| ICT GROUP INC ITEM 1A RISK FACTORS An investment in our Company involves a substantial risk of loss |
| You should carefully consider the risks described below together with all of the other information included in this Annual Report on Form 10-K before making an investment decision |
| The risks and uncertainties described below are not the only ones facing us |
| RISKS RELATING TO OUR BUSINESS We may not be able to manage our growth effectively, which could adversely affect our results of operations |
| We have experienced rapid growth over the past few years and currently expect to continue a high rate of growth |
| Rapid growth places a significant strain on our management, operations and resources |
| Our future performance and profitability will depend on our ability to: • build our infrastructure to meet the demands of our clients; • successfully recruit, train and retain qualified personnel in a cost-effective manner; • maintain state-of-the-art technology to compete effectively in the CRM industry; • effectively oversee and manage our CRM contact centers as we expand geographically, including internationally; • effectively manage the growth and implementation of our customer contact centers; • successfully introduce newer cost-effective, offshore, near-shore and home-shore CRM solutions; • select and serve new vertical markets; • successfully expand our service offerings from our core customer relationship management business to include enhanced technology, marketing and business process outsourcing services; • successfully integrate any acquired businesses; • manage our business in light of general economic conditions and conditions which may affect in particular our clients and other companies in the markets we serve; • manage our operating costs as we expand and grow our business; and • maximize the income tax benefits from the locations in which we operate under tax holidays |
| 8 ______________________________________________________________________ [37]Table of Contents If we are unable to keep pace with technological changes, our business will be harmed |
| Our business is highly dependent on our computer and telecommunications equipment and software capabilities |
| Our failure to maintain the competitiveness of our technological capabilities or to respond effectively to technological changes could have a material adverse effect on our business, results of operations or financial condition |
| Our continued growth and future profitability will be highly dependent on a number of factors, including our ability to: • expand our existing solutions offerings; • achieve cost efficiencies in our existing CRM contact center operations; • introduce new solutions that leverage and respond to changing technological developments; and • stay current with technology advances |
| There can be no assurance that technologies or services developed by our competitors or vendors will not render our products or services non-competitive or obsolete, that we can successfully develop and market any new services or products, that any such new services or products will be commercially successful or that the integration of automated customer support capabilities will achieve intended cost reductions |
| In addition, the inability of equipment vendors and service providers to supply equipment and services on a timely basis could harm our operations and financial condition |
| Our results of operations may be subject to significant fluctuations |
| Our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a wide variety of factors, including: • the commencement and expiration or termination of contracts; • our revenue mix; • the amount and timing of new business; • the impact of litigation and associated costs; • the financial strength of our clients and the collectibility of our receivables; • our ability to successfully open new customer relationship management contact centers or to expand existing centers in a timely fashion; • the timing of additional selling, general and administrative expenses; • competitive conditions in our industry; • our sources of pre-tax income, which will impact our overall effective tax rate; and • changes in statutory income tax rates and tax laws in the jurisdictions we operate |
| Historically, our business has been strongest in the fourth quarter due to the high level of client sales activity during the fall holiday season |
| In the past, during the first quarter, CRM services activity generally leveled off or slowed from the previous quarter as a result of reduced client sales activity and client transitions to new marketing programs during the first quarter of the calendar year |
| In addition, we have generally expanded our operations in the first and third quarters, without a commensurate increase in revenues in those quarters, to support anticipated business growth beginning in the second and fourth quarters, respectively |
| However, more recently, we have experienced quarterly fluctuations in our business as a result of other factors, such as the timing of demand for the particular services we offer in the specific geographical areas we service |
| Due to these factors, our quarterly revenues, expenses and results of operations could vary significantly in the future |
| You should take these factors into account when evaluating past periods and, because of the potential variability in our quarterly results, you should not rely upon results of past periods as an indication of our future performance |
| In addition, because our operating results may vary significantly from quarter to quarter, results may not meet the expectations of securities analysts and investors, and this could cause the price of our common stock to fluctuate significantly |
| 9 ______________________________________________________________________ [38]Table of Contents Our contracts often are short-term or may be subject to early termination by our clients, which could cause our operating results to fluctuate |
| We generally operate under month-to-month contractual relationships with our teleservices clients |
| The potentially brief duration of certain teleservices programs we implement for clients could cause our operating results to fluctuate |
| In addition, while our customer care management services unit generally enters into longer-term contractual relationships, those contracts often provide for early termination at the client’s discretion |
| Certain of those contracts require the client to pay a contractually agreed amount in the event of early termination, but others do not |
| We cannot assure you that we will be able to collect such amount or that such amount, if received, will sufficiently compensate us for our investment in the canceled program or for the revenues we may lose as a result of early termination |
| We generate a significant portion of our revenue from a small number of major clients |
| For the year ended December 31, 2005, our top ten clients accounted for 48prca of our total revenue |
| The loss of one of these clients or the failure to maintain the current service level volumes for these customers could have a material adverse effect on our business, financial condition and results of operations |
| Many of our contracts are cancelable by the customer with limited notice, therefore these contracts do not necessarily ensure that we will generate a minimum level of revenue to cover our fixed operating costs |
| We depend on particular industries for a majority of our revenues |
| We currently generate a majority of our revenues from clients in the financial services, healthcare and telecommunications industries |
| Our growth and financial results are largely dependent on continued demand for our services from clients in these industries and current trends in these industries to outsource certain CRM services |
| If any of these industries experience a downturn, our clients in these sectors may do less business with us, or they may elect to perform the services provided by us in-house |
| If there are any trends in any of these industries to reduce or eliminate the use of outsourced CRM services, our financial results could be negatively affected |
| Our revenue, by industry is as follows: For the years ended December 31, 2005 2004 2003 Financial Services and insurance 51 % 52 % 53 % Telecommunications & information technology 29 % 32 % 33 % Pharmaceutical and health care 13 % 10 % 10 % Other 7 % 6 % 4 % We may be unable to cost-effectively hire or retain qualified personnel, which could materially increase our costs |
| Our business is labor intensive and is characterized by high personnel turnover, particularly at new contact centers |
| A higher turnover rate among our employees would increase our recruiting and training costs and decrease operating efficiencies and productivity |
| Some of our operations require specially trained employees and growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time |
| We may not be able to successfully hire, train and retain sufficient qualified personnel to adequately staff for existing business or future growth, particularly when we undertake new client relationships in industries in which we have not previously provided services |
| In addition, a significant portion of our costs consists of wages paid to hourly workers |
| An increase in hourly wages, costs of employee benefits or employment taxes could materially adversely affect us |
| Our profitability will be adversely affected if we do not maintain sufficient capacity utilization |
| Our profitability is influenced significantly by how we utilize our workstation capacity |
| We attempt to maximize utilization during all periods |
| However, because much of our business is inbound, we typically experience significantly higher utilization during peak (weekday) periods than during off-peak (night and weekend) periods |
| In addition, we have experienced, and in the future may experience, at least in the short-term, idle peak period capacity when we open a new customer interaction center or terminate or complete a large client program |
| From time to time we assess the expected long-term capacity utilization of our centers |
| Accordingly, we may, if deemed necessary, consolidate or shutdown under-performing centers in order to maintain or improve targeted utilization and margins |
| There can be no assurance that we will be able to achieve or maintain optimal customer interaction center capacity utilization |
| 10 ______________________________________________________________________ [39]Table of Contents Interruptions or failures of our technology infrastructure could harm our business and reputation |
| We are highly dependent on the stability of our computer and communications equipment, systems and software |
| These systems could be interrupted by natural disasters, power losses, operating malfunctions or computer viruses and other disruptions caused by unauthorized or illegal access to our systems |
| If an interruption occurs, the contracts that we have with our clients may provide for damages and for termination or re-negotiation |
| Our property damage insurance may not adequately compensate us for any losses we may incur |
| Although we have put in place a disaster recovery program, any interruption in or failure of our technology equipment systems could have a material adverse effect on our business |
| A significant interruption in telephone service could harm our business |
| Any significant interruption in telephone service or developments that could limit the ability of telephone companies to provide us with increased capacity in the future could harm our existing operations and prospects for future growth |
| Any future acquisitions we decide to undertake will involve risks |
| We have grown our business primarily through internal expansion, and we expect to continue our growth through both internal expansion and selective acquisitions of companies that would augment our service offerings, facilitate our entry into new sectors and/or geographic markets and otherwise expand our efforts in the CRM business |
| We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities, reach mutually agreeable terms with acquisition candidates or obtain additional financing, if amounts in excess of the availability under our existing credit facility are necessary, to pay for any acquisitions that we undertake |
| The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources |
| Future acquisitions by us could result in: • dilutive issuances of equity securities; • a decline in our operating results; • incurrence of debt and contingent liabilities; • recording of goodwill and other intangibles that could become impaired; and • other acquisition-related expenses |
| Any businesses we acquire in the future may not generate sales and profitability sufficient to justify our investment |
| If we fail to successfully integrate an acquired business, we may not be able to realize the synergies we anticipated in valuing that business |
| In addition, to the extent that consolidation becomes more prevalent in our industry, the prices for suitable acquisition candidates may increase to unacceptable levels and thus limit our ability to grow through acquisitions |
| Our international operations are susceptible to business and political risks that could adversely affect our results of operations |
| We have business locations in various countries outside the United States, including Canada, Ireland, the United Kingdom, Australia, Mexico, Barbados and the Philippines |
| As of December 31, 2005, 50prca of our employees are located outside the United States and generate a significant amount of our revenue |
| Additionally, North American companies have created a demand for offshore customer care outsourcing capacity |
| As a result, we expect to continue expansion through start-up operations and acquisitions in additional countries |
| Expansion of our existing international operations and entry into additional countries will require management attention and financial resources |
| In addition, there are certain risks inherent in conducting business internationally including: the imposition of trade barriers, foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivable collection, difficulties in complying with a variety of foreign laws, changes in legal or regulatory requirements, difficulties in staffing and managing foreign operations, political instability and potentially adverse tax consequences |
| To the extent we experience these risks, our business and results of operations could be adversely affected |
| We conduct our business in various foreign currencies and are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact our results of operations and financial condition |
| While we do attempt to mitigate some of this risk through hedging arrangements, to the extent these arrangements are ineffective we may not be successful in mitigating this risk |
| We also are subject to certain exposures arising from the translation and consolidation of the financial results of our foreign subsidiaries |
| A significant change in the value of the dollar against the currency of one or more countries in which we operate may have a material adverse effect on our results of operations |
| 11 ______________________________________________________________________ [40]Table of Contents Future litigation may result in significant costs for defense purposes or for settlement purposes, both of which may or may not be covered by our current insurance programs |
| Litigation may also take away management focus from the business and could significantly impact our financial results |
| We disclose that our business, not unlike other businesses, may face litigation from time to time |
| In 2005, we settled a large class action lawsuit for alleged wage rate violations for dlra14dtta75 million |
| Although this specific litigation was resolved, we cannot predict whether any other material suits, claims, or investigations may arise in the future for similar claims |
| Irrespective of the outcome of any potential lawsuits or potential actions, claims, or investigations relating to the same or any other subject matter, we may incur substantial defense costs and possibly settlement costs, which may or may not be covered in their entirety by insurance |
| Litigation may also take away management focus from the business, which, in addition to the costs that we may incur, could result in harm to our business, financial condition, results of operations and cash flows |
| Our business could be significantly disrupted if we lose members of our management team |
| We believe that our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group |
| Our future performance will be substantially dependent on our ability to retain them |
| The loss of the services of any of our executive officers, particularly John J Brennan, our Chief Executive Officer, could prevent us from executing our business strategy |
| We may not be able to effectively win business against our competition |
| The CRM solutions industry is highly competitive |
| We compete with: • the in-house CRM operations of our clients or potential clients; • other outsourced CRM providers, some of which have greater resources than we have; and • providers of other marketing and CRM formats and, in particular, other forms of direct marketing such as interactive shopping and data collection through television, the internet and other media |
| Many businesses that are significant consumers of CRM solutions use more than one CRM solutions firm at a time and reallocate work among various firms from time to time |
| We and other firms seeking to perform outsourced CRM solutions are frequently required to compete with each other as individual programs are initiated |
| We cannot be certain that we will be able to compete effectively against our current competitors or that additional competitors, some of which may have greater resources than we have, will not enter the industry and compete effectively against us |
| As competition in the industry increases, we may face increasing pressure on the prices for our services |
| If the trend toward outsourcing or the growth in the industries we serve decreases, our growth may suffer |
| Our growth depends in part on continued demand for our services prompted by the outsourcing trend, as well as continued growth in the industries we serve |
| If interest in outsourcing wanes because of economic, political, or other conditions, or if there is a significant downturn in the industries in which we operate, our business and our growth could suffer |
| Consumer resistance to our services could harm our industry |
| As the CRM solutions industry continues to grow, the effectiveness of CRM solutions as a direct marketing tool may decrease as a result of consumer saturation and increased consumer resistance to customer acquisition activities, particularly direct sales |
| Government regulation of our industry and the industries we serve may increase our costs and restrict the operation and growth of our business |
| Both the United States Federal and various state governments regulate our business and the CRM solutions industry as a whole |
| The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the FTC to issue regulations restricting certain telemarketing practices and prohibiting misrepresentations in telephone sales |
| The FTC regulations implementing this Act are commonly referred to as the Telemarketing Sales Rule |
| Our operations outside the United States are also subject to regulation |
| In addition to current laws, rules and regulations that regulate our business, bills are frequently introduced in Congress to regulate the use of credit information |
| We cannot predict whether additional Federal or state legislation will be enacted that regulates our business |
| Additional Federal or state legislation could limit our activities or increase our cost of doing business, which could cause our operating results to suffer |
| 12 ______________________________________________________________________ [41]Table of Contents Several of the industries we serve, particularly the insurance, financial services, pharmaceutical, healthcare and telecommunications industries, are subject to government regulation |
| We could be subject to a variety of regulatory enforcement or private actions for our failure or the failure of our clients to comply with these regulations |
| Our results of operations could be adversely impacted if the effect of government regulation of the industries we serve is to reduce the demand for our services or expose us to potential liability |
| We and our employees who sell insurance products are required to be licensed by various state insurance commissions for the particular type of insurance product sold and to participate in regular continuing education programs |
| Our participation in these insurance programs requires us to comply with certain state regulations, changes in which could materially increase our operating costs associated with complying with these regulations |
| Terrorism and the possibility of further acts of violence or war may have a material adverse effect on our operations |
| Terrorist attacks, such as those that occurred on September 11, 2001, the response by the United States and further acts of violence or war may affect the market on which our common stock trades, the markets in which we operate, our operations and profitability and your investment |
| Further terrorist attacks against the United States or other countries may occur |
| The potential near-term and long-term effect of these attacks on our business, the market for our common stock and the global economy is uncertain |
| The consequences of any terrorist attacks, or any armed conflicts that may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or the trading price of our common stock |
| Security and privacy breaches of the systems we use to protect personal data could adversely affect our business, results of operations and financial condition |
| Our databases contain personal data of our clients’ customers, including credit card and healthcare information |
| Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services |
| Our data security procedures may not effectively address evolving security risks or address the security and privacy concerns of existing or potential clients |
| Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations |
| Our business may be affected by the success of our clients |
| In substantially all of our client programs, we generate revenue based, in large part, on the amount of time our customer service representatives devote to our clients’ customers |
| Consequently, the amount of revenue generated from any particular client program is dependent upon consumers’ interest in, and use of, the client’s products and/or services |
| There can be no assurance that our clients will continue to market products and services or develop new products and services that require them to use our services |
| We may not be able to adequately protect our proprietary information or technology |
| Third parties may infringe upon or misappropriate our trademarks, trade names, trade secrets or other intellectual property rights, which could adversely affect our business, results of operations and financial condition, and litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others |
| The steps we have taken to deter misappropriation of our proprietary information and technology or client data may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information |
| Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights |
| In addition, because we operate in many foreign jurisdictions, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate or others |
| Our technology and services may infringe upon the intellectual property rights of others |
| Third parties may assert claims against us alleging that we are violating or infringing upon their intellectual property rights |
| Any claims and any resulting litigation could subject us to significant liability for damages |
| An adverse determination in any litigation of this type could require us to design around a third party’s patent, license alternative technology from another party or reduce or modify our product and service offerings |
| In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources |
| Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims |
| RISKS RELATING TO OUR COMMON STOCK A Voting Trust controlled by our Chief Executive Officer and one of our directors controls 35prca of our outstanding common stock |
| A Voting Trust controlled by John J Brennan, our Chief Executive Officer, and his brother Donald P Brennan, one of our directors, controls approximately 35prca of our outstanding common stock |
| John J Brennan and Eileen Brennan Oakley, Trustee of the 1996 and 1997 Brennan Family Trusts, have entered into a voting agreement under which the shares of our common stock held by these Trusts, currently about 7prca of our outstanding common stock, shall be voted by unanimous consent with John J Brennan on all matters involving the election of directors |
| While this voting agreement is in effect, voting of the shares in the Voting Trust on all matters involving the election of directors shall be by the unanimous consent of Ms |
| John J Brennan controls an additional 16prca of our outstanding common stock through shares he personally owns and through various voting agreements he has entered into with our employees |
| As a result, John J Brennan and Eileen Brennan Oakley have substantial influence in the election of our directors and John J Brennan and Donald P Brennan have substantial influence in determining the outcome of other matters requiring shareholder approval |
| If either John J Brennan or Donald P Brennan ceases to be one of our affiliates, their substantial holdings could be sold in the public market without restriction, which could then lower the market price of our common stock |
| Our stock price has been and may continue to be highly volatile |
| From January 1, 2004 through February 28, 2006, the market price of our common stock fluctuated from a low of dlra6dtta38 to a high of dlra23dtta74 |
| Because much of our common stock is owned by affiliates, the number of shares that is subject to daily trading on the market is limited |
| Therefore, the volatility of our stock price is exacerbated by relatively low trading volumes |
| The market price of our common stock may continue to be volatile and may be significantly affected by: • actual or anticipated fluctuations in our operating results; • announcements of new services by us or our competitors; • developments with respect to conditions and trends in our industry or in the industries we serve; • governmental regulation; • general market conditions; • the loss of a significant client or a significant change in the volume of services we provide to a client; • levels of liquidity in our stock’s trading volumes, and • other factors, many of which are beyond our control |
| These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the price at which you purchased it |
| In addition, the stock market has, recently and from time to time, experienced significant price and volume fluctuations that have adversely affected the market prices of securities of companies without regard to their operating performances |
| 13 ______________________________________________________________________ [42]Table of Contents Anti-takeover provisions in our articles of incorporation, bylaws and Pennsylvania law and the right of our board of directors to issue preferred stock without shareholder approval could make a third-party acquisition of us difficult |
| Provisions of our articles of incorporation and bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt not approved by our board of directors, including those made at a premium over the prevailing market price of the common stock held by shareholders |
| Our classified board of directors, limitations on calling a special meeting of our shareholders and the authority of our board to issue preferred stock and establish certain rights, preferences, privileges, limitations and other special rights thereof without any further vote or action by our shareholders could have the effect of delaying, impeding or discouraging the acquisition of control of us in a transaction not approved by our board of directors |
| Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, or the PBCL, which is applicable to us, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders |
| In general, Subchapter F of Chapter 25 of the PBCL delays for five years and imposes conditions upon “business combinations” between an “interested shareholder” and us, unless prior approval of our board of directors is given |
| The term “business combination” is defined broadly to include various merger, consolidation, division, exchange, or sale transactions, including transactions using our assets for purchase price amortization or refinancing purposes |
| An “interested shareholder,” in general, would be a beneficial owner of shares entitling that person to cast at least 20prca of the votes that all shareholders would be entitled to cast in an election of directors |