% in 1999 as an
increase in labor cost per production hour offset savings in telecommunication
costs per hour.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 25% to $74.8 million in 2000 from $60.1
million in 1999 due to increased numbers of contact centers and workstation
capacity and additional sales and systems support implemented to support
business growth and the launch of CRM hosted technology services. As percentage
of revenues, selling, general and administrative expenses were 38% in 2000
versus 39% in 1999, as the Company was able to leverage its existing
infrastructure to support volume growth.
Interest Expense, net. Net interest expense of $1.2 million in 2000
versus $801,000 in 1999 reflects the interest expense related to borrowings
against the Company's equipment line of credit and capital leases for capital
expansion offset by investment income. The increase in net interest expense is
primarily the result of increased average outstanding balances on line of credit
borrowings to fund capital expenditures in 2000 as compared to 1999.
Income Taxes. Provision for income taxes increased $1.3 million to $4.3
million in 2001 from $3.0 million in 1999. For both 2000 and 1999, the provision
for income taxes was approximately 39% of income before taxes.
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 fall. In the first quarter, CRM
Services activity generally levels off or slows 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 addition, the Company
typically expands its 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 business decreases during the summer months. In addition, the
Company's operating expenses increase during the third quarter as it expands its
capacity in anticipation of higher demand for its services during the fourth
quarter.
14
Liquidity and Capital Resources
Cash provided by operations in 2001 was $17.3 million compared to $9.0
million in 2000. The $8.3 million increase is due to a $1.2 million increase in
net income, a $1.7 million increase in depreciation and an $8.0 million decrease
in the growth of accounts receivable in 2001 when compared to 2000. These
positive factors were partially offset by a $1.0 million decrease in the growth
of accounts payable and accrued expenses.
Cash used in investing activities was $8.3 million in 2001 compared to
$16.3 million in 2000. The decrease from the prior year is attributable to a
lower investment in capital expenditures. In 2000, a significant investment was
made in software licenses for hosted CRM technology services. Additionally, the
Company added 673 workstations in 2001, compared to the 1,753 workstations added
in 2000. The Company operated 6,594 workstations at December 31, 2001 compared
to 5,921 workstations at December 31, 2000.
Cash used in financing activities was $3.1 million in 2001 versus cash
provided by financing activities of $4.3 million in 2000. The $7.5 million
decrease is due to the lower capital expenditures in 2001 as compared to 2000.
Consequently, the Company was able to pay down $2.8 million of debt and fund
$773,000 in debt issuance costs in 2001 versus borrowing $4.0 million in 2000.
The Company's operations will continue to require significant capital
expenditures. Historically, equipment purchases have been financed through cash
generated from operations, the Company's line of credit, operating leases, and
through capitalized lease obligations with various equipment vendors and lending
institutions. At December 31, 2001, $16.0 million was outstanding under the
Company's line of credit with $69.0 million available to borrow.
On April 26, 2001, the Company announced it had secured a new
three-year $85.0 million revolving credit facility from five banks. This
facility replaced the existing $45.0 million credit facility which was due to
expire in the third quarter of 2001. The new credit facility has an aggregate
commitment of $85.0 million. The commitment includes sub-limits for both foreign
denominated loans and Letters of Credit. The agreement has two borrowing
options, either a "Base Rate" option, defined as the higher of federal funds
plus .5% or prime, or a Eurodollar rate option, defined as LIBOR plus a spread
ranging from 1.25% to 2.25%, depending on the Company's ratio of funded debt to
EBITDA. The Company is required to pay a quarterly commitment fee ranging from
.25% to .50% of the unused amount, as well as a quarterly low usage fee ranging
from 0% to .05%, based on the Company's ratio of funded debt to EBITDA. The
agreement contains customary affirmative and negative covenants including
financial covenants requiring the maintenance of specified levels of
consolidated leverage, consolidated fixed charges, and minimum net worth. The
Company was in compliance with all covenants as of December 31, 2001. The
Company believes that cash on hand, together with cash flow generated from
operations, the availability of operating leases, and funds available under the
new credit facility will be sufficient to finance its current operations and
planned capital expenditures at least into 2003.
In January 2001, the Company signed a lease for a new corporate
headquarters facility. The lease is scheduled to commence in February 2002, is
for approximately 105,000 square feet, and has a term of 15 years. Minimum
annual rent in the first year of the lease is $2.3 million and increases by 2%
per year throughout the lease term.
The Company has entered into agreements that create contractual
obligations and commercial commitments. These obligations and commitments will
have an impact on future liquidity and the availability of capital resources.
The tables noted on the next page present a summary of these obligations and
commitments:
15
Contractual Obligations:
Payments Due By Period
(in thousands)
- ----------------------------------------------------- ---------------- -------------- -------------- -------------- -------------
Total Less Than One to Three Four to Five After five
Description Obligations One Year Years Years Years
- ----------- ----------- -------- ----- ----- -----
- ----------------------------------------------------- ---------------- -------------- -------------- -------------- -------------
Operating leases *................................. $108,777 $19,372 $32,951 $17,551 $38,903
- ----------------------------------------------------- ---------------- -------------- -------------- -------------- -------------
Telephone contract commitments..................... $ 3,850 $ 3,208 $ 642 --- ---
- ----------------------------------------------------- ---------------- -------------- -------------- -------------- -------------
Total contractual cash obligations................. $112,627 $22,580 $33,593 $17,551 $38,903
- ----------------------------------------------------- ---------------- -------------- -------------- -------------- -------------
* -- Includes facility and equipment operating leases, some of which call for
payment of direct operating costs in addition to rent. These obligation amounts
include future minimum lease payments and exclude such direct operating costs.
Commercial Commitments (1):
Amount of Commitment Per Period
(in thousands)
- --------------------------------------------------- ------------------ -------------- -------------- -------------- -------------
Total Amounts Less Than One to Three Four to Five After five
Description Committed One Year Years Years Years
- ----------- --------- -------- ----- ----- -----
- --------------------------------------------------- ------------------ -------------- -------------- -------------- -------------
Line of Credit.................................... $16,000 $16,000 --- ---
- --------------------------------------------------- ------------------ -------------- -------------- -------------- -------------
Total commercial commitments............... $16,000 $16,000 --- ---
- --------------------------------------------------- ------------------ -------------- -------------- -------------- -------------
(1) Excludes purchase orders for merchandise and supplies in the normal course
of business which are liquidated within 12 months.
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.
16
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's operations are exposed to market risks primarily as a
result of changes in interest rates and foreign currency exchange rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Risk
The Company's exposure to market risk for changes in interest
rates relates primarily to its variable rate line of credit. A change
in market interest rates exposes the Company to the risk of earnings or
cash flow loss but would not impact the fair market value of the
related underlying instrument. The rate on $16 million of outstanding
borrowings at December 31, 2001 approximated market rates; thus, the
fair value of the debt approximates its reported value. In the past the
Company has not entered into financial instruments such as interest
rate swaps or interest rate lock agreements. However, it may consider
these instruments to manage the impact of changes in interest rates
based on management's assessment of future interest rates, volatility
of the yield curve and the Company's ability to access the capital
markets in a timely manner.
Foreign Currency Risk
The Company historically has not used foreign currency
exchange contracts or purchased currency options to hedge local
currency cash flows. The Company has operations in Canada, Ireland, the
United Kingdom, and Australia that are subject to foreign currency
fluctuations. As currency rates change, translation of income
statements of these operations from local currencies to US dollars
affects year-to-year comparability of operating results. The Company's
foreign operations represent 21.6% of the Company's consolidated
revenues for the year ended December 31, 2001. In addition, foreign
operations produced 20.0% of the business associated with domestic
revenues. Management does not expect the risk of foreign currency
fluctuations to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company being filed under this Item 8
can be found beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the
Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders (the
"Proxy Statement"), which is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
See Index to Financial Statements at page F-1.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
Exhibits
The following is a list of exhibits filed as part of this annual report
on Form 10-K. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically
except for in those situations where the exhibit number was the same as set
forth below.
3.1 Articles of Incorporation. (2)
3.2 Bylaws. (2)
9.1 Amended and Restated Voting Trust Agreement among John J.
Brennan, Donald P. Brennan and the Company, dated October 16,
2000. (1) (Exhibit 10.11)
9.3 Form of Voting Agreement between the Company and certain
option holders. (1) (Exhibit 10.13)
10.1 ICT Group, Inc. 1987 Stock Option Plan. (1) (2)+
10.2 ICT Group, Inc. Equity Incentive Plan. (1)+
10.3 ICT Group, Inc. Equity Compensation Plan. (2)+
10.4 ICT Group, Inc. 1996 Non-Employee Directors Plan. (2)+
10.5 Employment Agreement between John J. Brennan and the Company,
dated May 8, 1996. (2)+
10.7 Employment Agreement between John L. Magee and the Company,
dated April 1, 1987. (1)+
10.8 Employment Agreement between John D. Campbell and the Company,
dated October 1, 1987. (1)+
10.11 Amended and Restated Shareholders Agreement among John J.
Brennan, Donald P. Brennan, the Company and certain family
trusts, dated October 16, 2000. (1) (Exhibit 10.12)
18
10.14 Amended Employment Agreement between Vincent A. Paccapaniccia
and the Company, dated January 2, 2002
10.17 Employment Agreement between Timothy F. Kowalski and the
Company, dated July 7, 1997
10.18 Amended Employment Agreement between Vincent M. Dadamo and the
Company, dated January 2, 2002
10.19 ICT Group, Inc. Non-Qualified Deferred Compensation Plan
10.20 iCT ConnectedTouch Option Plan
10.21 Employment Agreement between Pam Goyke and the Company, dated
September 11, 2000
10.22 Amended Employment Agreement between Dean Kilpatrick and the
Company, dated January 2, 2002
10.23 Lease Agreement between Brandywine Operating Partnership,
L.P., dated January 23, 2001
10.24 Employment Agreement between Robert Mannarino and the Company,
dated June 18, 2001
21 List of Subsidiaries*
23 Consent of Independent Public Accountants*
99.1 Letter Regarding Arthur Andersen LLP*
---------
* Filed herewith.
+ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1 on
April 26, 1996 (Registration No. 333-4150).
(2) Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 on June 4, 1996 (Registration No. 333-4150).
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ICT GROUP, INC.
(Registrant)
Dated: March 29, 2002
By: /s/ John J. Brennan
---------------------------------
John J. Brennan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ John J. Brennan Chairman, Chief March 29, 2002
--------------------------------- Executive Officer and Director
John J. Brennan (principal executive officer)
By: /s/ Vincent A. Paccapaniccia Senior Vice President, Finance and March 29, 2002
--------------------------------- Administration, Chief Financial Officer
Vincent A. Paccapaniccia and Asst. Secretary (principal financial and
accounting officer)
By: /s/ Donald P. Brennan Director March 29, 2002
---------------------------------
Donald P. Brennan
By: /s/ Bernard Somers Director March 29, 2002
---------------------------------
Bernard Somers
By: /s/ John Stoops Director March 29, 2002
---------------------------------
John Stoops
By: /s/ Seth Lehr Director March 29, 2002
---------------------------------
Seth Lehr
20
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10.14 Amended Employment Agreement between Vincent A. Paccapaniccia
and the Company, dated January 2, 2002
10.18 Amended Employment Agreement between Vincent M. Dadamo and the
Company, dated January 2, 2002
10.22 Amended Employment Agreement between Dean Kilpatrick and the
Company, dated January 2, 2002
10.24 Employment Agreement between Robert Mannarino and the Company,
dated June 18, 2001
21 List of Subsidiaries*
23 Consent of Independent Public Accountants*
99.1 Letter Regarding Arthur Andersen LLP*
21
ICT GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
FINANCIAL STATEMENT SCHEDULE:
II. VALUATION AND QUALIFYING ACCOUNTS F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ICT Group, Inc.:
We have audited the accompanying consolidated balance sheets of ICT Group, Inc.
(a Pennsylvania corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements and schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ICT Group, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 1, 2002
F-2
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------
ASSETS 2001 2000
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,875,264 $ 8,539,170
Accounts receivable, net of allowance for doubtful accounts
of $1,746,936 and $684,103 48,058,068 42,411,274
Prepaid expenses and other 3,841,021 3,073,430
Deferred income taxes 916,274 306,943
--------------- ---------------
Total current assets 65,690,627 54,330,817
PROPERTY AND EQUIPMENT, net 33,235,820 36,160,410
DEFERRED INCOME TAXES 1,528,516 1,689,056
OTHER ASSETS 2,130,747 1,556,999
--------------- ---------------
$ 102,585,710 $ 93,737,282
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,000,000 $ 8,500,000
Current portion of long-term debt -- 4,000,000
Current portion of capitalized lease obligations -- 291,918
Accounts payable 9,050,216 10,433,489
Accrued expenses 10,560,878 6,643,796
Income taxes payable 3,313,354 1,184,842
--------------- ---------------
Total current liabilities 26,924,448 31,054,045
--------------- ---------------
LINE OF CREDIT 12,000,000 --
--------------- ---------------
LONG-TERM DEBT -- 6,000,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 40,000,000 shares authorized, 12,232,575 and
12,073,550 shares issued and outstanding 122,326 120,736
Additional paid-in capital 50,330,820 49,797,414
Retained earnings 16,260,940 8,283,211
Accumulated other comprehensive loss (3,052,824) (1,518,124)
--------------- ---------------
Total shareholders' equity 63,661,262 56,683,237
--------------- ---------------
$ 102,585,710 $ 93,737,282
=============== ===============
The accompanying notes are an integral part of these statements.
F-3
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES $239,323,748 $198,609,414 $153,049,467
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 133,815,612 111,545,354 84,390,236
Selling, general and administrative 91,945,313 74,825,658 60,079,796
------------ ------------ ------------
225,760,925 186,371,012 144,470,032
------------ ------------ ------------
Operating income 13,562,823 12,238,402 8,579,435
INTEREST EXPENSE 1,458,877 1,674,088 1,261,652
INTEREST INCOME (379,939) (467,171) (460,684)
------------ ------------ ------------
Income before income taxes 12,483,885 11,031,485 7,778,467
INCOME TAXES 4,506,156 4,302,279 3,033,462
------------ ------------ ------------
NET INCOME $ 7,977,729 $ 6,729,206 $ 4,745,005
============ ============ ============
EARNINGS PER SHARE:
Basic earnings per share $ 0.66 $ 0.56 $ 0.40
============ ============ ============
Diluted earnings per share $ 0.63 $ 0.54 $ 0.39
============ ============ ============
Shares used in computing basic earnings
per share 12,150,535 11,922,671 11,748,776
============ ============ ============
Shares used in computing diluted earnings
per share 12,682,060 12,454,151 12,261,075
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Deferred Retained Other Comp- Total
--------------------- Paid-in Compen- Earnings rehensive Shareholders'
Shares Amount Capital sation (Deficit) Loss Equity
---------- --------- ----------- -------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1998 11,642,475 $116,425 $49,334,130 $(53,716) $(3,191,000) $ (420,754) $45,785,085
Amortization of deferred compensation -- -- -- 53,716 -- -- 53,716
Exercise of stock options 167,550 1,675 68,286 -- -- -- 69,961
-----------
Comprehensive income:
Net income -- -- -- -- 4,745,005 -- 4,745,005
Currency translation adjustment -- -- -- -- -- (313,784) (313,784)
-----------
Total comprehensive income 4,431,221
---------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 11,810,025 118,100 49,402,416 -- 1,554,005 (734,538) 50,339,983
Amortization of deferred compensation -- -- -- -- -- --
Exercise of stock options 263,525 2,636 394,998 -- -- -- 397,634
-----------
Comprehensive income:
Net income -- -- -- -- 6,729,206 -- 6,729,206
Currency translation adjustment -- -- -- -- -- (783,586) (783,586)
-----------
Total comprehensive income 5,945,620
---------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 12,073,550 120,736 49,797,414 -- 8,283,211 (1,518,124) 56,683,237
Exercise of stock options 159,025 1,590 416,103 -- -- -- 417,693
-----------
Comprehensive income:
Net income -- -- -- -- 7,977,729 -- 7,977,729
Currency translation adjustment -- -- -- -- -- (1,534,700) (1,534,700)
-----------
Total comprehensive income 6,443,029
---------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 12,232,575 $122,326 $50,213,517 $ -- $16,260,940 $(3,052,824) $63,543,959
========== ======== =========== ======== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
ICT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,977,729 $ 6,729,206 $ 4,745,005
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 11,278,574 9,621,025 8,003,889
Deferred income tax expense (benefit) (448,791) 1,418,602 (64,583)
Tax benefit of stock option exercises 117,303 -- --
Amortization of deferred financing costs 252,197 -- --
(Increase) decrease in-
Accounts receivable (5,646,794) (13,614,921) (2,452,672)
Prepaid expenses and other (767,591) (474,012) (1,041,503)
Other assets (113,751) (44,161) 42,587
Increase (decrease) in-
Accounts payable (1,383,273) 2,564,672 984,738
Accrued expenses 3,917,082 1,612,778 1,425,649
Income taxes payable 2,128,512 1,184,842 (103,367)
------------ ------------ -----------
Net cash provided by operating activities 17,311,197 8,998,031 11,539,743
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,293,497) (16,270,917) (8,646,665)
-------------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 7,500,000 8,500,000
Payments on long-term debt (10,000,000) (4,000,000) (4,000,000)
Payments on capitalized lease obligations (291,918) (541,013) (665,487)
Debt issuance costs incurred (772,681) --- ---
Proceeds from exercise of stock options 417,693 397,634 69,961
------------ ------------ -----------
Net cash provided by (used in) financing
activities (3,146,906) 4,356,621 (4,595,526)
------------ ------------ -----------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (1,534,700) (783,586) (313,784)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,336,094 (3,699,851) (2,016,232)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 8,539,170 12,239,021 14,255,253
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,875,264 $ 8,539,170 $12,239,021
============ ============ ===========
The accompanying notes are an integral part of these statements.
F-6
ICT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
-----------
ICT Group, Inc. (incorporated in the state of Pennsylvania in 1987) and
subsidiaries (the "Company") is a leading global provider of integrated Customer
Relationship Management (CRM) solutions which help its clients identify,
acquire, retain, service, measure and maximize the lifetime value of their
customer relationships. The Company manages 44 customer contact centers in the
U.S., Europe, Canada and Australia from which it supports domestic and
multinational corporations and institutions, primarily in the financial,
insurance, telecommunications, healthcare, information technology, media and
energy services industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of ICT Group, Inc.
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation", substantially all assets and liabilities of the
Company's foreign subsidiaries are translated at the period-end currency
exchange rate and revenues and expenses are translated at an average currency
exchange rate for the period. The resulting translation adjustment is
accumulated in a separate component of shareholders' equity.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
The Company recognizes revenues 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
were $519,000 as of December 31, 2001 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.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less. Cash equivalents at December
31, 2001 consist of an overnight repurchase agreement, money market accounts and
investment-grade commercial paper.
F-7
Property and Equipment
- ----------------------
December 31,
-------------------------------
2001 2000
------------ ------------
Communications and computer equipment $ 60,371,352 $ 54,023,505
Furniture and fixtures 12,848,797 11,837,556
Leasehold improvements 7,548,812 6,614,403
------------- ------------
80,768,961 72,475,464
Less - Accumulated depreciation and
amortization (47,533,141) (36,315,054)
------------ ------------
$ 33,235,820 $ 36,160,410
============ ============
Property and equipment are recorded at cost. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets using the
straight-line method. The lives used are as follows:
Communications and computer equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements Lease term
Depreciation expense was $11,218,087, $9,531,142 and $7,860,290 for the years
ended December 31, 2001, 2000 and 1999, respectively. Repairs and maintenance
are charged to expense as incurred. Additions and betterments are capitalized.
Other Assets
- ------------
December 31,
--------------------------
2001 2000
---------- ----------
Deposits $1,027,396 $ 913,645
Goodwill, net of accumulated amortization of $399,401 and
$338,914 508,534 569,021
Deferred Financing Costs, net of accumulated amortization of
$177,864 and $277,297 594,817 74,333
---------- ----------
$2,130,747 $1,556,999
========== ==========
For the years ended December 31, 2001, 2000 and 1999, goodwill was amortized
over 15 years on a straight-line basis with amortization expense of $60,487 for
each of those years.
Deferred financing costs represent costs incurred by the Company in obtaining
its new line of credit (see note 3). These costs are being amortized ratably as
interest expense over the 3-year term of the agreement.
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.
F-8
Accrued Expenses
- ----------------
December 31,
-----------------------------
2001 2000
------------- -------------
Payroll and related benefits $ 7,363,387 $ 5,160,236
Telecommunications expense 1,001,079 559,289
Interest 53,000 220,157
Sales and VAT taxes 738,333 208,138
Deferred revenue 518,540 --
Other 886,539 495,976
------------- -------------
$ 10,560,878 $ 6,643,796
============= =============
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred income tax assets and liabilities are
determined based on differences between the financial reporting and income tax
bases of assets and liabilities measured using enacted income tax rates and laws
that are expected to be in effect when the differences reverse (see Note 4).
Supplemental Cash Flow Information
- ----------------------------------
For the years ended December 31, 2001, 2000 and 1999, the Company paid interest
of $1,626,034, $1,479,031, and $1,562,798, respectively. For the years ended
December 31, 2001, 2000 and 1999, the Company paid income taxes of $2,758,132,
$1,683,327 and $3,529,584, respectively.
Major Customers
- ---------------
The following table summarizes the percent of revenues during the years ended
December 31, 2001, 2000 and 1999 derived from each client that represented at
least 10 percent of revenues:
2001 2000 1999
---- ---- ----
Client A 17% 19% 17%
Client B 12% * *
* -- Less than 10 %
At December 31, 2001 and 2000, the above clients accounted for approximately 28%
and 16% of total accounts receivable, respectively.
In 2001, 2000 and 1999, revenues from customers within the insurance industry
accounted for 28%, 33% and 35% of total revenues, respectively, and customers
within the financial services industry accounted for 34%, 31% and 30% of total
revenues, respectively. The loss of the Company's major customers or a downturn
in the insurance or financial services industries could have a material adverse
effect on the Company's business.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and a
line of credit. The interest rate on $16 million of outstanding borrowings at
December 31, 2001 approximated market rates; thus, the fair value of the debt
approximates its reported value. Management believes that the carrying value of
these assets and liabilities are representative of their respective fair values
due to the short-term nature of those instruments.
F-9
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents and accounts
receivable. The Company performs periodic evaluations of the relative credit
standing of the financial institutions with which it does business. Accounts
receivable are subject to the financial conditions of its customers. The Company
periodically evaluates the financial conditions of its customers and generally
does not require collateral. The Company's allowance for doubtful accounts
reflects current market conditions and management's assessment regarding the
collectibility of its receivables. The Company maintains cash accounts that at
times may exceed federally insured limits. The Company has not experienced any
losses from maintaining cash accounts in excess of such limits. Management
believes that it is not exposed to any significant risks on its cash accounts.
Earnings Per Share
- ------------------
The Company follows 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 years ended December
31, 2001, 2000 and 1999, the dilutive effect of Common Stock equivalents used in
computing Diluted EPS was 531,525, 531,480 and 512,299, respectively. For the
years ended December 31, 2001, 2000 and 1999, options to purchase 271,500,
365,875 and 68,500 shares of Common Stock, respectively, were outstanding but
not included in the computation of Diluted EPS as the result would be
antidilutive.
Comprehensive Income (Loss)
- ---------------------------
The Company follows SFAS No. 130, "Reporting Comprehensive Income". This
statement requires companies to classify items of other comprehensive income
(loss) by their nature in a financial statement and display the accumulated
balance of other comprehensive income (loss) separately from retained earnings
and additional paid-in capital in the equity section of the balance sheet. At
December 31, 2001 and 2000, accumulated other comprehensive loss consists of
foreign currency translation adjustments.
New 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 any 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. SFAS No.
144 supercedes 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 has adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS
No. 144 on January 1, 2002 had no impact on the Company's financial position or
results of operations.
F-10
3. LINES OF CREDIT AND LONG-TERM DEBT:
-----------------------------------
In April 2001, the Company entered into a new credit agreement with a group of
banks that provides for a three-year, secured revolving credit facility (the
"Credit Facility") with an aggregate commitment of $85.0 million. The Credit
Facility includes sub-limits for both foreign denominated loans and letters of
credit. Under the Credit Facility, the Company has two borrowing options, either
a "Base Rate" option, defined as the higher of federal funds plus .5% or prime,
or a Eurodollar rate option, defined as LIBOR plus a spread ranging from 1.25%
to 2.25%, depending on the Company's ratio of funded debt to EBITDA. The Company
is required to pay a quarterly commitment fee ranging from .25% to .50% of the
unused amount, as well as a quarterly low usage fee ranging from 0% to .05%,
based on the Company's ratio of funded debt to EBITDA. The Credit Facility
contains certain affirmative and negative covenants including financial
covenants requiring the maintenance of specified levels of consolidated
leverage, consolidated fixed charges, and minimum net worth. The Company was in
compliance with all covenants as of December 31, 2001.
Upon closing of the Credit Facility, all amounts outstanding under the previous
line of credit and term loans were repaid. There was no penalty associated with
the repayment of these amounts. The Credit Facility can be drawn upon through
April 2004, at which time all amounts outstanding are repayable.
At December 31, 2001, $16,000,000 of borrowings were outstanding under the
Credit Facility. At December 31, 2001, $12,000,000 has been classified as
long-term and $4,000,000 has been classified as current as management has the
intent and ability to repay that amount during 2002. There were no outstanding
foreign currency loans nor were there any outstanding letters of credit at
December 31, 2001. The amount of the unused Credit Facility at December 31, 2001
was $69,000,000.
The Company incurred interest expense of $1,053,968 and $768,338 and $0 under
its lines of credit for the years ended December 31, 2001, 2000 and 1999,
respectively. The effective interest rate on borrowings under the Credit
Facility at December 31, 2001 was 3.18%. The weighted average interest rate on
borrowings under lines of credit was 4.8% and 8.4%, respectively for the years
ended December 31, 2001 and 2000.
Borrowings under the Credit Facility are secured by substantially all of the
Company's assets, as well as the capital stock of the Company's subsidiaries.
4. INCOME TAXES:
-------------
The components of the income before income taxes are as follows:
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Domestic $ 7,539,152 $ 8,022,414 $ 7,519,791
Foreign 4,944,733 3,009,071 258,676
--------------- --------------- ---------------
$ 12,483,885 $ 11,031,485 $ 7,778,467
=============== =============== ===============
The components of the income tax provision are as follows:
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999
-------------- -------------- ---------------
Current:
Federal $ 4,490,027 $ 1,611,557 $ 2,680,365
State 175,000 160,000 --
Foreign 289,920 1,112,120 417,680
-------------- -------------- ---------------
4,954,947 2,883,677 3,098,045
-------------- -------------- ---------------
Deferred:
Federal (281,512) 1,605,002 123,445
State -- -- (38,548)
Foreign (167,279) (186,400) (149,480)
-------------- -------------- ---------------
(448,791) 1,418,602 (64,583)
-------------- -------------- ---------------
$ 4,506,156 $ 4,302,279 $ 3,033,462
============== ============== ===============
F-11
The approximate income tax effect of each type of temporary difference is as
follows:
December 31,
-------------------------
2001 2000
----------- -----------
Deferred tax assets:
Nonrecurring compensation expense $ 1,999,552 $ 2,487,958
Accruals and reserves not currently
deductible for tax 916,274 306,943
Foreign net operating loss carryforwards 547,713 380,434
----------- -----------
$ 3,463,539 $ 3,175,335
=========== ===========
Deferred tax liabilities:
Depreciation methods (330,310) (666,630)
Other (688,439) (512,706)
----------- -----------
$(1,018,749) $(1,179,336)
=========== ============
The Company has recorded no valuation reserve for deferred tax assets as of
December 31, 2001. 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. At
December 31, 2001, a non-US subsidiary of the Company had net operating loss
carryforwards for tax purposes of approximately $1.6 million that do not expire.
At December 31, 2001, the Company had no valuation reserve for its foreign net
operating loss carryforwards as management believes it is more likely than not
that the tax benefit of these carryforwards will be realized.
At December 31, 2001, there were approximately $4,962,872 of accumulated
undistributed earnings of non-U.S. subsidiaries that are considered to be
reinvested indefinitely. If such earnings were remitted to the Company,
applicable U.S. federal income and foreign withholding taxes may be partially
offset by foreign tax credits.
In June 1996, the Company recorded a nonrecurring compensation charge of $12.7
million relating to the extension of stock options. In connection with the
compensation charge, the Company recorded a deferred tax benefit of $4.7 million
based on the then excess of the Company's stock price ($16 per share) over the
exercise price of the extended options. To the extent the stock price is below
$16 per share when the options are exercised, the actual tax deduction the
Company will receive will be less than the carrying amount of the deferred tax
asset. Based on the Company's stock price at December 31, 2001 of $18.61 per
share, there would have been no impairment if all of the extended options had
been exercised.
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Year Ended December 31,
------------------------------------------
2001 2000 1999
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 1.0 1.0 0.2
Other 1.0 4.0 4.8
-------------------------------------------
36.0% 39.0% 39.0%
========= ========= =========
F-12
5. PROFIT SHARING PLAN:
--------------------
The Company maintains a trusteed profit sharing plan (Section 401(k)) for all
qualified employees, as defined. The Company matches 50% of employee
contributions, up to a maximum of 6% of the employee's compensation; however, it
may also make additional contributions to the Plan based upon profit levels and
other factors. No such additional contributions were made in 2001, 2000 or 1999.
Employees are fully vested in their contributions, while full vesting for the
Company's contributions occurs upon death, disability, retirement or completion
of five years of service. In 2001, 2000 and 1999, the Company's contributions
were $613,725, $562,806 and $446,050, respectively. The Plan's trustees are the
management of the Company.
In 1999, the Company adopted a Non-Qualified Deferred Compensation Plan for
certain employees and deferrals commenced in April 2000. This plan allows
certain employees to defer a portion of their compensation on a pre-tax basis.
Employees are fully vested in their deferred amounts, but withdrawals are not
permitted until the plan is terminated, the employee attains age 65, or the
employee terminates, becomes disabled, or dies. Other withdrawals are permitted
for unforeseeable emergencies only. In 2001, the Company matched 10% of employee
deferrals, up to certain limits with vesting of Company matching contributions
occurring ratably over three years. This amount totaled $61,574. There was no
Company match in 2000.
6. EQUITY PLANS:
-------------
Stock Option Plans
- ------------------
The Company's 1996 Equity Compensation Plan authorizes up to 1,620,000 shares of
Common Stock for issuance in connection with the granting to employees and
consultants of incentive and nonqualified stock options, restricted stock, stock
appreciation rights and other awards based on the Company's Common Stock. The
options to be granted and the option prices are established by the Board of
Directors or a committee composed of two or more of its members. Incentive stock
options are granted at prices not less than fair market value. Options are
exercisable for periods not to exceed ten years, as determined by the Board of
Directors or its committee and generally vest over a three-year period. As of
December 31, 2001, 356,050 shares of Common Stock were available for grant under
the plan.
The Company's 1996 Non-Employee Director Plan authorizes up to 50,000 shares of
Common Stock for issuances of nonqualified stock options to non-employee
directors. As of December 31, 2001, 12,500 shares of Common Stock are available
for grant under this plan.
In connection with the Company's 1987 Stock Option Plan, options to purchase
1,530,000 shares of Common Stock were authorized for issuance. No future grants
will be made under this plan.
Equity Incentive Plan
- ---------------------
In December 1995, the Company adopted an Equity Incentive Plan that provided for
the issuance of up to 270,000 Equity Incentive Units ("Units"). In December
1995, the Company awarded 159,300 Units with a purchase price of $1.02 per Unit.
Each Unit allows the holder the right to purchase one share of Common Stock at a
specified price. Units are exercisable for a period not to exceed ten years from
the date of grant. As of December 31, 2001, there were 49,000 Units
outstanding. No more Units will be granted under the Equity Incentive Plan.
iCT ConnectedTouch Equity Incentive Plan
- ----------------------------------------
The Company formed iCT ConnectedTouch LLC ("ConnectedTouch") in February 2000 as
a wholly-owned subsidiary of the Company.
In 2000, ConnectedTouch issued options to purchase 961,000 interests to
employees of the Company and ConnectedTouch and each member of the Company's
Board of Directors. These options were issued at an exercise price of $0.30 per
interest, the fair market value of the interests at the time of grant as
determined by an independent financial advisor retained by the Company.
Effective November 30, 2001, ConnectedTouch was merged into the Company and all
outstanding options described above were terminated with no consideration
offered to any option holders.
F-13
Information with respect to the options granted under the Company's stock option
plans and Units is as follows:
Weighted
Exercise Average Exercise
Shares Price Price
--------- -------------- ----------------
Outstanding, December 31, 1998 1,235,650 $ .04 - $16.25 $ 2.22
Granted 300,800 3.40 - 11.00 3.91
Exercised (167,550) .04 - 4.75 .45
Canceled (40,475) 1.02 - 16.00 6.30
---------
Outstanding, December 31, 1999 1,328,425 .04 - 16.25 2.71
Granted 430,400 6.00 - 11.94 9.90
Exercised (263,525) .04 - 10.00 1.51
Canceled (113,400) 1.02 - 16.00 8.33
---------
Outstanding, December 31, 2000 1,381,900 .04 - 16.25 4.69
Granted 324,600 8.75 - 16.45 12.05
Exercised (156,025) .04 - 11.00 2.58
Canceled (19,650) 1.02 - 11.00 8.61
---------
Outstanding, December 31, 2001 1,530,825 $ .04 - 16.45 $ 6.41
=========
The following table summarizes information about stock options and units
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
------------------ ------------ --------- -------- ----------- ----------
$ .04 to $ 1.62 385,875 3 $ .30 385,875 $ .30
$1.63 to $ 4.87 192,450 7 3.45 125,600 3.42
$4.88 to $ 9.75 472,800 7 6.76 309,775 5.86
$9.76 to $16.45 479,700 9 12.18 137,675 11.81
---------- ---------
$ .04 to $16.45 1,530,825 7 $ 6.41 958,925 $ 4.16
========== =========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock options granted employees. The Company follows the disclosure
requirement of SFAS No. 123, "Accounting for Stock-Based Compensation". Had
compensation cost for the Company's stock-based compensation plans been
determined under SFAS No. 123, the Company's net income and earnings per share
would have been decreased to the following pro forma amounts:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ---------
Net income, as reported $ 7,977,729 $ 6,729,206 $ 4,745,005
Pro forma net income $ 7,240,945 $ 6,136,307 $ 4,131,810
Diluted EPS, as reported $ 0.63 $ 0.54 $ 0.39
Pro forma Diluted EPS $ 0.57 $ 0.49 $ 0.34
F-14
The weighted average fair value of the options granted in 2001, 2000 and 1999 is
estimated at $6.72, $4.24 and $2.05 per share, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: no expected dividend yield, volatility of 85%, weighted average
risk-free interest rate of 4% in 2001, 7% in 2000 and 5% in 1999, and an
expected life of two years in 2001, 2000 and 1999.
7. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company leases office facilities and certain equipment under operating
leases. Rent expense was $17,764,470, $13,006,831 and $9,716,388 for the years
ended December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001,
future minimum rentals for all operating leases are as follows:
2002 $ 19,371,679
2003 17,785,166
2004 15,165,809
2005 11,552,357
2006 5,998,954
2007 and thereafter 38,902,631
The Company enters into agreements with its telephone long-distance carriers
ranging from one to three years, which provide for, among other things, annual
minimum purchases and termination penalties.
From time to time, the Company is involved in certain legal actions arising in
the ordinary course of business. In management's opinion, the outcome of such
actions will not have a material adverse effect on the Company's financial
position or results of operations.
As previously reported by the Company, on October 23, 1997, a shareholder,
purporting to act on behalf of a class of ICT shareholders filed a complaint in
the United States District Court for the Eastern District of Pennsylvania
against the Company and certain of its directors. The complaint alleges that the
defendants violated the federal securities laws, and seeks compensatory and
other damages, including rescission of stock purchases made by the plaintiff and
other class members in connection with the Company's initial public offering
effective June 14, 1996. The defendants believe the complaint is without merit,
deny all of the allegations of wrongdoing and are vigorously defending the suit.
On February 2, 1998, the defendants filed a motion to dismiss the complaint. On
May 19, 1998, the complaint was dismissed by a judge for the United States
District Court for the Eastern District of Pennsylvania with leave to plaintiff
to file an amended complaint on narrow accounting allegations. On June 22, 1998,
plaintiffs filed a First Amended Class Action Complaint purporting to bring
negligence claims in connection with the Company's initial public offering. The
defendants continue to deny all allegations of wrongdoing, believe the amended
complaint is without merit and are vigorously defending the suit. On November 3,
1998, the court granted a motion appointing Rowan Klein and Michael Mandat as
lead plaintiffs. On February 2, 1999, the court dismissed the case without
prejudice, directing that the case remain in status quo, that the statute of
limitations be tolled and that the parties continue with discovery and advise
the court if assistance by the court is needed. Since that time the defendants
filed a motion for summary judgement 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 judgement 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 among other things to 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.
F-15
As previously reported by the Company on July 12, 1996, Main Street Marketing of
America Incorporated ("Main Street Marketing") brought a demand for arbitration
against the Company in the Commonwealth of Pennsylvania before the American
Arbitration Association claiming damages as a 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, data processing and customer support
services relating to Main Street Marketing's magazine subscription program
during 1995 and 1996. Main Street Marketing alleged that the Company committed
various breaches of the service agreement and demanded an award in excess of $15
million. The Company responded to this demand for arbitration by denying
liability and counterclaiming in an amount in excess of $125,000. The
arbitration hearing in this matter commenced on July 30, 2001. Prior to the
completion of the hearing, Main Street Marketing and the Company agreed to
settle and finally resolve all claims of the parties and to release each other
from any further liability with respect thereto.
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
The Company has renewable employment agreements with ten key executives with
terms ranging from one to three years. The agreements provide for, among other
things, severance payments ranging from six months to three years.
F-16
8. 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,
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, and Australia and
includes business conducted by Spantel for the US Hispanic market.
For the Year Ended December 31,
---------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------
(In thousands)
Revenues:
Domestic CRM Services $ 175,547 $ 146,445 $ 129,041
International CRM Services 63,777 52,164 24,008
----------------- ----------------- -----------
$ 239,324 $ 198,609 $ 153,049
================= ================= ===========
Operating income (loss):
Domestic CRM Services $ 6,695 $ 7,445 $ 8,678
International CRM Services 6,868 4,793 (99)
----------------- ----------------- -----------
$ 13,563 $ 12,238 $ 8,579
================= ================= ===========
Total assets:
Domestic CRM Services $ 67,769 $ 61,245 $ 57,261
International CRM Services 28,818 28,995 15,777
Corporate 5,999 3,497 5,035
----------------- ----------------- -----------
$ 102,586 $ 93,737 $ 78,073
================= ================= ===========
Depreciation and amortization:
Domestic CRM Services $ 5,749 $ 5,023 $ 4,844
International CRM Services 3,237 2,594 1,793
Corporate 2,293 2,004 1,367
----------------- ----------------- -----------
$ 11,279 $ 9,621 $ 8,004
================= ================= ===========
Capital expenditures:
Domestic CRM Services $ 5,473 $ 9,468 $ 3,069
International CRM Services 996 5,707 5,036
Corporate 1,824 1,096 542
----------------- ----------------- -----------
$ 8,293 $ 16,271 $ 8,647
================= ================= ===========
F-17
The following table represents information about the Company by geographic area:
For the Year Ended December 31,
--------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------
(In thousands)
Revenues:
United States $ 187,650 $ 155,898 $ 134,018
Canada 28,503 24,415 9,155
Europe 19,607 15,333 8,391
Australia 3,564 2,963 1,485
----------------- ----------------- -----------
$ 239,324 $ 198,609 $ 153,049
================= ================= ===========
Operating income (loss):
United States $ 8,356 $ 8,967 $ 9,395
Canada 4,835 2,974 1,186
Europe 883 1,068 (1,650)
Australia (511) (771) (352)
----------------- ----------------- -----------
$ 13,563 $ 12,238 $ 8,579
================= ================= ===========
Total assets:
United States $ 73,768 $ 64,842 $ 62,496
Canada 11,583 12,382 6,388
Europe 14,599 14,199 8,516
Australia 2,636 2,314 673
----------------- ----------------- -----------
$ 102,586 $ 93,737 $ 78,073
================= ================= ===========
9. QUARTERLY FINANCIAL DATA (unaudited):
-------------------------------------
(in Thousands Except per Share Data)
Quarter Ended
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
2001 2000 2001 2000 2001 2000 2001 2000
------- ------- ------- ------- ------- ------- ------- -------
Revenues $57,772 $41,285 $58,004 $48,126 $55,816 $51,445 $67,732 $57,753
Gross margin 25,713 17,835 25,865 21,197 23,682 21,888 30,248 26,144
Operating income 3,585 2,154 3,807 3,107 1,190 2,961 4,981 4,016
Income before
income taxes 3,227 1,987 3,595 2,807 953 2,587 4,709 3,650
Net income 2,033 1,212 2,265 1,712 619 1,578 3,061 2,227
Diluted earnings
per share 0.16 0.10 0.18 0.14 0.05 0.13 0.24 0.18
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.
F-18
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 fall. In the first quarter, CRM Services
activity generally levels off or slows 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 addition, the Company
typically expands its 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 business decreases during the summer months. In addition, the
Company's operating expenses increase during the third quarter as it expands its
capacity in anticipation of higher demand for its services during the fourth
quarter.
F-19
ICT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance,
Beginning Charged to Balance,
Description of Year Expense Deductions End of Year
- ------------------------------------------ ---------------- ------------- ----------------- -------------
Allowance for doubtful accounts:
2001 $ 684,103 $ 1,891,920 $ (829,087) $ 1,746,936
2000 804,588 831,998 (952,483) 684,103
1999 514,897 1,145,177 (855,486) 804,588
F-20