<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (Fee Required) for the fiscal year ended June 30, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 (No Fee Required) for the transition period from
______________ to _______________
Commission file number: 0-14315
ATC COMMUNICATIONS GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
5950 BERKSHIRE LANE, SUITE 1650, DALLAS, TEXAS 75225
----------------------------------------------------
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (214) 361-9870
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of Class)
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, 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 as of September 12, 1997 was approximately $104.6 million.
As of September 12, 1997, 21,806,554 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the ATC Communications Group, Inc.
1997 Annual Meeting are incorporated by reference in Part III of this report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
ATC Communications Group, Inc. (hereinafter referred to as "ATC" or the
"Company") is a leading provider of outsourced telecommunications-based
marketing, customer service and call center management services in the United
States. The Company specializes in the execution and management of large volume
call handling requirements for major U.S. corporations in a variety of
industries. ATC's operations are technology driven through its advanced data
and communications systems which permit real-time interface with clients' host
systems. The Company derives its competitive advantage from four primary
differentiators: (i) providing consistent and superior customer services; (ii)
maintaining a consistent commitment to quality; (iii) implementing advanced
technology including predictive dialing, call blending and proprietary
front-end interfaces which enable real-time access to clients' host data; and
(iv) rapidly adapting to meet changing client needs. Management believes these
advantages have contributed to the Company's record of client retention and its
ability to attract new business, both of which have contributed to compound
annual growth in revenues of 38% over the last three years.
The Company's headquarters are located at 5950 Berkshire Lane, Suite 1650,
Dallas, Texas 75225, and its telephone number is (214) 361-9870.
SERVICES AND STRATEGY
The Company designs, manages and conducts large-scale
telecommunications-based, outbound and inbound marketing and customer service
programs. These programs feature live, knowledgeable operators provided on an
outsourced basis to large U.S. corporations in a wide variety of industries.
Additionally, the Company manages both inbound and outbound call center
facilities for clients under multi-year contracts. Such call center management
applications usually require the development and licensing of proprietary
software systems. ATC does not engage in any form of outbound calling that uses
computerized voice presentations or requires unsolicited financial requests nor
is ATC engaged in the "900" number business.
ATC seeks long-term relationships with major corporations that utilize the
telephone as an integral, ongoing element in their core marketing and/or
customer service strategies. By offering high quality, customized, flexible and
fully-integrated services designed to improve quality, productivity and
effectiveness, ATC can enhance and add value to its clients' existing marketing
and customer service programs.
ATC's objective is to become the premier high-quality, full service
provider of outsourced call center operations to large corporations throughout
the United States. Management believes that the inbound segment of the industry
possesses the greatest long-term growth potential and thus is concentrating its
efforts primarily on that industry niche. In order to serve all of its clients'
needs, however, ATC offers outbound services as well. For the fiscal year ended
June 30, 1997, approximately 66% of ATC's revenues were generated from inbound
services, while the remaining 34% were generated by outbound services.
OPERATIONS
ATC operates or manages for its clients 18 fully-automated call centers in
six facilities comprising approximately 3,238 workstations located around
Dallas, Chicago and San Francisco. Seven Rockwell Galaxy GVS 3000 Automatic Call
Distributors interfaced with multiple Data General System
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microprocessors are utilized to operate ATC's call centers. The data system
itself is based on an open architecture UNIX operating protocol supported by a
sophisticated database manager. This advanced data system allows the Company to
interface real-time and seamlessly with the client's host systems and provides
the flexibility that enables ATC to rapidly deliver solutions to its client's
marketing and customer service needs. Outbound calling is enhanced through a
Rockwell Predictive Dialing System based on a fault tolerant Tandem Platform.
Through its sophisticated communications system, ATC can process in excess of
200,000 calls per hour. ATC also maintains a substantial systems staff that
permits customized software applications for its clients as well as the
capability to respond quickly to changing client needs. ATC's operations are
further enhanced by the use of universal workstations that can automatically
handle either inbound or outbound call activity. Such technology permits ATC to
offer productivity enhancements associated with "call blending". At September
12, 1997, approximately 98% of ATC's workstations were universal workstations.
The Company also believes a key component of its success is the quality of
its employees. Because its marketing and service representatives deal directly
with the clients' customers and sales prospects, ATC places a heavy emphasis on
the training and quality control processes. System-wide, ATC has dedicated in
excess of 30,000 square feet to these functions in addition to a 14,700 square
foot call center equipped for live role playing by training classes. Currently,
the Company employs a large staff of trainers dedicated to teaching the details
of client programs to ATC's marketing and service representatives. The training
curriculum includes coverage of the sales or service process, study of the
features and benefits of the product and service, intensive role playing and
information about ATC's philosophy and culture. ATC conducts both primary and
recurrent training for all representatives which, depending on the complexity of
the client program, can require up to six weeks to complete. The Company's
training curriculum is developed by professional experts in adult learning
methodologies and includes a "hands-on" PC lab experience. This attentiveness to
training enables the Company to perform an assortment of duties when handling
inbound and outbound calling programs. Quality control is measured both
quantitatively and qualitatively through multiple processes with different
reporting lines in the Company. The Company and its clients monitor the
Company's marketing and service representatives for strict compliance with the
client's standards and to maintain quality and efficiency. In many instances,
quality is evaluated and communicated on a daily basis.
INDUSTRY AND COMPETITION
The telecommunications-based marketing, customer service and call center
management services industry is highly fragmented and is comprised of a large
number of in-house and independent organizations. The teleservices industry has
experienced rapid growth over the last ten years and, according to industry
sources, expenditures for these services have more than doubled during this
period to an estimated $83 billion in 1995. According to recent research by
Frost & Sullivan, the market for the call center services segment of the
industry was $15.4 billion in 1996 and is expected to grow at a 15.8% compound
annual growth rate through 2003. With the proliferation of toll-free "800" and
"888" numbers, the telephone is becoming the principal means of contact between
companies and their customers; however, historically only a small percentage of
these expenditures have been outsourced. The Company believes that large
corporations will increasingly outsource their telecommunications-based
marketing and customer service activities in order to concentrate their internal
resources on their core competencies and to access the quality and cost
effectiveness available from outsourced service providers. The market includes
many non-captive outsourced services providers and is very competitive and
highly fragmented. Competitors range in size from very small firms offering
specialized applications to large, full-service companies with multiple, high
volume call centers. The Company believes the principal competitive factors
differentiating outsourced service providers are: (i) a reputation for quality
results; (ii) price competitiveness; (iii) technological expertise; and (iv)
flexibility in responding rapidly to the client's sales, marketing and customer
service needs.
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MARKETING OF SERVICES
ATC seeks to differentiate itself from its competitors through its emphasis
on quality and service to the client, its technological capabilities and its
flexibility to meet and enhance the client's changing requirements. The Company
seeks to develop and maintain long-term relationships with its clients and
targets its marketing efforts towards large corporations in selected industries
that utilize telecommunications as an integral, ongoing element in their core
marketing and/or customer service strategy. The Company believes such
corporations possess the greatest potential for recurring revenue growth and
their call handling requirements demand the sophistication, volume and quality
requirements to capitalize effectively on ATC's technology and client support
infrastructure. The Company seeks new business by responding to requests for
proposals, client and consultant referrals and by targeting potential new
clients. Additionally, new business is obtained by identifying additional needs
of existing clients and cross-selling the Company's services to meet those
needs.
GOVERNMENTAL REGULATIONS
Telephone sales practices are regulated at both the federal and state
levels. The rules of the Federal Communications Commission (the "FCC") under the
Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the
initiation of telephone solicitations to residential subscribers before 8:00
a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone
dialing equipment to call certain telephone numbers. In addition, the FCC
requires telemarketers to have procedures in place to maintain lists of
residential customers who do not want to receive telephone solicitations and to
avoid making calls to those customers. The FCC also prohibits the use of
pre-recorded or artificial voice calls to consumers (with limited exceptions)
and advertising via telephone facsimile machines. ATC does not utilize
pre-recorded or artificial voice calls or telephone facsimile technology in
delivering its services
The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission ("FTC") to
issue regulations prohibiting misrepresentation in telephone sales. In August
1995, the FTC issued numerous rules under the TCFAPA, which set forth disclosure
requirements for telemarketers when placing calls, prohibit deceptive
telemarketing acts or practices during solicitation, provide guidelines on
collecting payments by check and credit cards, provide restrictions on abusive
telephone solicitation practices and promulgate certain record keeping
requirements.
The Company believes that it is in compliance with the TCPA and the FCC
rules thereunder and with the FTC's rules under the TCFAPA. The Company trains
its customer service representatives to comply with the FTC and FCC rules and
programs its call management system to avoid telephone calls during restricted
hours or to individuals maintained on "do-not-call" lists.
A number of states have enacted or are considering legislation to regulate
telephone solicitations. For example, some states require telemarketers to be
licensed by state regulatory agencies prior to soliciting purchasers within the
state. Additionally, telephone sales in certain states cannot be final unless a
written contract is delivered to and signed by the buyer and 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 and post bonds.
From time to time, bills are introduced in Congress which, if enacted,
would regulate the use of credit information. The Company cannot predict whether
this legislation will be enacted and what effect, if any, it would have on the
Company or its industry.
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The industries served by the Company are also subject to varying degrees of
government regulation. The Company works closely with its clients and their
advisors to develop the scripts to be used by its agents in connection with
making consumer contacts. The Company generally requires its clients to
indemnify it against claims and expenses arising with respect to the Company's
services performed on its clients' behalf. To date, the Company has not been
held liable for a client's regulatory noncompliance.
REVENUES AND SEASONAL NATURE OF BUSINESS
The Company's revenues are affected by the timing and magnitude of its
clients' marketing programs and the commencement of new programs. Additionally,
expenses incurred to support client programs are affected by such timing; thus,
the Company experiences and expects to continue to experience quarterly
variations in revenues and operating results. Although the business is not
seasonal in nature, historically, ATC has generated a slightly larger percentage
of its annual revenues in the second and fourth quarters of its fiscal year due
to client marketing programs which are typically slower in the post holiday and
summer months. The Company's competitive advantages have enabled it to grow
rapidly and diversify its client mix in the last two fiscal years by attracting
a variety of new clients in various industries and by expanding the services
provided to its existing clients. The following entities each accounted for ten
percent or more of gross revenues of the Company in fiscal 1997: AT&T and
American Express. In fiscal 1996, ten percent or more of the Company's gross
revenues were generated by each of the following clients: AT&T, American
Express, Pacific Bell and U S WEST.
EMPLOYEES
As of September 12, 1997, the Company employed approximately 3,076 persons
including 2,711 teleservices agents. To date the Company has not experienced any
material difficulty in attracting and retaining qualified personnel in the
geographic regions where it currently conducts business. The Company believes
its relationship with its employees is good.
HISTORICAL DEVELOPMENTS
The Company was incorporated in Delaware on August 2, 1985 under the name
of Kenneth Resources, Inc. and changed its name to NRP Inc. on July 12, 1988.
The legal name of the Company was formally changed to ATC Communications Group,
Inc. on April 24, 1996. The Company's original business plan was to assemble an
integrated direct marketing company comprised of direct mail marketing and
mailing list services in addition to telecommunications-based marketing
services. In the year ended June 30, 1993, management examined the Company's
overall business plan and each operating segment's operating performance and
concluded that (i) the integrated company strategy had not achieved the expected
synergies and economies of scale to management's satisfaction, and (ii) the
telecommunications-based marketing business possessed significantly greater
growth potential than the other two segments. Accordingly, in the year ended
June 30, 1994, the Company divested of its direct mail publishing subsidiary,
and in the year ended June 30, 1995, divested of its mailing list services
business, thereby enabling the Company to concentrate on growing and creating
long-term value in its telecommunications-based subsidiary. Revenues generated
by its remaining operating subsidiary, Advanced Telemarketing Corporation
("Advanced"), which now operates under the tradename ATC Communications,
accounted for 100% of the Company's consolidated revenues from both continuing
and discontinued operations for each of the years ended June 30, 1997, 1996 and
1995. Management believes this shift in strategy has enabled the Company to grow
revenues and improve operating results, while positioning the Company to compete
effectively as a provider of telecommunications-based marketing and information
services.
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ITEM 2. PROPERTIES
The Company's principal executive offices in Dallas, Texas are occupied
pursuant to a lease expiring November 30, 2001 and contain approximately 4,170
square feet. The Company's operational and administrative headquarters are
located in a 23,333 square foot building in Irving, Texas which is leased by the
Company. This lease expires on December 31, 2003.
The Company currently performs its services in 18 call centers in the six
facilities listed below. All of the Company's call center facilities are
occupied pursuant to various lease arrangements, except the Chicago facility,
which is owned by the client and is occupied by the Company at the client's
expense. The leases at the Dallas, Texas, Garland, Texas and San Francisco,
California locations expire on June 30, 1998 and at the Irving, Texas facilities
on December 31, 2003. The Company believes it can extend the leases at these
locations or relocate the facilities at terms comparable with its current lease
obligations. As of September 12, 1997, the Company operated the following call
center facilities:
CALL CENTER FACILITIES
<TABLE>
<CAPTION>
CURRENT
SQUARE EQUIPPED
LOCATION FOOTAGE WORKSTATIONS
- ---------------------------- ------- ------------
<S> <C> <C>
Chicago, Illinois N/A 69
Dallas, Texas 90,000 1,237
Garland, Texas 12,963 222
Irving, Texas (2 facilities) 83,825 1,535
San Francisco, California 32,616 175
------- -----
219,404 3,238
======= =====
</TABLE>
While the Company's current capacity is sufficient to handle its current
production demands, as the Company's growth continues additional call center
facilities may be needed.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its businesses,
neither the Company nor its subsidiary are parties to, nor are their properties
the subject of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock, $.01 par value per share (the "Common Stock"),
trades on the Nasdaq National Market System ("Nasdaq NMS") under the symbol
"ATCT". As of September 12, 1997, there were approximately 21,806,554 shares of
Common Stock outstanding held by approximately 764 holders of record.
The table below lists the range of high and low bids for the Company's
Common Stock as reported by the Nasdaq NMS for the two-year period ended June
30, 1997 and the subsequent interim period.
<TABLE>
<CAPTION>
Fiscal Year 1996 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter 3 7/8 2 1/4
Second Quarter 6 2 15/16
Third Quarter 9 5/8 4 3/4
Fourth Quarter 15 3/4 8 3/8
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1997 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter 19 3/4 11 1/4
Second Quarter 26 1/4 11 3/8
Third Quarter 15 5
Fourth Quarter 6 5/8 2 9/16
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter 5 1/4 3 7/8
(through September 12, 1997)
</TABLE>
The above quotations represent prices between dealers and do not include
retail mark-up, mark-down or commissions and may not represent actual
transactions.
DIVIDENDS
To date, the Company has not declared a cash dividend on its Common Stock.
The Company intends to retain any earnings for use in the operation and
expansion of its business, and therefore does not anticipate declaring a cash
dividend in the foreseeable future. The Company has accrued an annual dividend
of $0.36 per share on its 29,778 outstanding shares of Series B Preferred Stock.
Pursuant to Advanced's working capital line of credit and equipment term loan
credit agreements, Advanced is restricted in its ability to pay dividends to
ATC.
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ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth certain selected consolidated financial data for
the Company and its subsidiaries for the last five years. This information
should be read in conjunction with Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues(1) $ 97,629,300 $ 94,313,886 $ 61,353,999 $ 37,447,381 $ 17,828,764
Income (loss) from
continuing operations $ 2,881,610 $ 10,177,313 $ 2,754,628 $ 1,338,588 $ (938,686)
Net income(2) $ 1,429,468 $ 5,850,128 $ 1,335,383 $ 2,995,604 $ 1,182,219 (3)
Net income (loss) from
continuing operations per
weighted common share $ 0.06 $ 0.25 $ 0.06 $ 0.02 $ (0.07)(4)
Total assets $ 41,222,786 $ 37,780,182 $ 25,356,630 $ 24,261,190 $ 13,833,669
Long-term obligations
(including capitalized leases) $ 4,753,613 $ 2,455,022 $ 3,578,584 $ 3,141,558 $ 1,337,534
Total liabilities $ 12,601,525 $ 18,338,406 $ 13,119,896 $ 13,249,271 $ 8,883,925
Weighted average number of
common shares outstanding:
Primary 22,149,692 21,177,186 18,441,214 13,685,286 13,294,442
Fully Diluted 22,181,831 21,305,314 18,616,991 13,728,070 13,294,442
</TABLE>
- ---------
(1) Includes revenues generated by the telecommunications-based services
subsidiary only; sales of discontinued operations are omitted.
(2) Includes (i) income from operations of discontinued business segments, net
of applicable taxes, and (ii) in fiscal 1994, the gain on the disposition
of the assets of a discontinued business segment, net of applicable taxes.
(3) Includes an income tax benefit of $819,166 resulting from a change in the
accounting method used to record deferred income taxes.
(4) Includes an income tax benefit of $420,838 resulting from a change in the
accounting method used to record deferred income taxes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As discussed above, prior to June 30, 1995, the Company sold substantially
all of the assets relating to two of its three business segments and, as a
result of such dispositions, discontinued the operations of the two business
segments. Accordingly, in order for the financial data to be comparable, the net
financial results of the two discontinued business segments are reflected as a
single line item, "Income (loss) from operations of discontinued business
segments, net of applicable taxes." The following narrative discusses only the
operations of the Company's remaining business segment, which provides
outsourced telecommunications-based marketing, customer service and call center
management services.
The following table sets forth statements of income data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of services 69.9% 67.0% 70.3%
----- ----- -----
Gross margin 30.1% 33.0% 29.7%
Selling, general and administrative expenses 23.4% 19.1% 21.6%
Depreciation and amortization 3.7% 3.1% 3.6%
----- ----- -----
Total expenses 27.1% 22.2% 25.2%
----- ----- -----
Income from continuing operations 3.0% 10.8% 4.5%
Interest expense 0.6% 0.9% 1.5%
Interest income 0.1% 0.1% 0.1%
----- ----- -----
Income from continuing operations before income taxes 2.4% 10.0% 3.1%
Income tax expense 1.0% 3.8% 0.7%
----- ----- -----
Income from continuing operations 1.5% 6.2% 2.4%
Income (loss) from operations of discontinued business
segments, net of applicable taxes - - (0.2%)
----- ----- -----
Net income 1.5% 6.2% 2.2%
===== ===== =====
</TABLE>
FISCAL 1997 VS. FISCAL 1996
The Company earned net income from continuing operations of $1,429,468, or
1.5% of revenues of $97,629,300, for the fiscal year ended June 30, 1997, versus
net income from continuing operations of $5,850,128, or 6.2% of revenues of
$94,313,886, earned in fiscal 1996.
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Revenues increased $3,315,414, or 3.5%, to $97,629,300 during the fiscal
year ended June 30, 1997 over revenues generated in fiscal 1996 of $94,313,886.
This revenue growth is the result of the addition of new clients and was offset
by decreases in the volume of services provided to certain of the Company's
existing clients. Approximately 44% of the revenues earned by the Company during
fiscal 1997 and fiscal 1996 originated from one of the Company's existing
clients. During the fourth quarter of fiscal 1997, the percentage of the
Company's revenue derived from this client declined to approximately 31% as a
result of reduced volumes and delays in certain of the client's programs while
the client reevaluated and reorganized the management of its teleservices
efforts.
The Company is continuing its strategy to secure recurring revenues from
long-term relationships with targeted, large corporate clients which use
telecommunications strategies as an integral, ongoing element in their marketing
and customer service programs. The Company continues to perform project-based
business for certain of its clients, and there can be no assurance that these
clients will continue existing projects or provide new ones.
For the fiscal year ended June 30, 1997, gross profit earned on revenues
decreased $1,802,106, or 5.8%, from fiscal 1996. The decrease in gross profit
is due to: (i) additional costs associated with the implementation of new
internal reporting systems; and (ii) lower capacity utilization resulting from
the decline in service volumes with the Company's largest client and a change
in business mix which resulted in decreased operating efficiencies. Management
is continuing its efforts to improve operating efficiencies while maintaining
the Company's high quality standards. For fiscal 1997, gross margin as a
percentage of revenues was 30.1% versus 33.0% for fiscal 1996.
Selling, general and administrative ("SG&A") expenses increased $4,812,033,
or 26.7%, in fiscal 1997 as compared to fiscal 1996. This increase in expenses
is primarily the result of the addition of personnel and infrastructure in
anticipation of expected revenue growth. In response to slower than expected
revenue growth, the Company initiated an aggressive expense reduction program,
in the fourth quarter of fiscal 1997, to match expenses with future expected
revenue levels. The increase in SG&A expenses is also due in part to
approximately $1,175,000 in non-recurring charges and management transition
expenses. SG&A expenses as a percentage of revenues increased to 23.4% in fiscal
1997 from 19.1% in fiscal 1996.
The increase in depreciation and amortization expense of $681,564, or
23.2%, for fiscal 1997 over fiscal 1996 is primarily the result of expansion in
the Company's operating capacity and new internal systems in fiscal 1997.
Despite the increase in whole dollars, the impact of the expansion on
depreciation and amortization expense was mitigated somewhat by the increase in
revenues. As a percentage of revenues, depreciation and amortization expense for
fiscal 1997 was 3.7% versus 3.1% for fiscal 1996.
For the fiscal year ended June 30, 1997, net interest expense decreased
$261,225, or 34.4%, as compared to fiscal 1996 due primarily to an increase in
interest expense in the prior fiscal year related to the write-off of
approximately $170,000 in unamortized fees associated with the Company's
previous banking relationship and lower utilization of the Company's working
line of credit.
For the 1997 fiscal year, the Company's effective tax rate was
approximately 40.0%. In fiscal 1996, the Company's effective tax rate was 37.9%.
The increase in the Company's effective tax rate was primarily due to additional
income-based state taxes paid.
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FISCAL 1996 VS. FISCAL 1995
The Company earned net income from continuing operations of $5,850,128, or
6.2% of revenues of $94,313,886, for the fiscal year ended June 30, 1996 versus
net income from continuing operations of $1,444,612, or 2.4% of revenues of
$61,353,999, earned in fiscal 1995.
Revenues increased $32,959,887, or 53.7%, to $94,313,886 during the fiscal
year ended June 30, 1996 over revenues generated in fiscal 1995 of $61,353,999.
This revenue growth resulted from the addition of new clients and increases in
the volume of services provided to the Company's existing clients. Approximately
44% of the revenues earned by the Company during fiscal 1996 emanated from one
of the Company's existing clients; however, with the addition of new clients and
increased business volumes with other clients, the percentage of the Company's
revenues generated by this client decreased from the approximately 53% this
client represented in fiscal 1995.
For the fiscal year ended June 30, 1996, gross profit earned on revenues
increased $12,910,919, or 70.8%, from fiscal 1995. The increase in gross profit
was due in part to increased revenues; however, the improvement in gross profit
was also attributable to increased operating efficiencies which increased gross
margin as a percentage of revenues. For fiscal 1996, the gross margin as a
percentage of revenues was 33.0% versus 29.7% for fiscal 1995. This improvement
in operating efficiencies also resulted from: (i) the renegotiation of the
Company's telecommunications tariff; (ii) economics of scale derived from the
increased revenue base; and (iii) management's ongoing efforts to enhance
capacity utilization.
SG&A expenses, increased $4,789,001, or 36.2%, in fiscal 1996 as compared
to fiscal 1995. This increase in expenses arose primarily from: (i) additional
personnel and infrastructure necessary to support the Company's revenue growth;
(ii) increased costs associated with the recruitment and training of personnel;
and (iii) sales commissions associated with increased revenues. As a result of
management's efforts to improve operating efficiencies while maintaining the
Company's high quality standards in an atmosphere of revenue and capacity
growth, SG&A expenses as a percentage of revenues decreased to 19.1% in fiscal
1996 from 21.6% in fiscal 1995.
The increase in depreciation and amortization expense of $699,233, or
31.2%, for the fiscal year ended June 30, 1996 over fiscal 1995 was primarily
the result of the expansion of the Company's operating capacity in fiscal 1995
and fiscal 1996. Despite the increase in whole dollars, the impact of the
expansion on depreciation and amortization expense was mitigated by the increase
in revenues. As a percentage of revenues, the expense for fiscal 1996 was 3.1%
versus 3.6% for fiscal 1995.
For the fiscal year ended June 30, 1996, net interest expense decreased
$99,236, 11.6%, as compared to fiscal 1995 despite the write-off of
approximately $170,000 in unamortized fees associated with its previous banking
relationship. Several factors contributed to this decrease in net interest
expense:
(a) Diminished utilization of the Company's working capital borrowing
facilities due to management's efforts to improve cash flow by decreasing
the number of days receivables are outstanding and due to improved
profitability by the Company.
(b) During fiscal 1996, the Company secured a $15 million working capital
line of credit with a new commercial bank which replaced the working
capital borrowing arrangement with the Company's previous bank. The terms
of this new arrangement provide for a lower borrowing rate than the
previous relationship.
11
<PAGE> 12
(c) During fiscal 1996, the Company paid off an unsecured note payable
which contained a provision offering a discount if the note was paid in a
timely manner. Thus in fiscal 1996, the Company recognized approximately
$61,000 in interest expense reduction due to the pay-off of the note
payable in a timely fashion.
For fiscal 1996, the Company's effective tax rate was approximately 37.9%.
In fiscal 1995, the Company earned certain tax credits which significantly
reduced the impact of income taxes to an effective tax rate of 23.8%. The
federal programs which created these tax credits expired on December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operating activities and available borrowing capacity under credit facilities.
The following table sets forth certain information from the Company's statement
of cash flows for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 4,066,511 $ 732,415 $ 5,279,277
Net cash used in investing activities (3,247,985) (2,520,627) (4,455,848)
Net cash provided by (used in) financing activities (1,909,402) 1,030,744 (3,508,333)
----------- ----------- -----------
Net decrease in cash and cash equivalents $(1,090,876) $ (757,468) $(2,684,904)
=========== =========== ===========
</TABLE>
During fiscal 1997, net cash provided by operating activities increased
$3,334,096, or 455.2%, over fiscal 1996, primarily due to the decrease in and
collection of accounts and notes receivable.
Cash used in investing activities has been expended for equipment and other
capital to support expansion of the Company's operations, including additions to
the Company's telephone and data management systems. During the last three
fiscal years, the Company has added approximately 1,766 workstations. Capital
expenditures during this period totaled $11,145,078 and have been funded with
proceeds from bank borrowings and excess cash from operations.
Financing activities have included borrowing activity under the Company's
credit facilities, securing capital lease obligations and the exercise of stock
options.
During fiscal 1994, the Company secured a $15 million working capital
financing facility and a $1.5 million equipment term loan with a major bank to
meet the working capital needs created by the Company's growth. During the
quarter ended March 31, 1996, the Company refinanced both the $1.5 million
equipment term loan and the $15 million working capital financing facility with
a new major bank on terms and conditions more favorable to the Company (the
"Credit Facility"). At June 30, 1997, the Credit Facility had a zero balance.
The Credit Facility contains various covenants which limit, among other
things, the operating subsidiary's indebtedness, capital expenditures,
investments, payments and dividends to the Company and requires the operating
subsidiary to meet certain financial covenants. Similarly, under the terms of
the guaranty arrangement, the Company is subject to certain covenants limiting,
among
12
<PAGE> 13
other things, its ability to incur indebtedness, enter into guaranties, and
acquire other companies. These credit facilities are secured by liens on the
operating subsidiary's accounts receivable, furniture and equipment, and are
guaranteed by the Company.
The Company intends to use funds generated from future operations and
available credit under the Credit Facility to meet normal operating needs as
well as fund planned capital expenditures for the first half of fiscal 1998.
At June 30, 1997, the Chairman of the Company had outstanding borrowings
and accrued interest of approximately $3,539,779. The borrowing bears 6% annual
interest, is due in full on June 30, 1998 and is secured by collateral pledged
by Codinvest Limited, the Company's largest shareholder of record. Interest
income from the receivable amounted to approximately $78,935 in fiscal 1997.
The Company operates in a dynamic, fast-growing industry. As the Company
grows, additional call center facilities will be needed and such facilities will
require furniture, equipment and technology that meet or exceed the quality
standards of its existing facilities. Currently, the Company is pursuing a new
site strategy focused on smaller call centers outside of the Dallas labor market
which management believes should result in lower operating expenses. The Company
may have to secure additional financing for these capital needs as its current
commitments and cash flow may be inadequate. Although no assurances can be made
in this regard, management anticipates that, based on the Company's ability to
secure such financing to date, the Company should be able to secure debt or
equity funding for such future capital equipment needs.
In addition to traditional internal growth strategies, management is
currently pursuing opportunities for growth through the acquisition of other
call center companies. Management believes that any acquisition candidate would
fit with the Company's corporate and operating strategies.
The Company believes its shares of Common Stock are currently undervalued.
In April 1997, the Company's Board of Directors authorized management to pursue
the implementation of a stock repurchase program for the repurchase of up to
five million shares of the Company's common stock on the open market and through
privately negotiated transactions. To date, the Company has used available cash
flow to purchase 355,000 shares at an average cost of $3.98 per share. The
Company anticipates that any future purchases of shares as part of this
repurchase program will be funded by available cash flow and borrowings under
its working capital credit facility. The Company may also secure additional debt
financing in order to fund such purchases.
Management knows of no trends or uncertainties other than those mentioned
above which are expected to have a material favorable or unfavorable impact on
operating results.
OUTLOOK AND UNCERTAINTIES
Certain information in this Form 10-K may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance and any statement
of assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by use of the terminology "may", "will", "expects",
"plans", "anticipates", "estimates", "potential", or "continue, or the negative
thereof or other comparable terminology. Although the Company believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, they can give no assurance that such
13
<PAGE> 14
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements. Future financial condition and results, as well
as any forward-looking statements, are subject to inherent risks and
uncertainties, some of which are summarized in this section.
The Company does not generally provide forecasts of potential future
financial performance or operating results. While the Company's management is
optimistic about the Company's future prospects, the following issues and
uncertainties, among others, should be considered in evaluating those prospects.
RELIANCE ON MAJOR CLIENTS. A significant portion of the Company's revenues
is derived from relatively few clients. In fiscal 1997, approximately 44% of
the Company's revenues originated from one client and approximately 63% were
attributable to the Company's two largest clients; in fiscal 1996,
approximately 44% of the Company's revenues were attributable to one principal
client and approximately 55% were derived from two clients. The general risk of
reliance on one or a few major clients includes a number of more specific
business risks that may adversely impact the provider's ability to derive
revenue from the client, including without limitation: the risk that a client
unilaterally decides to curtail or terminate marketing programs; the risk that
service or billing disputes may adversely impact the client's desire to utilize
the provider's services; the risk that the customer may decide to reduce the
number of providers of the subject services or otherwise consolidate its
operations; and the risk that financial, competitive or operational pressures
on the client may inhibit its ability to purchase services from outside
providers or prompt the client to negotiate lower fees for services provided.
As a result of the reorganization of its teleservicing efforts, subsequent to
June 30, 1997, the Company's largest client negotiated a price reduction in
certain of its programs. Most of the Company's contracts are terminable on
short notice. Although the Company believes its relations with major clients
are good, the loss of one or more of these clients could have a material
adverse effect on the Company.
DEPENDENCE ON OUTSOURCING TREND AND INDUSTRIES SERVED. The Company's growth
is dependent in part on continued demand for the Company's services prompted by
the trend toward outsourcing, as well as continued demand from the industries
served by the Company. If the interest in outsourcing wanes or there is a
significant downturn in the telecommunications, financial services,
cable/Internet, government, utilities or other industries, the Company could be
materially and adversely affected.
GOVERNMENT REGULATION. The Company's business has become subject to an
increasing amount of state and federal regulation over the past several years.
While the nature of much of the Company's business (inbound telephone calls
placed by the consumer to the Company) does not raise regulatory compliance
issues, no assurance can be given that additional federal or state
consumer-oriented legislation will not limit the business activities of the
Company or its clients or increase the cost of compliance. See "Business --
Governmental Regulations."
COMPETITION. The telecommunications-based marketing, customer service and
call center management services industry is highly competitive and highly
fragmented. The Company competes with numerous independent firms as well as the
in-house operations of many of its clients or potential clients. The Company
competes with direct mail, television, radio and other advertising media, and
advances in new forms of direct marketing, such as interactive home shopping
through television, computer networks and other media could also compete with
the Company's services and have a material adverse effect on the demand for the
Company's services.
DEPENDENCE ON LABOR FORCE. The Company's business is very labor intensive
and characterized by high personnel turnover. Although by industry standards the
Company believes its employees are highly qualified and well-trained, many
employees receive modest hourly wages and many are part-time employees. Labor
costs may increase, turnover would increase recruiting and
14
<PAGE> 15
training costs, and the inability to hire sufficient numbers of qualified
people would inhibit the Company's ability to grow. To date, the Company has
not experienced material difficulty in attracting qualified employees, but it
may experience such difficulty in the future.
RELIANCE ON TECHNOLOGY; COMPUTER SYSTEMS. The Company's success is
dependent in part on its continued investment in sophisticated
telecommunications and computer technology, including predictive dialers,
automated call distributors and digital switches. The failure to invest in,
maintain and anticipate technologies key to the Company's business could have a
materially adverse effect on the Company.
TELEPHONE SERVICE DEPENDENCE. The Company's business is materially
dependent upon service provided by various local and long distance telephone
companies. Rate increases that the Company is unable to pass on to its clients
or interruptions in service would materially and adversely affect the Company's
business.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company could
experience quarterly variations in revenues and operating income as a result of
many factors, including the timing of clients' marketing campaigns and customer
service programs, the timing of additional SG&A expenses to acquire and support
such new business and changes in the Company's revenue mix among its various
service offerings. In connection with certain contracts, the Company could incur
costs in periods prior to recognizing revenue under those contracts. In
addition, the Company must plan its operating expenditures based on revenue
forecasts, and a revenue shortfall below such forecast in any quarter would
likely materially and adversely affect the Company's operating results for that
quarter. Historically, revenue growth has tended to minimize any effects of
seasonality on the Company's business. However, the Company's business tends to
be slower in the first and third quarters due to client marketing programs which
are typically slower in the post-holiday and summer months.
OTHER UNCERTAINTIES. Other operating, financial or legal risks or
uncertainties are discussed in this Form 10-K in specific contexts. The Company
is, of course, also subject to general economic risks, dependence on key
personnel and other risks and uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-18 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the definitive proxy statement of the
Company for the 1997 Annual Meeting of Stockholders under the captions "Election
of Directors" and "Executive Officers" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the definitive proxy statement of the
Company for the 1997 Annual Meeting of Stockholders under the caption
"Compensation of Directors and Executive Officers" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information will be contained in the definitive proxy statement of the
Company for the 1997 Annual Meeting of Stockholders under the caption
"Beneficial Ownership of Common Stock" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the definitive proxy statement of the
Company for the 1997 Annual Meeting of Stockholders under the captions "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" included on page F-1 of
this Annual Report on Form 10-K for a listing of the financial statements and
schedules filed as a part of this Annual Report on Form 10-K.
The following exhibits are filed as a part of this Form 10-K Annual Report:
3.1 Certificate of Incorporation of Kenneth Resources, Inc. (Incorporated by
reference from Company's Amendment No.1 to Form S-1 Registration
Statement - File No. 33-6268).
3.2 Certificate of Amendment of Kenneth Resources, Inc. to reflect change of
name to National Reference Publishing, Inc. (Incorporated by reference
from Company's Amendment No. 1 to Form S-1 Registration Statement - File
No. 33-6268).
3.3 Certificate of Amendment of National Reference Publishing, Inc. to
reflect change of name to ATC Communications Group, Inc. (Incorporated
by reference from Company's Form 10-K Annual Report for the year ended
June 30, 1994).
3.4 Certificate of Amendment of NRP Inc. to reflect change of name to ATC
Communications Group, Inc. (Incorporated by reference from the Company's
Form 10-Q for the period ended March 31, 1996.)
3.5 Bylaws of Kenneth Resources, Inc. (Incorporated by reference from
Company's Amendment No. 1 to Form S-1 Registration Statement - File No.
33-6268).
3.6 Amendment to Bylaws of Kenneth Resources, Inc. (Incorporated by
reference from Company's Amendment No. 1 to Form S-1 Registration
Statement - File No. 33-6268).
4.1 Specimen of Share Certificate of Company's Common Stock. (Incorporated
by reference from Company's Form 10-K Annual Report for the year ended
June 30, 1994).
4.2 Form of Series B Preferred Stock, as amended. (Incorporated by reference
from Company's Form 10-K Annual Report for the year ended June 30,
1994).
4.3 ATC Communications Group, Inc. Series C Preferred Stock certificate
issued to Codinvest Limited with attached designations. (Incorporated by
reference from Company's Form 8-K Current Report dated June 16, 1994).
4.4 1992 NRP Inc. Stock Option Plan as amended (Incorporated by reference
from Company's Form S-8 Registration Statement - File No. 333-01131)
4.5 1995 NRP Inc. Stock Option Plan as amended (Incorporated by reference
from Company's Form S-8 Registration Statement - File No. 333-01131)
10.8 Lease Agreement dated January 1, 1991 by and between Royal Tech
Properties, Ltd. and Advanced Telemarketing Corporation. (Incorporated
by reference from Company's Form 10-K Annual Report for the year ended
June 30, 1991).
17
<PAGE> 18
10.11 Asset Purchase Agreement by and among M/B Ltd. Services, Inc., ATC
Communications Group, Inc., and United Communications Group executed
July 26, 1993. (Incorporated by reference from Company's Form 8-K
Current Report dated August 13, 1993).
10.12 Non-Competition Agreement by and among M/B Ltd. Services, Inc., ATC
Communications Group, Inc., and United Communications Group executed
July 26, 1993. (Incorporated by reference from Company's Form 8-K
Current Report dated August 13, 1993).
10.13 Loan and Security Agreement dated May 17, 1994 among Continental Bank
N.A., Advanced Telemarketing Corporation and American Telesales
Corporation. (Incorporated by reference from Company's Form 8-K Current
Report dated June 16, 1994).
10.14 Guaranty dated May 17, 1994 by ATC Communications Group, Inc. in favor
of Continental Bank, N.A. (Incorporated by reference from Company's Form
8-K Current Report dated June 16, 1994).
10.15 Investment Letter dated June 16, 1994 by Codinvest Limited.
(Incorporated by reference from Company's Form 8-K Current Report dated
June 16, 1994).
10.16 Asset Purchase Agreement by and among NRL Brokerage, Inc., NRL
Management, Inc., S.D. Bogner, Inc., ATC Communications Group, Inc., and
Stephen D. Bogner executed August 30, 1994 (including promissory notes
and guaranties). (Incorporated by reference from Company's Form 8-K
Current Report dated August 30, 1994).
10.17 Loan and Security Agreement dated February 8, 1996 among Advanced
Telemarketing Corporation and Bank One, Texas, N.A. (Incorporated by
reference from the Company's Form 10-K Annual Report for the year ended
June 30, 1996).
10.18 Unconditional Guaranty Agreement dated February 8, 1996 among NRP Inc.
and Bank One, Texas, Leasing Corporation (Incorporated by reference from
the Company's Form 10-K Annual Report for the year ended June 30, 1996).
10.19 Promissory Note dated September 16, 1997 among Michael G. Santry and ATC
Communications Group, Inc. (filed herewith).
10.20 Stock Pledge Agreement dated September 16, 1997 among Codinvest Limited
and ATC Communications Group, Inc. (filed herewith).
27.1 Financial Data Schedule (filed herewith).
ITEM 21. SUBSIDIARY OF COMPANY
The Company, as of June 30, 1997, had the following operating subsidiary:
<TABLE>
<CAPTION>
Name State of Incorporation Percentage Ownership
---- ---------------------- --------------------
<S> <C> <C>
Advanced Telemarketing Corporation Nevada 98.6%
(d/b/a ATC Communications)
</TABLE>
Copies of the above Exhibits are available to stockholders of record at a
charge of $.50 per page, minimum of $5.00 each. Direct requests to:
18
<PAGE> 19
ATC Communications Group, Inc.
Attention: Secretary
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
REPORTS ON FORM 8-K
None.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATC COMMUNICATIONS GROUP, INC.
(The Registrant)
Dated: September 26, 1997 By: /s/ Arthur Chavoya
-----------------------------------
Arthur Chavoya
President and Chief Executive
Officer, Director
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 Company
and in the capacities and on the dates indicated.
Dated: September 26, 1997 By: /s/ Michael G. Santry
-----------------------------------
Michael G. Santry, Director
Dated: September 26, 1997 By: /s/ Patrick V. Stark
-----------------------------------
Patrick V. Stark, Director
Dated: September 26, 1997 By: /s/ Jerry L. Sims, Jr.
-----------------------------------
Jerry L. Sims, Jr., Controller and
Director
Dated: September 26, 1997 By: /s/ Darryl D. Pounds
-----------------------------------
Darryl D. Pounds, Director
Dated: September 26, 1997 By: /s/ J. Michael Allred
-----------------------------------
J. Michael Allred, Director
Dated: September 26, 1997 By: /s/ J. Frank Mermoud
-----------------------------------
J. Frank Mermoud, Director
Dated: September 26, 1997 By:
-----------------------------------
David Malcolm, Director
20
<PAGE> 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE (ITEM 14(A))
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Statements of Income for the Years Ended
June 30, 1997, 1996, and 1995 F-3
Consolidated Balance Sheets at June 30, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1997, 1996, and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996, and 1995 F-7
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts for the Years Ended
June 30, 1997, 1996, and 1995 F-18
</TABLE>
All other schedules are omitted since the required information is not
applicable or is not material or because the information required is included in
the consolidated financial statements and notes thereto.
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of ATC Communications Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of ATC
Communications Group, Inc. and its subsidiaries at June 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
September 29, 1997
F-2
<PAGE> 23
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 97,629,300 $ 94,313,886 $ 61,353,999
Cost of services, excluding depreciation and
amortization shown below 68,281,841 63,164,321 43,115,353
------------ ------------ ------------
Gross margin 29,347,459 31,149,565 18,238,646
Selling, general and administrative expenses 22,847,197 18,035,164 13,246,163
Depreciation and amortization 3,618,652 2,937,088 2,237,855
------------ ------------ ------------
Total expenses 26,465,849 20,972,252 15,484,018
------------ ------------ ------------
Income from continuing operations 2,881,610 10,177,313 2,754,628
Interest expense (Notes 3, 4, and 5) 616,810 852,743 945,501
Interest income (Note 8) 119,218 93,926 87,448
------------ ------------ ------------
Income from continuing operations before income taxes 2,384,018 9,418,496 1,896,575
Income tax expense (Note 9) 954,550 3,568,368 451,963
------------ ------------ ------------
Income from continuing operations 1,429,468 5,850,128 1,444,612
Income (loss) from operations of discontinued business
segments, net of applicable taxes (Notes 8 and 14) - - (109,229)
------------ ------------ ------------
Net income $ 1,429,468 $ 5,850,128 $ 1,335,383
============ ============ ============
Earnings per common and common equivalent
share (Note 7):
Income from continuing operations $ 0.06 $ 0.25 $ 0.06
Income (loss) from discontinued operations - - ($ 0.01)
------------ ------------ ------------
Net income $ 0.06 $ 0.25 $ 0.05
============ ============ ============
Weighted average common and common equivalent
shares outstanding (Note 7):
Primary 22,149,692 21,177,186 18,441,214
============ ============ ============
Fully-diluted 22,181,831 21,305,314 18,616,991
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 632,826 $ 1,723,702
Accounts receivable - trade, less allowance for
doubtful accounts of $73,826 in 1997 and
$175,016 in 1996 14,527,440 21,699,793
Notes receivable:
Related parties (Note 8) 3,809,658 680,711
Other 157,693 144,717
Current deferred tax asset (Note 9) 3,037,066 506,539
Other current assets 763,361 292,632
----------- -----------
Total current assets 22,928,044 25,048,094
Property and equipment (Notes 2 and 5):
Equipment 16,154,352 12,578,293
Furniture and fixtures 5,205,110 4,311,663
Purchased software 1,299,546 829,979
----------- -----------
22,659,008 17,719,935
Accumulated depreciation and amortization 8,211,046 6,912,196
----------- -----------
14,447,962 10,807,739
Cost in excess of net assets acquired, net of accumulated
amortization of $1,046,475 in 1997 and $970,669 in
1996 (Notes 2 and 9) 1,723,319 1,269,740
Deferred tax assets (Note 9) 1,998,531 -
Other assets 124,930 654,609
----------- -----------
$41,222,786 $37,780,182
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Revolving line of credit (Note 3) $ - $ 2,382,165
Accounts payable - trade 821,187 2,576,068
Unearned revenues and customer deposits 573,922 1,072,662
Other accrued liabilities 2,872,596 5,389,319
Accrued compensation expense 1,524,954 1,958,413
Accrued telephone expense 659,949 1,129,703
Current portion of long-term debt 1,395,304 1,156,547
------------ ------------
Total current liabilities 7,847,912 15,664,877
Long-term debt (Note 4) 4,753,613 2,455,022
Deferred tax liability (Note 9) - 218,507
Commitments and contingencies (Notes 5 and 10) - -
Shareholders' equity (Notes 6 and 12):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative
Series B shares ($107,200 aggregate liquidation
preference) issued and outstanding in 1997 and
1996 and 840,000 convertible, $.11 cumulative
Series C shares ($3,074,400 aggregate liquidation
preference) issued and outstanding in 1996 298 8,698
Common stock, $.01 par value, 27,500,000 shares
authorized; 21,793,122 and 15,032,161 shares
issued and outstanding in 1997 and 1996,
respectively 217,931 150,322
Treasury stock (420,921) (7,448)
Additional paid-in capital 18,204,685 10,100,404
Retained earnings 10,619,268 9,189,800
------------ ------------
Total shareholders' equity 28,621,261 19,441,776
------------ ------------
$ 41,222,786 $ 37,780,182
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 26
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------------------------------------- ---------------------------
Series B Series C
--------------------------- ----------------------------
Par Par Par Treasury
Shares Value Shares Value Shares Value Stock
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JUNE 30, 1994 29,778 $ 298 840,000 $ 8,400 13,563,361 $ 135,634 $ -
Cash dividend
paid on
preferred stock - - - - - - -
Net Income - - - - - - -
Treasury stock
purchased - - - - - - (7,448)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT
JUNE 30, 1995 29,778 298 840,000 8,400 13,563,361 135,634 (7,448)
Cash dividend
paid on
preferred stock - - - - - - -
Net Income - - - - - - -
Exercise of stock
options - - - - 1,468,800 14,688 -
Tax benefit of
stock options
exercised - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT
JUNE 30, 1996 29,778 298 840,000 8,400 15,032,161 150,322 (7,448)
Conversion of
preferred stock - - (840,000) (8,400) 4,200,000 42,000 -
Net Income - - - - - - -
Purchase of
subsidiary
minority interest - - - - 526,032 5,260 -
Exercise of stock
options - - - - 2,034,929 20,349 -
Treasury stock - - - - - - (413,473)
purchased
Tax benefit of
stock options
exercised - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT
JUNE 30, 1997 29,778 $ 298 - $ - 21,793,122 $ 217,931 $ (420,921)
============ ============ ============ ============ ============ ============ ============
<CAPTION>
Additional Retained Total
Paid-In Earnings Shareholders'
Capital (Deficit) Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT
JUNE 30, 1994 $ 8,657,058 $ 2,210,529 $ 11,011,919
Cash dividend
paid on
preferred stock - (103,120) (103,120)
Net Income - 1,335,383 1,335,383
Treasury stock
purchased - - (7,448)
------------ ------------ ------------
BALANCE AT
JUNE 30, 1995 8,657,058 3,442,792 12,236,734
Cash dividend
paid on
preferred stock - (103,120) (103,120)
Net Income - 5,850,128 5,850,128
Exercise of stock
options 482,591 - 497,279
Tax benefit of
stock options
exercised 960,755 - 960,755
------------ ------------ ------------
BALANCE AT
JUNE 30, 1996 10,100,404 9,189,800 19,441,776
Conversion of
preferred stock (33,600) - -
Net Income - 1,429,468 1,429,468
Purchase of
subsidiary
minority interest 540,526 - 545,786
Exercise of stock
options 2,134,364 - 2,154,713
Treasury stock - - (413,473)
purchased
Tax benefit of
stock options
exercised 5,462,991 - 5,462,991
------------ ------------ ------------
BALANCE AT
JUNE 30, 1997 $ 18,204,685 $ 10,619,268 $ 28,621,261
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 27
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,429,468 $ 5,850,128 $ 1,335,383
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,618,652 2,937,088 2,237,855
Other 16,404 (60,174) 46,912
Changes in operating assets and liabilities:
Accounts and notes receivable -- related parties (3,128,947) 326,759 (630,459)
Accounts and notes receivable -- other 7,159,377 (13,799,138) 747,766
Other current assets (470,729) (38,269) 84,297
Deferred taxes 715,423 190,512 274,342
Assets held for sale - - 27,867
Other assets 400,420 150,402 (534,457)
Accounts payable (1,754,881) (447,648) 994,770
Unearned revenues (498,740) 72,693 780,314
Accrued liabilities (3,419,936) 5,601,089 (110,755)
Accrued interest - (51,027) 25,442
------------ ------------ ------------
Net cash provided by operating activities 4,066,511 732,415 5,279,277
Cash flows from investing activities:
Capital expenditures (3,247,985) (2,695,627) (5,201,466)
Proceeds from sale of assets - 175,000 745,618
------------ ------------ ------------
Net cash used in investing activities (3,247,985) (2,520,627) (4,455,848)
Cash flows from financing activities:
Proceeds (payments on) from line of credit, net (2,382,165) 2,382,165 (3,551,278)
Proceeds from long-term debt - - 841,073
Payments on long-term debt (333,332) (1,147,862) (150,401)
Payments on capital lease obligations (935,145) (700,838) (647,727)
Proceeds from exercise of stock options 2,154,713 497,279 -
Purchases of treasury stock (413,473) - -
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,909,402) 1,030,744 (3,508,333)
Net decrease in cash and cash equivalents (1,090,876) (757,468) (2,684,904)
Cash and cash equivalents at beginning of year 1,723,702 2,481,170 5,166,074
------------ ------------ ------------
Cash and cash equivalents at end of year $ 632,826 $ 1,723,702 $ 2,481,170
============ ============ ============
Supplemental information on non-cash transactions:
Capital lease obligations entered into $ 3,805,826 $ 210,477 $ 1,586,067
Tax benefit of stock options exercised 5,462,991 960,755 -
Supplemental disclosure of cash paid for income taxes 3,170,634 1,327,507 107,355
</TABLE>
See accompanying notes.
F-7
<PAGE> 28
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. ORGANIZATION AND ACQUISITIONS
ATC Communications Group, Inc. ("ATC" or the "Company"), formerly NRP Inc.,
was incorporated in 1985. Through its subsidiary, ATC provides outsourced
telecommunications-based marketing, customer service and call center
management services to large U.S. corporations in a variety of industries.
Prior to the disposition of the assets of its other business segments, ATC
also engaged in mail list management and brokerage services. (See Note 14.
- "Disposition of Assets").
At June 30, 1997, ATC had the following operating subsidiary:
<TABLE>
<CAPTION>
Percent Principal
Name Date acquired Owned by Ownership business activity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advanced Telemarketing April 1988 ATC 98.6% Call center
Corporation (d/b/a ATC management
Communications) ("Advanced")
</TABLE>
During fiscal 1997, the Company increased its ownership in Advanced through
the purchase of additional shares of Advanced common stock paid for by the
issuance of 526,032 shares of the Company's Common Stock. The Company
recognized approximately $529,000 of cost in excess of net assets acquired
as a result of these transactions. The minority ownership is not separately
disclosed in the Company's financial statements due to the immateriality of
such balances.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of ATC and its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
REVENUES. Revenues are recognized as services are performed. Principally
all clients have the contractual right to, and from time to time do, audit
documentation in support of their respective billings. While management
believes all such billings are proper and accurate, the Company
periodically records reserves against revenues representing management's
best estimate of billing adjustments or concessions that may be made as a
result of such audits.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the assets. Equipment, furniture and
fixtures, and computer software are depreciated over five-year to
eight-year lives. Maintenance and repairs are charged to operations as
incurred while renewals or improvements to such assets are capitalized.
CAPITALIZATION OF NEW CONTRACT START-UP COSTS. The Company capitalizes
certain up-front costs associated with the start-up of new business which
is to be performed for its clients pursuant to long-term contracts
(typically 3-5 years). Such costs are amortized over the life of such
long-term contracts.
F-8
<PAGE> 29
COST IN EXCESS OF NET ASSETS ACQUIRED. The cost in excess of net assets
acquired recognized in the acquisition of Advanced is being amortized using
the straight-line method over 25 years.
INCOME TAXES. ATC joins with its subsidiaries in filing a consolidated
federal income tax return. In 1993, ATC adopted SFAS No. 109 "Accounting
for Income Taxes", which requires an asset and liability approach for
financial accounting and reporting for income taxes. The cumulative effect
of this change was not material to the financial statements.
STATEMENTS OF CASH FLOWS. For the purposes of the statements of cash flows,
the Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
RECLASSIFICATIONS. Certain prior year balances have been reclassified to
conform with the 1997 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair market value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. The Company believes that the fair
values of financial instruments approximate their recorded values.
CONCENTRATION OF CREDIT RISK. The Company sells to clients in diversified
industries throughout the United States. A large percentage of the
Company's business is currently concentrated in the telecommunications
industry. The Company performs periodic credit evaluations of its clients'
financial conditions and generally does not require collateral. Receivables
are generally due within 30 days. Credit losses from clients have been
within management's expectations. The Company currently has certain clients
which each comprise more than 10% of the Company's revenues (See Note 11).
IMPAIRMENT OF LONG-LIVED ASSETS. In the event that facts and circumstances
indicate that the value of property and equipment, costs in excess of net
assets acquired or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow is required.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock based
Compensation" ("SFAS No. 123") was issued. This statement requires the fair
value of stock options and other stock-based compensation issued to
employees to either be included as compensation expense in the income
statement or the pro-forma effect on net income and earnings per share of
such compensation expense to be disclosed in the footnotes to the Company's
financial statements. In fiscal 1997, the Company adopted SFAS No. 123 on a
disclosure basis only. As such, implementation of SFAS No. 123 did not
impact the Company's consolidated balance sheet or results of operations.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles 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.
F-9
<PAGE> 30
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board issued FAS No. 128 ("SFAS 128). The Company will adopt SFAS 128,
which establishes standards for computing and presenting earnings per share
("EPS"), in the second quarter of fiscal 1998. This statement requires dual
presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and requires a reconciliation
of the numerator and the denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS
excludes the effect of potentially dilutive securities while dilutive EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into or resulted
in the issuance of common stock. If the Company had computed net EPS in
accordance with the provisions of SFAS 128, basic EPS would have been
$.0.07, $0.38, and $0.07 for the years ended June 30, 1997, 1996 and 1995,
respectively. Weighted average shares outstanding under the basic EPS
computation would have been 18,075,603, 13,890,616 and 13,561,007 for the
years ended June 30, 1997, 1996 and 1995, respectively. Diluted EPS would
not have been significantly different from the reported fully diluted EPS.
COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS 130 "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement is effective for fiscal years beginnning after
December 15, 1997. The Company believes that the adoption of this standard
will not have a material effect on the Company's consolidated results of
operations or financial position.
3. REVOLVING LINE OF CREDIT
Revolving line of credit at June 30, 1997 and 1996, is summarized below:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolving line of credit by Advanced of up to $15,000,000 with a
commercial bank at 0.50% over the bank's prime rate (effective rate
of 9.00% at June 30, 1997) secured by Advanced's accounts
receivable, furniture and equipment and expiring in January 1999 $ - $2,382,165
--------- ----------
$ - $2,382,165
========== ==========
</TABLE>
4. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996, is summarized below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to a commercial bank of $1,000,000 due in monthly
payments beginning March 1, 1996 equal to 1/36th of the principal
amount outstanding on such date plus interest at a rate of 0.75%
over the bank's prime rate (9.25% at June 30, 1997), with a maturity
date of January 1999; collateralized by Advanced's furniture and equipment $ 555,556 $ 888,889
Capital equipment lease obligations by Advanced, payable in
installments through January 2002, with interest rates ranging
from 8.75% to 10.25% (See Note 5) 5,593,361 2,722,680
----------- -----------
6,148,917 3,611,569
Less current maturities (1,395,304) (1,156,547)
----------- -----------
$ 4,753,613 $ 2,455,022
=========== ===========
</TABLE>
Both the note payable to the commercial bank and the revolving line of
credit discussed in Note 3 above contain various covenants which limit
Advanced's indebtedness, capital expenditures, investments and payment and
dividends to ATC. Additionally, Advanced is required to meet certain
financial covenants. At June 30, 1996, the Company had exceeded the capital
expenditure limits contained in these agreements. This event of default was
subsequently waived by the bank.
F-10
<PAGE> 31
At June 30, 1997, the Company failed to meet the minimum interest coverage
ratio required in these agreements. This event of default was subsequently
waived by the bank. The note payable and the revolving line of credit are
guaranteed by ATC. The guaranty agreement limits ATC's ability to incur
indebtedness, enter into guaranties and to acquire other companies.
Future maturities of long-term debt at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending June 30
---------------------------
<S> <C>
1998 $ 1,395,304
1999 1,381,284
2000 1,222,146
2001 1,323,281
2002 and thereafter 826,902
-----------
$ 6,148,917
===========
</TABLE>
The Company paid interest in the amount of $616,810, $903,770 and $920,059
in fiscal 1997, 1996 and 1995, respectively.
5. LEASES
Capital leases are included in the accompanying consolidated balance sheet
under the following captions at June 30, 1997:
<TABLE>
<S> <C>
Equipment $ 5,868,927
Less accumulated depreciation (542,274)
-----------
$ 5,326,653
===========
</TABLE>
Future minimum lease payments for all noncancelable leases with initial or
remaining terms of one year or more at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Years Ending June 30 Leases Leases
------------------------------------- ----------- -----------
<S> <C> <C>
1998 $ 1,510,052 $ 3,908,123
1999 1,510,052 2,684,272
2000 1,468,665 1,963,294
2001 1,459,189 1,869,753
2002 and thereafter 851,193 3,368,383
----------- -----------
Total minimum future lease payments $ 6,799,151 $13,793,825
===========
Less: amounts representing interest (1,205,790)
-----------
Present value of future lease payments $ 5,593,361
===========
</TABLE>
Rent expense on operating leases for the years ended June 30, 1997, 1996,
and 1995 was $4,641,374, $4,413,180, and $2,791,550, respectively.
6. PREFERRED STOCK
On June 16, 1994, approximately $3.1 million in short-term debt was
converted into 840,000 shares of a newly created Series C Preferred Stock.
The Series C Preferred Stock entitled the registered owners to the
following rights and preferences: (i) beginning June 30, 1995, preferential
cumulative cash dividends at the annual rate of $0.11 per share, (ii) at
any time prior to June 30,
F-11
<PAGE> 32
2014, the right to convert each share into shares of Common Stock, $.01 par
value, at a conversion ratio of one share of Series C Preferred Stock for
five shares of Common Stock, (iii) a liquidation preference of $3.66 per
share, (iv) cash dividends on parity with shareholders of Common Stock
based on the number of shares of Common Stock into which each share of
Series C Preferred Stock is convertible and, (v) the right to a number of
votes for each share of Series C Preferred Stock that is equal to the
number of shares of Common Stock into which shares of Series C Preferred
Stock is convertible.
During fiscal 1997, the holder of the Series C Preferred Stock exercised
the conversion right and exchanged the 840,000 shares of Series C Preferred
Stock for 4,200,000 shares of Common Stock.
7. EPS
Primary and fully diluted earnings per common share is computed by dividing
net income applicable to common shareholders by the weighted average number
of shares of common stock and dilutive common stock equivalents outstanding
during the period. Common stock equivalents consist of common stock
issuable under the assumed exercise of stock options and warrants and the
assumed conversion of the Company's issued and outstanding preferred stock.
A computation of EPS follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 18,075,603 13,890,616 13,561,007
Common stock equivalents:
Dilutive stock options and warrants, net of
shares assumed repurchased with exercise
proceeds 1,415,089 3,027,014 620,651
Common Stock assumed issued on
conversion of dilutive preferred stock 2,659,000 4,259,556 4,259,556
------------ ------------ ------------
Primary shares 22,149,692 21,177,186 18,441,214
============ ============ ============
FULLY DILUTED
Weighted average shares outstanding 18,075,603 13,890,616 13,561,007
Common stock equivalents:
Dilutive stock options and warrants, net of
shares assumed repurchased with exercise
proceeds 1,447,228 3,155,142 796,428
Common Stock assumed issued on
conversion of dilutive preferred stock 2,659,000 4,259,556 4,259,556
------------ ------------ ------------
Fully diluted shares 22,181,831 21,305,314 18,616,991
============ ============ ============
Net income from continuing operations $ 1,429,468 $ 5,850,128 $ 1,444,612
Less subsidiary income attributable to minority
interest in the subsidiary's stock and stock
options (See Note 12) (205,712) (600,939) (408,929)
------------ ------------ ------------
Net income from continuing operations
applicable to common stock 1,223,756 5,249,189 1,035,683
Net income (loss) from discontinued operations - - (109,229)
------------ ------------ ------------
Net income applicable to common shareholders $ 1,223,756 $ 5,249,189 $ 926,454
============ ============ ============
Primary earnings per share $ 0.06 $ 0.25 $ 0.05
============ ============ ============
Fully diluted earnings per share $ 0.06 $ 0.25 $ 0.05
============ ============ ============
</TABLE>
F-12
<PAGE> 33
8. OTHER RELATED PARTY TRANSACTIONS
At June 30, 1997, 1996 and 1995, the Chairman of the Company had
outstanding borrowings and accrued interest of approximately $3,539,779,
$566,045 and $793,773, respectively. The borrowing bears 6% annual
interest, is due in full on June 30, 1998 and is secured by collateral
pledged by Codinvest Limited., the Company's largest shareholder of record.
Interest income from the receivable amounted to approximately $78,935,
$27,200, and $19,000 in 1997, 1996, and 1995, respectively.
During each of the two years ended June 30, 1996, the Company held a note
receivable from Freiburghaus & Partners, S.A. ("F&P"), a shareholder of
record. The note bears interest at 11% per annum. At June 30, 1996, the
note receivable was paid in full. At June 30, 1995, unpaid principal and
accrued interest amounted to $73,696. Interest income from this note
amounted to $8,528 and $8,853 in fiscal 1996 and 1995, respectively. In
fiscal 1996 and 1995, the Company applied $82,225 and $21,440,
respectively, of accrued preferred stock dividends due to F&P towards the
note receivable due to ATC.
At June 30, 1997 and 1996, FEM Inc., a company controlled by a shareholder
of the Company, had outstanding borrowings and accrued interest of $198,212
and $27,051, respectively, pursuant to a note receivable to the Company.
The note bears 6% annual interest and is due in full on March 31, 1998.
In August 1994, the Company sold certain of the assets of its list services
subsidiaries to an officer of such subsidiaries. See further discussion in
Note 14.
9. INCOME TAXES
The components of the income tax expense (benefit) applicable to continuing
operations for the fiscal years ended June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current
Federal $ 127,317 $ 1,894,206 438,475
State 259,580 500,036 107,355
Deferred (4,747,565) 213,371 (93,867)
----------- ----------- -----------
(4,360,668) 2,607,613 451,963
----------- ----------- -----------
Direct credits to equity related to compensation
expense for tax purposes in excess of amount
recognized for financial reporting purposes 5,315,218 960,755 -
----------- ----------- -----------
Total income tax expense per the
statements of income $ 954,550 $ 3,568,368 $ 451,963
=========== =========== ===========
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
rate as a percentage of pre-tax income for the fiscal years ended June 30
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income tax 7.2% 3.5% 4.5%
Goodwill amortization 1.0% 0.3% 1.8%
Tax credits (5.2%) - (15.8%)
Other 3.0% 0.1% (0.7%)
----------- ----------- -----------
40.0% 37.9% 23.8%
=========== =========== ===========
</TABLE>
F-13
<PAGE> 34
The components of deferred taxes included in the accompanying consolidated
balance sheet as of June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 343,020 $ 411,493
Net operating loss carryforwards 5,395,683 665,325
Tax credits 125,000 -
---------- ----------
Gross deferred tax assets 5,863,703 1,076,818
Deferred tax liabilities:
Fixed assets (828,106) (788,786)
---------- ----------
Net deferred tax asset $5,035,597 $ 288,032
========== ==========
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $15,870,000. Due to an ownership change which took place in a
prior year, approximately $1,677,000 of the net operating loss
carryforwards are subject to limitations set forth in regulations under the
Internal Revenue Code. Under those regulations, future utilization is
limited to approximately $279,000 per year.
10. COMMITMENTS AND CONTINGENCIES
In September 1996, the Company entered into an employment agreement with an
officer of the Company through September 2001. The agreement specifies an
annual base salary of $400,000 and additional bonus compensation based on
the Company's performance and parameters established by the Compensation
Committee of the Company's Board of Directors.
During fiscal 1997, Advanced renegotiated the employment agreement with a
former officer of the Company and entered into a consulting agreement with
the former officer through December 1998. The agreement specifies a monthly
consulting fee of $14,825.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have
been filed or are pending against the Company. Management believes that the
claims are without merit and that the ultimate resolution of such
contingencies, for which adequate reserves have been made, will not have a
material adverse effect on the financial position or results of operations
of the Company
11. MAJOR CLIENTS
The Company had sales to major clients comprising the following percentages
of consolidated revenues for the years ended June 30:
<TABLE>
<CAPTION>
Customer 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C>
A 44% 44% 53%
B 19% 11% 0%
C 9% 10% 1%
D 6% 12% 2%
E 1% 5% 10%
</TABLE>
F-14
<PAGE> 35
12. STOCK OPTIONS AND WARRANTS
In February 1993, the Company's shareholders approved the NRP Inc. 1992
Stock Option Plan (the "1992 Plan") which provides for the granting of
options to purchase up to a maximum of 3,000,000 shares of Common Stock to
key employees, officers, and directors of the Company and its subsidiaries.
Options granted pursuant to the 1992 Plan are exercisable for 10 years from
the date of grant subject to vesting schedules. The Company may grant
additional options at any time prior to December 11, 2002.
In September 1996, the Company initiated the ATC Communications Group, Inc.
1996 Stock Option and Restricted Stock Plan (the "1996 Plan") which
provides for the granting of options to purchase up to a maximum of
2,000,000 shares of Common Stock to key employees, officers and directors
of the Company and its operating subsidiary. Options granted pursuant to
the 1996 Plan are exercisable for 10 years from the date of the grant
subject to vesting schedules. The Company may grant additional options at
any time prior to September 2006.
Information regarding the 1992 Plan and 1996 Plan is summarized below:
<TABLE>
<CAPTION>
1992 Plan 1996 Plan
------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 1,140,000 $1.25
Granted 225,000 $1.00
Exercised -
---------
Outstanding at June 30, 1995 1,365,000 $1.21
Granted 1,312,500 $9.28
Exercised (215,250) $1.25
---------
Outstanding at June 30, 1996 2,462,250 $5.51 -
Granted - 1,653,000 $11.08
Exercised (322,750) $1.60 -
Cancelled (42,500) $6.51 -
--------- ---------
Outstanding at June 30, 1997 2,097,000 $6.09 1,653,000 $11.08
========= =========
Exercisable at June 30, 1997 1,158,000 $3.66 250,000 $11.61
========= =========
</TABLE>
The following tables summarize information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Vested Options
---------------------------------------- --------------------
Weighted Weighted Weighted
Exercise Average Average Average
Price Remaining Number of Exercise Number of Exercise
Range Contractual Life Shares Price Shares Price
--------------- ---------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00 - $4.00 7.10 years 870,000 $ 1.27 815,000 $ 1.18
$4.88 - $9.00 9.18 years 1,845,000 $ 8.13 389,000 $ 8.44
$11.81 - $16.19 9.21 years 1,035,000 $14.47 204,000 $14.21
</TABLE>
F-15
<PAGE> 36
The fair value of each option was estimated on the date of grant based on
the Black-Sholes option pricing model assuming, among other things, no
dividend yield, a risk free interest rate of 6.57%, expected volatility of
70% and expected life of 6 years. Had the Company determined compensation
cost based on the fair value at the date of grant for its stock options
under SFAS No. 123, the Company's net income (loss) would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
AS REPORTED:
Net income from continuing operations $ 1,429,468 $ 5,850,128 $ 1,444,612
============= ============= =============
Earnings per common and common
equivalent share from continuing operations $ 0.06 $ 0.25 $ 0.06
============= ============= =============
PRO FORMA:
Net income (loss) from continuing operations $ (7,000,620) $ 731,039 $ 783,284
============= ============= =============
Earnings per common and common
equivalent share from continuing operations $ (0.32) $ 0.01 $ 0.02
============= ============= =============
</TABLE>
In May 1994, the Company granted warrants, which expire May 30, 1999, to a
financial advisory services firm entitling the firm to purchase 650,000
shares of Common Stock at a purchase price of $1.625 per share, the market
price on the date granted. During fiscal 1997, the warrants were exercised
in full.
In April 1993, Advanced initiated the Advanced Telemarketing Corporation
1993 Stock Option Plan which provides for the granting of options to
Advanced's key employees, officers, and directors to purchase up to a
maximum of 1,117,379 shares of Advanced's common stock ("Advanced Common").
In December 1996, the Company initiated the ATC Communications Group, Inc.
1996 Stock Exchange Rights Plan (the "Rights Plan") which provides for
holders of options to purchase shares of Advanced Common to exchange shares
of Advanced Common received upon exercise of such options for shares of
Common Stock. The shares exchanged pursuant to the Rights Plan are
exchanged on the ratio of two shares of Common Stock for one share of
Advanced Common. During fiscal 1997, holders of options to purchase 207,348
shares of Advanced Common exercised such options. At June 30, 1997, options
to purchase 11,669 shares of Advanced Common were outstanding with options
to purchase 9,534 of such shares vesting in 1998. The options to purchase
Advanced Common outstanding at June 30, 1997 are subject to the Rights Plan
as discussed above.
Pursuant to the Advanced Telemarketing Corporation 1993 Stock Option Plan,
in October 1993, Advanced granted to the president of Advanced options to
purchase 680,908 shares of Advanced's common stock (representing 15% of the
fully diluted common stock of Advanced) at $0.01 per share. In March 1995,
the president of Advanced surrendered such options in exchange for stock
options to purchase a total of 2,410,880 shares of ATC Common Stock at
$0.8125 per share, the market price at the date of grant. The ATC options
granted became fully exercisable on August 1, 1995 and are exercisable for
10 years from the date of grant. During fiscal years 1997 and 1996, options
to purchase 1,062,179 and 1,348,701 shares of ATC Common Stock,
respectively, were exercised pursuant to this grant.
In December 1996, the Company initiated the ATC Communications Group, Inc.
1996 Stock Exchange Rights Plan (the "Rights Plan") which provides for
certain holders of the Advanced
F-16
<PAGE> 37
Common to exchange such shares for shares of Common Stock. The shares
exchanged pursuant to the Rights Plan are exchanged, based on the fair
value of the respective shares, on a ratio of two shares of Common Stock
for one share of Advanced Common. During fiscal 1997, the Company issued
414,696 shares of Common Stock pursuant to the Rights Plan.
13. EMPLOYEE BENEFIT PLAN
During fiscal 1991, Advanced adopted a defined contribution 401(k) plan
covering all eligible employees, as defined. Eligible employees may elect
to contribute up to 15% of their compensation, not to exceed $9,500 per
year. The Company may, at its discretion, match employee contributions.
There was no employer matching contribution made in 1997, 1996 or 1995.
14. DISPOSITION OF ASSETS
On August 30, 1994, pursuant to an asset purchase agreement, NRL Direct,
Inc., a wholly-owned subsidiary of ATC, sold certain of its assets
consisting primarily of cash, accounts receivable, fixed assets,
tradenames, and other assets for promissory notes aggregating approximately
$745,000. As a result of the asset disposition, effective July 1, 1994, ATC
no longer engages in the list brokerage and list management businesses.
Summary financial information related to the discontinued business segment
was as follows:
<TABLE>
<CAPTION>
For the year ended June 30,
1995
---------
<S> <C>
Revenue $ -
Cost of Sales -
---------
Gross Margin -
=========
Income (Loss) From Operations (135,285)
Net Interest (Expense) Income -
---------
Net Income Before Taxes (135,285)
Income Tax (Expense) Benefit 26,056
---------
Net Income (Loss) $(109,229)
=========
</TABLE>
The net after-tax income or loss derived from the operation of this
business segment has been classified on the statement of income to
separately identify it as income from operations of discontinued business
segment, net of applicable taxes.
F-17
<PAGE> 38
ATC COMMUNICATIONS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACC OUNTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Charged To
Earnings -
Balance at General and Balance at
Beginning of Administrative Net End
Description Year Expenses Write-Off of Year
- ------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts $ 118,317 $ (15,000) $ (12,471) $ 90,846
============== ============== ============== ==============
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $ 90,846 $ 125,000 $ (40,830) $ 175,016
============== ============== ============== ==============
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts $ 175,016 $ (75,000) $ (26,190) $ 73,826
============== ============== ============== ==============
</TABLE>
F-18
<PAGE> 39
EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
Exhibit 10.19 Promissory Note dated September 16, 1997 among Michael G.
Santry ATC Communications Group, Inc.
Exhibit 10.20 Stock Pledge Agreement dated September 16, 1997 among
Codinvest and ATC Communications Group, Inc.
Exhibit 27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.19
PROMISSORY NOTE
$3,661,505.39 September 16, 1997
The undersigned (the "Maker") unconditionally promises to pay to the order
of ATC Communications Group, Inc. (the "Company") at 5950 Berkshire Lane, Suite
1650, Dallas, Texas 75225, or such other address given to the Maker by the
Company, in lawful money of the United States of America, and as hereinafter
provided, the principal amount of Three Million Six Hundred Sixty-One Thousand
Five Hundred and Five and 39/100 dollars ($3,661,505.39), or so much thereof as
may be outstanding from time to time, together with interest on the principal
amount from time to time remaining unpaid hereunder from the date hereof until
maturity at the rate of interest which shall from day-to-day equal the lesser
of (a) six percent (6%) per annum or (b) the Maximum Rate. All past due
principal and interest on this Note shall bear interest from maturity hereof
until paid at a rate per annum which shall from day-to-day equal to the lesser
of (a) ten percent (10%) or (b) the Maximum Rate.
The term "Maximum Rate," as used herein, shall mean, with respect to the
holder hereof, the maximum nonusurious interest rate, if any, that at any time,
or from time to time, may be contracted for, taken, reserved, charged, or
received on the indebtedness evidenced by this Note under the laws which are
presently in effect of the United States and the State of Texas applicable to
such holder and such indebtedness or, to the extent permitted by law, under
such applicable laws of the United States and the State of Texas which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
The accrued but unpaid interest on this Note shall be payable in quarterly
installments, payable on the last business day of each calendar quarter until
all indebtedness under this Note has been paid in full. A principal payment of
$732,301.06 shall be paid on or before June 16, 1998. All remaining principal
and accrued but unpaid interest shall be due and payable on June 30, 1998.
The Maker shall have the right and privilege of prepaying all or any part
of this Note at any time without notice, premium or penalty and all amounts
prepaid shall be applied first to the payment of accrued interest and the
balance remaining, if any, shall be applied to the reduction of principal.
This Note shall become immediately due and payable, at the option of the
holder hereof, without presentment or demand or any notice to the Maker or any
other person obligated hereon, upon the occurrence of any of the following
events (collectively, "Events of Default"): (a) default in the payment or
performance of any liability or obligation hereunder of the Maker to the holder
of this Note and such default shall continue for fifteen (15) days; (b) default
in the performance of any obligation of Codinvest Limited under the terms of
that certain Stock Pledge Agreement between Codinvest Limited, a British Virgin
Islands corporation, and the Company dated the date hereof (the "Pledge
Agreement"), which secures repayment of this Note, and such
1
<PAGE> 2
default shall continue for fifteen (15) days; (c) Maker shall (i) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator, (ii) file a voluntary petition in bankruptcy, admit in writing that
Maker is unable to pay Maker's debts as they become due or generally not pay
Maker's debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) file a petition or answer seeking reorganization or
an arrangement with creditors or to take advantage of any bankruptcy or
insolvency laws, (v) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against Maker in any
bankruptcy, reorganization or insolvency proceeding, or (vi) take action to
effect any of the foregoing.
Under the terms of the Pledge Agreement, as security for payment of
Maker's obligations hereunder, Codinvest Limited has granted to the Company a
security interest in 4,672,897 shares of the Common Stock of Computer
Integration Corp., a Delaware corporation (the "Collateral").
Upon an Event of Default, and at any time thereafter, at the option of the
holder of this Note, any or all of the principal hereof and accrued, but
unpaid, interest, shall become immediately due and payable without presentment
or demand or any notice to the Maker or any other person obligated thereon and
the Company shall have and may exercise with reference to the Collateral any or
all the rights and remedies of a secured party under the Uniform Commercial
Code as adopted and as amended in the State of Texas, and as otherwise granted
herein or under any law or under any other agreement executed by the Maker. In
the event that an Event of Default occurs in connection with the payment of the
Note at maturity, regardless of how such default or maturity occurs, Maker may
seek, among other permitted courses of action, the preservation, enforcement,
foreclosure or other similar sale or disposition of any security interest or
other liens anytime hereafter securing the payment of the indebtedness
evidenced by this Note, and no attachment, execution, or other writ of process
shall be sought, issued or levied against any assets, properties or funds of
Maker as such.
No waiver by the Company of any of its rights or remedies hereunder or
under any other document evidencing or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of the Company; no
delay or omission in the exercise or enforcement by the Company of any rights
or remedies shall ever be construed as a waiver of any right or remedy of the
Company; and no exercise or enforcement of any such rights or remedies shall
ever be held to exhaust any right or remedy of the Company.
If this Note is collected by suit or through any probate or bankruptcy
court, or any judicial proceeding, or if this Note is not paid at maturity,
however such maturity may be brought about, and it is placed in the hands of an
attorney for collection, then the Maker agrees to pay all costs and expenses of
collection including, but not limited to, court costs and attorney's fees of
the holder hereof.
The Maker and all sureties, endorsers and guarantors of this Note jointly
and severally waive notice of default, demand, presentment for payment, notice
of non-payment, notice of intent to accelerate, notice of acceleration,
protest, notice of protest, and all other notices, filing
2
<PAGE> 3
of suit and diligence in collecting this Note or enforcing any of the security
herefor and agree to any substitution, exchange or release of any of such
security or the release of any party primarily or secondarily liable hereon and
further agree that it will not be necessary for any holder herefor, in order to
enforce payment by them of this Note, to first institute suit or exhaust its
remedies against the Maker or others liable herefor, or to enforce its rights
against any security herefor, and consent to any extensions or postponements or
time of payment of this Note or any other indulgences with respect hereto,
without notice thereof to any of them.
Notwithstanding anything contained in this Note to the contrary, the
Company shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on this Note, any amount in excess of the amount
permitted and calculated at the Maximum Rate, and, in the event the Company
ever receives, collects or applies as interest any amount in excess of the
amount permitted and calculated at the Maximum Rate, such amount which would be
excessive interest shall be applied to the reduction of the unpaid principal
balance of this Note, and, if the principal balance of this Note is paid in
full, any remaining excess shall forthwith be paid to Maker. In determining
whether or not the interest paid or payable under any specific contingency
exceeds the Maximum Rate, Maker and the Company shall, to the maximum extent
permitted under applicable law, (i) characterize any non-principal payment
(other than payments which are expressly designated as interest payments
hereunder) as an expense, fee, or premium, rather than as interest, (ii)
exclude voluntary prepayments and the effect thereof, and (iii) spread the
total amount of interest throughout the entire contemplated term of this Note.
THIS NOTE IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED
IN THE STATE OF TEXAS. EXCEPT TO THE EXTENT THAT THE LAWS OF THE UNITED STATES
MAY APPLY TO THE TERMS HEREOF, THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL
GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS NOTE.
IN THE EVENT OF A DISPUTE INVOLVING THIS NOTE OR ANY OTHER INSTRUMENTS EXECUTED
IN CONNECTION HEREWITH, THE UNDERSIGNED IRREVOCABLY AGREES THAT VENUE FOR SUCH
DISPUTE SHALL LIE IN ANY COURT OF COMPETENT JURISDICTION IN DALLAS COUNTY,
TEXAS.
3
<PAGE> 4
NO ORAL AGREEMENTS. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
MAKER:
/s/ MICHAEL G. SANTRY
----------------------------------
MICHAEL G. SANTRY
Address: 5950 Berkshire Lane
Suite 1650
Dallas, Texas 75225
4
<PAGE> 1
EXHIBIT 10.20
STOCK PLEDGE AGREEMENT
This STOCK PLEDGE AGREEMENT dated as of September 16, 1997 (the
"Agreement"), by and between Codinvest Limited, a British Virgin Islands
corporation having an address of Road Town, P.O. Box 3126, Tortola, British
Virgin Islands (the "Pledgor"), and ATC Communications Group, Inc., a Delaware
corporation, having an address of 5950 Berkshire Lane, Suite 1650, Dallas,
Texas 75225 (together with all successors and assigns, the "Lender"):
W I T N E S S E T H:
WHEREAS, Michael G. Santry has borrowed $3,661,505.39 from Lender (the
"Loan") evidenced by a Promissory Note of even date herewith made by Michael G.
Santry and payable to Lender in the principal amount of $3,661,505.39 (the
"Note"); and
WHEREAS, the Pledgor has agreed to pledge the Pledged Stock (as defined in
Section 1(a) of this Agreement), and such additional collateral as may be
required by Section 1(a) hereof, to Lender as collateral security for the
repayment of the Loan, all upon the terms and subject to the conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency whereof are hereby acknowledged, the parties hereby agree as
follows:
Section 1. Grant of Security Interests.
(a) The Pledgor hereby pledges, assigns, transfer and delivers to
Lender, and grants to Lender a continuing security interest in 4,672,897 shares
of Common Stock of Computer Integration Corp., together with the proceeds
thereof, all renewals, substitutions, modifications and extensions thereof, any
other property or money held hereunder or any part thereof (collectively, the
"Pledged Stock"), all upon the terms and subject to the conditions set forth
herein. The market value of the Pledged Stock on the date hereof is
approximately $7,009,345.50. The Pledgor hereby covenants and agrees that if,
as of the last business day of any calendar quarter, the market value of the
Pledged Stock is less than 150% of the amount of indebtedness then outstanding
under the Note at any time, Lender may upon written notice to Pledgor, require
Pledgor to deposit, and Pledgor shall within 15 days of such written notice
deposit with Lender, cash, cash equivalents, marketable securities or such
other collateral as is reasonably acceptable to Lender, with a market value
that, added to the then market value of the Pledged Stock, is not less than
150% of the amount of indebtedness then outstanding under the Note. The "market
value" of securities for purposes of this Section 1(a) shall be based on the
closing sale price of such securities as reported by NASDAQ or the applicable
exchange, or if no such closing sale price is reported, the average of the bid
and ask prices of such securities as reported by NASDAQ or the applicable
exchange, or if no such prices are reported, the fair market value of the
securities as determined by the Board of Directors of Lender in good faith.
STOCK PLEDGE AGREEMENT - Page 1
<PAGE> 2
All references in this Agreement to the Pledged Stock shall, to the extent
appropriate, constitute references to any additional collateral required by the
preceding sentence.
(b) The Pledged Stock shall constitute security for the and full
payment of all amounts due and payable under the Loan.
Section 2. Pledged Stock Delivery and Documentation; Release of Stock. The
Pledgor shall deliver to Lender the original certificates representing the
Pledged Stock, endorsed in blank (which endorsement shall be undated) or with
an undated stock assignment power endorsed in blank.
Section 3. Further Assurances. The Pledgor agrees to do such further acts
and things and to execute and deliver such additional documentation as Lender
from time to time may reasonably request in connection with the administration
or enforcement of this Agreement, or to perfect Lender's security interest in
the additional collateral that constitutes Pledged Stock under this Agreement,
whether related to the Pledged Stock or any part thereof, to evidence, confirm,
perfect or protect any security interest granted or required to have been
granted hereunder or in order better to assure and confirm unto Lender its
rights, powers and remedies hereunder.
Section 4. Representations and Warranties. To induce the Lender to enter
into this Agreement, the Pledgor represents and warrants to the Lender that:
(a) the execution, delivery and performance by him of this (i)
will not violate or be in conflict with any applicable law (including, without
limitation, any applicable federal or state securities or similar law) and (ii)
will not violate, be in conflict with, result in a breach of or constitute,
with the giving of notice, the passage of time, or both, a default under any
material indenture, agreement or other instrument to which he is a party or by
which he or any of his properties or assets is or may be bound or subject;
(b) this Agreement constitutes the legal, valid and binding
obligation of the Pledgor, enforceable against the Pledgor in accordance with
its terms;
(c) the Pledgor is the owner of the Pledged Stock and none of
the Pledged Stock is subject to any security interest, lien or other
encumbrance or any adverse claim of any kind or nature whatsoever, except for
the security interest granted hereunder to Lender, and any assignee of all or
any portion of the Pledged Stock is entitled to receive payments with respect
thereto without any defense, counterclaim, set-off, abatement, reduction,
recoupment or other claim of any kind or nature whatsoever;
(d) there are no actions, suits or proceedings (whether or
not purportedly on behalf of the Pledgor) pending or threatened against the
Pledgor and related to the Pledged Stock or the Pledgor's equity interest
therein;
STOCK PLEDGE AGREEMENT - Page 2
<PAGE> 3
(e) all consents or approvals, if any, required as a condition
precedent to or in connection with the due and valid execution and delivery by
the Pledgor of this Agreement have been obtained;
(f) the Pledged Stock may only be transferred under an effective
registration statement under the Securities Act of 1933, in compliance with
Rule 144 of the rules and regulations under such Act, or pursuant to any other
applicable exception under such Act;
(g) the Pledgor is not engaged principally in, nor has as one
of his important activities, the business of extending credit for the purpose
of purchasing or carrying any "margin stock" (within the meaning of Regulations
G, T, U and X of the Board of Governors of the Federal Reserve System of the
United States of America, as amended to the date hereof) and, if requested by
Lender, the Pledgor will furnish to Lender a statement on Federal Reserve Form
U-1; and
(h) no part of the proceeds of the Loan will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately,
(i) to purchase or to carry margin stock or to extend credit to others for the
purpose of purchasing or carrying margin stock, or to refund indebtedness
originally incurred for such purposes, or (ii) for any purpose which violates
or is inconsistent with the provisions of Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System.
Section 5. Covenants. The Pledgor covenants and agrees that, from the date
hereof and until payment and performance in full of all amounts due under the
Loan, the Pledgor shall not sell, transfer or otherwise dispose or agree to
dispose of (other than by operation of law, as in the case of Pledgor's death)
all or any portion of the Pledged Stock, without first obtaining the written
consent of Lender to such sale, transfer or disposition; shall not further
pledge, assign or deliver a security interest in the Pledged Stock, or amend,
modify, supplement or waive any provisions of the Pledged Stock; and shall not
suffer or permit any lien or encumbrance to be created upon or with respect to
any of the Pledged Stock, except for the security interest granted hereunder to
Lender.
Section 6. Litigation Respecting Pledged Stock. In the event any action,
suit or other proceeding at law, in equity, in arbitration or before any other
authority relating to the Pledgor, the Pledged Stock, or the Pledgor's equity
interest therein is contemplated by the Pledgor or is otherwise commenced, the
Pledgor shall give the trustee immediate notice thereof and shall furnish
Lender with such indemnity as may reasonably be requested by Lender.
Section 7. Rights and Duties of the Pledgor with Respect to the Pledged
Stock. Subject to the provisions of this Agreement and unless there shall have
occurred an Event of Default pursuant to any Loan Document:
(a) The Pledgor shall be entitled to exercise any and all voting,
waiver or consensual rights and powers relating or pertaining to the Pledged
Stock or any part thereof for any purpose not inconsistent with the terms of
this Agreement.
STOCK PLEDGE AGREEMENT - Page 3
<PAGE> 4
(b) The Pledgor shall be entitled to receive and retain any
and all cash dividends payable on the Pledged Stock, but any and all stock or
liquidating dividends or other distributions of cash or other assets or
properties made on, in respect of, upon, in redemption of, in exchange for or
in payment of principal of the Pledged Stock (whether resulting from a
subdivision, combination or reclassification of the outstanding capital stock
or any issuer thereof, any merger, consolidation, acquisition or other exchange
of assets or securities to which any such issuer may be a party, any
conversion, call or redemption, or otherwise) shall be and become part of the
Pledged Stock pledged under this Agreement, and, if received by the Pledgor,
shall be delivered immediately to the Lender or its designee (accompanied by
the documentation required under this Agreement) to be held as Pledged Stock
pursuant to this Agreement.
(c) The Lender shall execute and deliver (or cause to be executed
and delivered) to the Pledgor all such proxies, powers of attorney, dividend
orders, interest coupons and other instruments as the Pledgor may reasonably
request for the purpose of enabling the Pledgor to exercise the voting or
consensual rights and powers that it is entitled to exercise pursuant to
subsection (a) of this Section 7 and to receive the dividends and interest
payments that it is authorized to received and retain pursuant to subsection
(b) of this Section 7.
Section 8. Rights of Lender to the Pledged Stock.
(a) In the event of an occurrence of an Event of Default under the
Note, the Lender in its sole and absolute discretion may take any or more of
the following actions:
(i) further notify all parties, if any, interested in any of the
Pledged Stock of the interest of the Lender therein and of any action
proposed to be taken with respect thereto, and inform any of those
parties that all payments otherwise payable to the Pledgor with
respect thereto shall be made to the Lender until all amounts due
under the Loan have been paid in full;
(ii) receive and retain all payments of any kind with respect to
any and all of the Pledged Stock;
(iii) take such action with respect to the sale, assignment and
delivery of the whole of, or from time to time anyone or more items
of, the Pledged Stock, including, without limitation, to sell, assign
and deliver the whole of, or from time to time any part of, the
Pledged Stock at any private sale or at public auction, for cash, for
credit or for other property, for immediate or future delivery, and
for such price or prices and on such terms as the Lender in its sole
and absolute discretion may determine, and the Lender may bid for and
purchase the whole or any portion of the Pledged Stock so sold free
from any right or equity of redemption; to adjourn any such sale or
cause the same to be adjourned at the time and place fixed for the
sale; and to carry out any agreement to sell all or any portion of
the Pledged Stock in accordance with the terms of such agreement, any
requirement of reasonable notice imposed by law to be deemed met if
such notice is in writing and is mailed, telegraphed or hand
delivered to the Pledgor at
STOCK PLEDGE AGREEMENT - Page 4
<PAGE> 5
least three days prior to the sale, disposition or other event giving
rise to such notice requirement;
(iv) otherwise use or deal from time to time with the Pledged
Stock, in whole or in part, in all respects as if the Lender were the
outright owner thereof; and
(v) in addition to, and not by way of limitation of, any of the
rights specified above, exercise any and all rights and remedies
afforded to the Lender, under the Loan Documents or as a secured
party in possession of collateral or otherwise, under any and all
provisions of applicable law, including, but not limited to, the
Uniform Commercial Code as adopted by the State of Texas.
(b) The Lender shall collect the cash proceeds received from any
sale or other disposition or from any other source contemplated by subsection
(a) of this Section 8 and shall apply the full proceeds in accordance with the
provisions of this Agreement.
(c) Notwithstanding the foregoing, none of the provisions of
this Section 8 shall confer on the Lender any rights or privileges that are not
permissible under applicable law.
(d) In connection with the provisions of this Agreement, the
Pledgor from time to time shall promptly execute and deliver, or cause to be
executed and delivered, to the Lender such reasonable documents and
instruments, shall join in such notices and shall take, or cause to be taken,
such other reasonable and lawful action as the Lender shall deem necessary or
desirable to enable it to exercise any of the rights with respect to the
Pledged Stock granted to it pursuant to this Agreement.
Section 9. Application of Funds. In the event that an Event of Default has
occurred under the Note and all amounts due thereunder have not been paid in
full by the Pledgor, any funds received from or on behalf of the Pledgor under
this Agreement by the Lender shall be applied to the following items:
(a) to payment of all amounts due under the Loan; and
(b) to return any remainder to the Pledgor.
Section 10. Power of Attorney. With respect to the Pledged Stock that the
Lender or its designee holds hereunder, the Pledgor hereby irrevocably makes,
constitutes, and appoints, effective upon the occurrence of an Event of Default
under the Note and all amounts due thereunder being declared due and payable
and not being paid by the Pledgor, the Lender and each of the Lender's officers
and each of them, with full power of substitution, as the Pledgor's true and
lawful attorneys-in-fact with full power, from time to time, in the Pledgor's
name, place and stead, subject to Section 8 hereof, to (a) transfer the Pledged
Stock on the books of the Company, in whole or in part, to the name of the
Lender or such other person or persons as the Lender may designate; (b) take
possession of and endorse any one or more checks, drafts, bills of exchange,
money orders or any other documents received on account of the Pledged Stock;
(c)
STOCK PLEDGE AGREEMENT - Page 5
<PAGE> 6
collect, sue for and give acquittances for monies due on account of the
foregoing; (d) withdraw any claims, suits or proceedings pertaining to or
arising out of the foregoing; (e) execute and record or file on behalf of the
Pledgor any evidence of a security interest contemplated by this Agreement or
any refiling, continuation or extension thereof; (f) take any other action
contemplated by this Agreement; and (g) sign, execute, acknowledge, swear to,
verify, deliver, file, record and publish any one or more of the foregoing.
This power of attorney is hereby declared to be irrevocable, with full power of
substitution and coupled with interest. This power of attorney shall survive
the bankruptcy of the Pledgor and shall extend to and be binding upon the
Pledgor's successors or assigns. This power of attorney may be exercised by any
one of the above named attorneys-in-fact, or by an substitute designated by any
of those attorneys-in-fact. A facsimile signature shall be effective if so
affixed.
Section 11. Termination of Security Interest. The security interest of the
Lender hereunder shall terminate when all amounts due and payable under the
Loan shall have been fully paid and satisfied. Upon such complete satisfaction
Lender shall reassign, release and/or deliver to the Pledgor all Pledged Stock
then held by the Lender.
Section 12. Notices. All notices, certificates or other communications
permitted or required to be given hereunder shall be sufficiently given and
shall be deemed given when delivered or when mailed by registered or certified
mail, postage prepaid to the addressee thereof at their respective addresses as
set forth below or at such other address as either party hereto may designate
to the other party hereto by notice given in accordance with this Section 12.
If to the Pledgor: Codinvest Limited
Road Town
P.O. Box 3126
Tortola, British Virgin Islands
Attn: Luc Argand
If to the Lender: ATC Communications Group, Inc.
5950 Berkshire Lane
Suite 1650
Dallas, Texas 75225
Attn: Chief Financial Officer
Section 13. Section Headings; Definitions. The Section headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
Section 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas and applicable
federal law, without regard to principles of conflict of laws.
STOCK PLEDGE AGREEMENT - Page 6
<PAGE> 7
Section 15. Severability. In the event that any provision of this
Agreement shall be determined to be superseded, invalid or otherwise
unenforceable pursuant to applicable law, such determination shall not affect
the validity of the balance of this Agreement, and the remaining provisions of
this Agreement shall be enforced as if the invalid provisions were deleted.
Section 16. Survival of Representations, Etc. All representations,
warranties, covenants and other agreements made herein shall survive the
execution and delivery of this Agreement and shall continue in full force and
effect until all of the Obligations have been paid in full. This Agreement
shall remain and continue in full force and effect without regard to any
modification, extension, renewal, amendment or waiver of any provision of the
Note.
Section 17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
Section 18. Successors and Assigns. Whenever in this Agreement reference
is made to any party, such reference shall be deemed to include the successors
and assigns of that part, and, without limiting the generality of the
foregoing, all covenants, agreements, representations and warranties made by or
on behalf of the Pledgor in this Agreement shall inure to the successors and
assigns of the Lender; provided, however, that nothing herein shall be deemed
to authorize or permit the Pledgor to assign any of his rights or obligations
hereunder to any other person or entity and the Pledgor agrees that he shall
not make any such assignment.
Section 19. No Waiver by Inaction, Etc. Any waiver or consent respecting
any covenant, representation, warranty or other term or provision of this
Agreement shall be effective only in the specified instance and for the
specific purpose for which given and shall not be deemed regardless of
frequency given, to be a further or continuing waiver or consent. The failure
or delay of the Lender at any time or times to require performance of, or to
exercise its rights with respect to, any representation, warranty, covenant or
other term or provision of this Agreement in no manner shall affect its right
at a later time to enforce any such provision. No notice to or demand on a
party in any case shall entitle such party to any other or further notice or
demand in the same, similar or other circumstances.
Section 20. Modification, Amendment, Etc. Each and every modification and
amendment of this Agreement shall be in writing and signed by the parties
hereto and each and every waiver of, and consent to any departure from, any
covenant, representation, warranty or other provision of this Agreement shall
be in writing and signed by the party adversely affected by such waiver or
consent.
Section 21. Entire Agreement. This Agreement contains the entire agreement
of the parties and supersedes all other representations, agreements and
understandings, oral or otherwise, between the parties with respect to the
matters contained herein.
STOCK PLEDGE AGREEMENT - Page 7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CODINVEST LIMITED
a British Virgin Islands corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ATC COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
STOCK PLEDGE AGREEMENT - Page 8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 632,826
<SECURITIES> 0
<RECEIVABLES> 18,494,791
<ALLOWANCES> 73,826
<INVENTORY> 0
<CURRENT-ASSETS> 22,928,044
<PP&E> 22,659,008
<DEPRECIATION> 8,211,046
<TOTAL-ASSETS> 41,222,786
<CURRENT-LIABILITIES> 7,847,912
<BONDS> 0
0
298
<COMMON> 217,931
<OTHER-SE> 28,403,032
<TOTAL-LIABILITY-AND-EQUITY> 41,222,786
<SALES> 97,629,300
<TOTAL-REVENUES> 97,629,300
<CGS> 68,281,841
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,465,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497,592
<INCOME-PRETAX> 2,384,018
<INCOME-TAX> 954,550
<INCOME-CONTINUING> 1,429,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,429,468
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
