<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ATC COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 75-2050538
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5950 BERKSHIRE LANE; SUITE 1650
DALLAS, TEXAS 75225
(214) 361-9870
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MICHAEL G. SANTRY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5950 BERKSHIRE LANE; SUITE 1650
DALLAS, TEXAS 75225
(214)361-9870
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
Kenneth G. Hawari Robert A. Miller, Jr.
Hughes & Luce, L.L.P. Paul, Hastings, Janofsky & Walker LLP
1717 Main Street; Suite 2800 555 South Flower Street; 23rd Floor
Dallas, Texas 75201 Los Angeles, California 90071
(214) 939-5500 (213) 683-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 33,500,000 (1) $9.90 (2) $30,573,000 (2) $9,020 (3)
</TABLE>
(1) This Registration Statement covers the number of shares of the Registrant's
common stock, $.01 par value per share (the "ATC Common Stock"), issuable
upon consummation of the Merger (as defined herein), as well as the
Additional Shares (as defined herein) and shares issuable upon the exercise
of certain outstanding warrants. Neither the average price nor the number of
shares of ATC Common Stock to be issued in the Merger will affect the
determination of the Proposed Maximum Aggregate Offering Price pursuant to
Rule 457(f)(2).
(2) Estimated solely for the purpose of calculating the registration fee on the
basis of the book value of the securities to be received by the Registrant
in the Merger pursuant to Rule 457(f)(2).
(3) $6,115 of the Registration Fee was previously paid by the Registrant in
connection with the filing of its Preliminary Joint Proxy Statement /
Prospectus on Schedule 14A on May 8, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
BECOMES EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
5950 BERKSHIRE LANE, SUITE 1650
DALLAS, TEXAS 75225
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, JUNE 30, 1998
------------------------
To the Stockholders of ATC Communications Group, Inc.:
The Annual Meeting of Stockholders (together with any adjournments, the "ATC
ANNUAL MEETING") of ATC Communications Group, Inc. ("ATC") will be held at the
offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st Floor,
New York, NY 10022, on Tuesday, June 30, 1998, at 10:00 a.m., local time, for
the following purposes:
1. To consider and vote on a proposal to approve and adopt the merger (the
"MERGER") of ATC Merger Sub, Inc., a New York corporation and
wholly-owned subsidiary of ATC ("SUB"), with and into IQI, Inc., a New
York corporation ("IQI"), pursuant to the terms and subject to the
conditions of that certain Agreement and Plan of Merger dated as of April
7, 1998 (the "MERGER AGREEMENT") by and among ATC, Sub and IQI, which
will result in IQI becoming a wholly-owned subsidiary of ATC. As a result
of the Merger, stockholders of IQI will have the right to receive 9.7513
shares of ATC common stock, $.01 par value per share ("ATC COMMON
STOCK"), for each share of IQI common stock, $.001 par value per share,
issued and outstanding at the Effective Time;
2. To approve an amendment to the ATC Amended and Restated Certificate of
Incorporation (the "ATC CHARTER") to increase the number of authorized
shares of ATC Common Stock from 27,500,000 to 100,000,000;
3. To approve an amendment to the ATC Charter changing the name of the
company from ATC Communications Group, Inc. to "AEGIS COMMUNICATIONS
GROUP, INC.," which amendment will become effective only upon
consummation of the Merger;
4. To approve an amendment to the ATC Charter classifying the board of
directors into three classes of four directors each, which amendment will
become effective only upon consummation of the Merger;
5. To elect a board of directors to serve until each of their respective
successors shall have been duly elected and qualified;
6. To approve the ATC 1998 Stock Option Plan;
7. To ratify the selection of Price Waterhouse, LLP to serve as ATC's
independent auditors for the 1998 fiscal year; and
8. To transact such other business as may properly come before the ATC
Annual Meeting.
The terms of the Merger Agreement and the Merger and the ATC Common Stock to
be issued to stockholders of IQI in connection with the Merger are described in
detail in the accompanying Joint Proxy Statement/Prospectus.
<PAGE>
The Board of Directors of ATC has fixed the close of business on May 28,
1998 as the record date (the "ATC RECORD DATE") for the determination of
stockholders of ATC entitled to notice of, and to vote at, the ATC Annual
Meeting. Only stockholders of record at the close of business on the ATC Record
Date are entitled to notice of, and to vote at, the ATC Annual Meeting. A holder
of shares of ATC Common Stock is entitled to one vote, in person or by proxy,
for each share of ATC Common Stock on all matters properly brought before the
ATC Annual Meeting.
ALL HOLDERS OF ATC COMMON STOCK (WHETHER THEY EXPECT TO ATTEND THE ATC
ANNUAL MEETING OR NOT) ARE REQUESTED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY
THE PROXY CARD ENCLOSED WITH THIS NOTICE.
By Order of the Board of Directors
/s/ Jerry L. Sims, Jr.
--------------------------------------
Jerry L. Sims, Jr.,
SECRETARY
June 1, 1998
<PAGE>
IQI, INC.
1645 NORTH VINE STREET, 7TH FLOOR
LOS ANGELES, CALIFORNIA 90028
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 30, 1998
------------------------
To the Stockholders of IQI, Inc.:
Notice is hereby given that a Special Meeting of stockholders (together with
any adjournments, the "IQI SPECIAL MEETING") of IQI, Inc. ("IQI") will be held
at the offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st
Floor, New York, NY 10022, on June 30, 1998, at 10:30 a.m., local time, for the
following purposes:
1. To consider and vote on a proposal to approve and adopt the merger (the
"MERGER") of ATC Merger Sub, Inc. ("SUB"), a New York corporation and
wholly-owned subsidiary of ATC Communications Group, Inc., a Delaware
corporation ("ATC"), with and into IQI, pursuant to the terms and subject
to the conditions of that certain Agreement and Plan of Merger dated as
of April 7, 1998 (the "MERGER AGREEMENT") by and among IQI, ATC and Sub,
which will result in IQI becoming a wholly-owned subsidiary of ATC. As a
result of the Merger, stockholders of IQI will have the right to receive
9.7513 shares of ATC common stock, $.01 par value per share ("ATC COMMON
STOCK"), for each share of IQI common stock, $.001 par value per share,
issued and outstanding at the Effective Time of the Merger; and
2. To transact such other business as may properly come before the IQI
Special Meeting.
The terms of the Merger Agreement and the Merger and the ATC Common Stock to
be issued to stockholders of IQI in connection with the Merger are described in
detail in the accompanying Joint Proxy Statement/Prospectus.
THE APPROVAL OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER BY THE
SHAREHOLDERS OF IQI SHALL CONSTITUTE APPROVAL OF THE ESCROW AGREEMENT BY AND
AMONG ATC, THE REPRESENTATIVE (AS DEFINED THEREIN) AND THE ESCROW AGENT (AS
DEFINED THEREIN), AND ALL OF THE ARRANGEMENTS RELATING THERETO, INCLUDING
WITHOUT LIMITATION THE PLACEMENT OF THE ESCROW SHARES (AS DEFINED IN THE MERGER
AGREEMENT) IN ESCROW AND THE APPOINTMENT OF THE REPRESENTATIVE.
The Board of Directors of IQI has fixed the close of business on May 15,
1998 as the record date (the "RECORD DATE") for the determination of
stockholders of IQI entitled to notice of, and to vote at, the IQI Special
Meeting. Only stockholders of record at the close of business on the Record Date
are entitled to notice of, and to vote at, the IQI Special Meeting. A holder of
shares of IQI Common Stock is entitled to one vote, in person or by proxy, for
each share of IQI Common Stock on all matters properly brought before the IQI
Special Meeting.
<PAGE>
ALL HOLDERS OF IQI COMMON STOCK (WHETHER THEY EXPECT TO ATTEND THE IQI
SPECIAL MEETING OR NOT) ARE REQUESTED TO COMPLETE, SIGN, DATE, AND RETURN
PROMPTLY THE PROXY ENCLOSED WITH THIS NOTICE.
You are cordially invited and encouraged to attend the meeting in person.
By Order of the Board of Directors
/s/ Eric A. Croson
--------------------------------------
Eric A. Croson,
SECRETARY
June 1, 1998
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors (the "ATC BOARD") of ATC
Communications Group, Inc. ("ATC") for use at the ATC Annual Meeting of
Stockholders (together with any adjournments, the "ATC ANNUAL MEETING"), to be
held on Tuesday, June 30, 1998, at the offices of Paul, Hastings, Janofsky &
Walker LLP, 399 Park Avenue, 31st Floor, New York, NY 10022, at 10:00 a.m.,
local time, or any adjournments or postponements thereof. At the ATC Annual
Meeting, ATC stockholders will consider and vote upon the following proposals:
(1) to approve the proposed merger (the "MERGER") of ATC Merger Sub, Inc., a New
York corporation and wholly-owned subsidiary of ATC ("SUB"), with and into IQI,
Inc., a New York corporation ("IQI"), pursuant to the terms and subject to the
conditions of that certain Agreement and Plan of Merger (the "MERGER
AGREEMENT"), dated April 7, 1998, by and among ATC, Sub and IQI; (2) to approve
an amendment to the ATC Charter to increase the number of authorized shares of
ATC Common Stock from 27,500,000 to 100,000,000; (3) to approve an amendment to
the ATC Charter changing the name of ATC to "AEGIS COMMUNICATIONS GROUP, INC.",
which amendment shall become effective only upon consummation of the Merger; (4)
to approve an amendment to the ATC Charter classifying the ATC Board into three
classes of four directors each, which amendment shall become effective only upon
consummation of the Merger; (5) to elect a board of directors to serve until
each of their respective successors shall have been duly elected and qualified;
(6) to approve the ATC 1998 Stock Option Plan (the "1998 PLAN"); (7) to ratify
the selection of Price Waterhouse LLP to serve as ATC's independent auditors for
the 1998 fiscal year; and (8) to transact such other business as may properly
come before the ATC Annual Meeting. See "The ATC Annual Meeting."
This Joint Proxy Statement/Prospectus is also furnished in connection with
the solicitation of proxies by the Board of Directors (the "IQI BOARD") of IQI
for use at a Special Meeting of Stockholders of IQI (together with any
adjournments, the "IQI SPECIAL MEETING") to be held on Tuesday, June 30, 1998 at
the offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st
Floor, New York, NY 10022, at 10:30 a.m., local time, or any adjournments or
postponements thereof. At the IQI Special Meeting, holders of IQI Common Stock
will consider and vote upon the following proposals: (1) to approve the Merger;
and (2) to transact such other business as may properly come before the IQI
Special Meeting. See "The IQI Special Meeting."
As a result of the Merger, IQI will become a wholly-owned subsidiary of ATC,
and each outstanding share of IQI Common Stock will be converted into the right
to receive 9.7513 shares (the "EXCHANGE RATIO") of ATC Common Stock. On May 27,
1998, the closing sale price of ATC Common Stock on The NASDAQ Stock Market,
National Market System ("NASDAQ") was $2 1/8 per share. IQI Common Stock is not
registered with the Securities and Exchange Commission (the "COMMISSION") nor is
it listed with any exchange. Subject to stockholder approvals, the closing of
the Merger will occur promptly after the satisfaction of the conditions
precedent contained in the Merger Agreement, but in no event later than July 31,
1998, unless otherwise agreed by ATC and IQI. See "The Merger Agreement."
In connection with the proposed Merger, one of IQI's major stockholders,
Thayer Equity Investors III, L.P. ("THAYER"), issued a commitment letter to ATC
(the "THAYER COMMITMENT LETTER") pursuant to which Thayer has provided ATC with
a guaranty of $2.0 million in additional indebtedness incurred under ATC's
Credit Agreement with Bank One Texas, N.A. In consideration of such commitment,
ATC issued Thayer for the purchase price of $110,000 warrants to purchase up to
1.1 million shares of ATC Common Stock at an exercise price per share of $1.96
(110% of the average of the high and low prices of ATC Common Stock on April 7,
1998, the day before the announcement of the proposed Merger). ATC may redeem,
or Thayer may put, the warrants for $110,000 if the Merger is not consummated
for any reason. In addition, ATC granted Thayer a warrant at an exercise price
of $2.00 per share that entitles Thayer to acquire a number of shares of ATC
Common Stock equal to the amount drawn on the guaranty divided by $2.00.
Alternatively, Thayer may make an election to convert the amount of any funded
indebtedness into ATC Common Stock at a conversion rate of $2.00 per share. See
"Other Transactions Related to the Merger--Thayer Commitment Letter."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of ATC
that is part of the Registration Statement on Form S-4 (the "REGISTRATION
STATEMENT") of ATC filed with the Commission with respect to the issuance of up
to approximately 33,500,000 shares of ATC Common Stock to be issued or issuable
pursuant to the Merger. All information contained herein with respect to ATC has
been furnished by ATC, and all information contained herein with respect to IQI
has been furnished by IQI.
SEE "RISK FACTORS" BEGINNING ON PAGE 35 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF ATC WITH RESPECT TO THE MERGER
AND BY THE STOCKHOLDERS OF IQI WITH RESPECT TO THE MERGER AND AN INVESTMENT IN
ATC UPON CONSUMMATION OF THE MERGER.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of ATC and IQI on or about June 1, 1998.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF ATC TO BE ISSUED IN CONNECTION
WITH THE MERGER HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is June 1, 1998.
<PAGE>
AVAILABLE INFORMATION
ATC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements, and other information filed by ATC with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a Web site
where reports, proxy statements, and other information filed by publicly traded
companies, including ATC, may be retrieved, and the address of such site is
HTTP://WWW.SEC.GOV. ATC Common Stock is included for quotation on NASDAQ, and
reports, proxy statements and other information can also be inspected at the
offices of The NASDAQ Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
IQI's Common Stock is currently not registered with the Commission nor is it
included on NASDAQ or listed on any exchange.
ATC has filed the Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the shares
of ATC Common Stock to be issued or issuable as a result of the Merger. This
Joint Proxy Statement/Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, including the schedules and exhibits filed as a part thereof or
incorporated by reference therein. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit hereto or as otherwise filed with the
Commission. The Registration Statement and the exhibits and schedules thereto
may be inspected, without charge, and copies thereof may be obtained at
prescribed rates, at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/ PROSPECTUS, OR A SOLICITATION
OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES MADE UNDER THIS JOINT PROXY STATEMENT/ PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF ATC OR IQI AT ANY TIME SUBSEQUENT TO THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
------------------------
The term "ATC" as used herein includes all subsidiaries and predecessors of
ATC, except as the context may otherwise require. The term "IQI" as used herein
includes all subsidiaries and predecessors of IQI, except as the context may
otherwise require.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION........................................................................................... 2
QUESTIONS AND ANSWERS ABOUT THE ATC/IQI MERGER.................................................................. 7
SUMMARY......................................................................................................... 9
The Companies................................................................................................. 9
ATC Annual Meeting............................................................................................ 10
IQI Special Meeting........................................................................................... 11
The Merger.................................................................................................... 11
Other Transactions Related to the Merger...................................................................... 19
Reasons for the Merger........................................................................................ 22
Recommendation of the ATC Board............................................................................... 23
Recommendation of the IQI Board............................................................................... 24
Market Price Data............................................................................................. 25
Dividend Policy............................................................................................... 25
Summary ATC Historical Consolidated Financial Data............................................................ 27
Summary IQI Historical Consolidated Financial Data............................................................ 29
Summary Unaudited Pro Forma Combined Financial Data........................................................... 31
Comparative Per Share Data of ATC and IQI..................................................................... 33
Other Proposals to be Presented at the ATC Annual Meeting..................................................... 34
RISK FACTORS.................................................................................................... 35
Implementation of Business Strategy........................................................................... 35
New Management................................................................................................ 35
Increased Leverage; Future Capital Requirements............................................................... 36
Factors Affecting Ability to Manage and Sustain Growth........................................................ 36
Control by Principal Shareholder.............................................................................. 36
Exchange Ratio................................................................................................ 36
Possible Volatility of Stock Price............................................................................ 37
Shares Available for Future Sale.............................................................................. 37
Potential Fluctuation in Quarterly Operating Results.......................................................... 37
Dependence on Key Personnel................................................................................... 38
Reliance on Major Clients..................................................................................... 38
Risks Associated with ATC's and IQI's Contracts............................................................... 38
Dependence on Outsourcing Trend and Industries Served......................................................... 38
Government Regulation......................................................................................... 39
Dependence on Labor Force..................................................................................... 39
Competition................................................................................................... 40
Reliance on Technology; Computer Systems...................................................................... 40
Telephone Service Dependence.................................................................................. 40
Risk of Business Interruption................................................................................. 40
Year 2000 Compliance.......................................................................................... 41
Other Uncertainties........................................................................................... 41
THE ATC ANNUAL MEETING.......................................................................................... 42
Place, Date and Time.......................................................................................... 42
Matters to be Considered...................................................................................... 42
Record Date and Voting........................................................................................ 48
Vote Required................................................................................................. 48
Proxy Solicitation, Revocation and Expenses................................................................... 48
Dissenters' Appraisal Rights.................................................................................. 49
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
THE IQI SPECIAL MEETING......................................................................................... 49
<S> <C>
Place, Date and Time.......................................................................................... 49
Matters to be Considered...................................................................................... 49
Record Date and Voting........................................................................................ 49
Vote Required................................................................................................. 50
Proxy Solicitation, Revocation and Expenses................................................................... 50
Dissenters' Appraisal Rights.................................................................................. 50
THE PROPOSED MERGER............................................................................................. 51
Description of the Merger..................................................................................... 51
Background of the Merger...................................................................................... 52
ATC's Reasons for the Merger.................................................................................. 54
ATC Board Recommendation of the Merger........................................................................ 54
Opinion of Financial Advisor to ATC........................................................................... 55
IQI's Reasons for the Merger.................................................................................. 61
IQI Board Recommendation of the Merger........................................................................ 61
Interests of Certain Persons in the Merger.................................................................... 61
Governmental and Regulatory Approvals......................................................................... 62
Accounting Treatment.......................................................................................... 62
Dissenters' Appraisal Rights.................................................................................. 63
Certain Federal Income Tax Consequences....................................................................... 63
OTHER TRANSACTIONS RELATED TO THE MERGER........................................................................ 65
New Senior Loan............................................................................................... 65
Thayer Commitment Letter...................................................................................... 65
Proxy Agreements with Certain Stockholders of IQI............................................................. 65
Stockholders' Agreement....................................................................................... 66
Registration Rights Agreement................................................................................. 66
THE MERGER AGREEMENT............................................................................................ 67
Terms of the Merger........................................................................................... 67
Exchange Ratio................................................................................................ 67
Fractional Shares............................................................................................. 68
Effective Time of the Merger.................................................................................. 68
Effect on IQI Stock Options and IQI Warrants.................................................................. 68
Surrender of IQI Common Stock Certificates.................................................................... 69
Representations and Warranties................................................................................ 69
Conduct of ATC Business and IQI Business Pending the Merger................................................... 70
Conditions to Consummation of the Merger...................................................................... 71
Amendment to ATC Bylaws....................................................................................... 73
Regulatory Approvals Required................................................................................. 73
Indemnification............................................................................................... 74
Shareholders' Representative.................................................................................. 75
Escrow Shares................................................................................................. 75
Additional Shares............................................................................................. 75
Waiver and Amendment.......................................................................................... 76
Termination; Termination Fee.................................................................................. 76
Limitation on Negotiations.................................................................................... 77
Expenses...................................................................................................... 77
Resale of ATC Common Stock.................................................................................... 77
MANAGEMENT AND OPERATIONS AFTER THE MERGER...................................................................... 78
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
SELECTED FINANCIAL INFORMATION.................................................................................. 80
<S> <C>
Selected ATC Historical Financial Information................................................................. 80
ATC Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 81
Selected IQI Historical Financial Information................................................................. 86
IQI Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 87
Unaudited Pro Forma Financial Data............................................................................ 94
INFORMATION CONCERNING ATC...................................................................................... 102
Overview...................................................................................................... 102
Services and Strategy......................................................................................... 102
Operations.................................................................................................... 102
Industry and Competition...................................................................................... 103
Marketing of Services......................................................................................... 103
Governmental Regulations...................................................................................... 104
Revenues and Seasonal Nature of Business...................................................................... 104
Personnel and Training........................................................................................ 105
Quality Assurance............................................................................................. 105
Employees..................................................................................................... 105
Historical Developments....................................................................................... 105
Facilities.................................................................................................... 106
Legal Proceedings............................................................................................. 106
ATC MANAGEMENT.................................................................................................. 107
Directors and Executive Officers of ATC....................................................................... 107
Nominees for Election as Director............................................................................. 108
Committees and Meetings of the ATC Board...................................................................... 108
Section 16(a) Beneficial Ownership Reporting Compliance....................................................... 109
Security Ownership of Certain Beneficial Owners and Management of ATC......................................... 110
Executive Compensation and Other Information.................................................................. 111
Compensation of Directors..................................................................................... 114
Employment Contracts and Termination of Employment Contracts.................................................. 114
Compensation and Stock Option Committee Interlocks and Insider Participation in Compensation Decisions........ 114
Compensation Committee Report on Executive Compensation....................................................... 115
Performance Graph............................................................................................. 116
Certain Relationships and Related Transactions................................................................ 116
INFORMATION CONCERNING IQI...................................................................................... 117
Overview...................................................................................................... 117
Services and Strategy......................................................................................... 117
Operations.................................................................................................... 118
Industry and Competition...................................................................................... 119
Marketing of Services......................................................................................... 120
Government Regulations........................................................................................ 121
Revenues and Seasonal Nature of Business...................................................................... 122
Technology Resources.......................................................................................... 122
Personnel and Training........................................................................................ 122
Quality Assurance............................................................................................. 123
Employees..................................................................................................... 123
Facilities.................................................................................................... 124
Legal Proceedings............................................................................................. 125
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
IQI MANAGEMENT.................................................................................................. 126
<S> <C>
Directors and Executive Officers of IQI....................................................................... 126
Security Ownership of Certain Beneficial Owners and Management of IQI......................................... 128
COMPARATIVE RIGHTS OF STOCKHOLDERS OF ATC AND IQI............................................................... 129
Authorized Capital............................................................................................ 129
Directors..................................................................................................... 130
Removal of Directors.......................................................................................... 130
Filling Vacancies on the Board of Directors................................................................... 130
Amendment to Charter or Certificate of Incorporation.......................................................... 131
Amendment of Bylaws........................................................................................... 131
Stockholder Meetings and Provisions for Notices; Proxies...................................................... 131
Voting by Stockholders........................................................................................ 131
Stockholder Action Without a Meeting.......................................................................... 132
Business Combinations......................................................................................... 132
Indemnification and Limitation of Liability................................................................... 132
Dissenters' or Appraisal Rights............................................................................... 133
Dissolution................................................................................................... 133
Dividends..................................................................................................... 134
Right to Examine Stockholder List............................................................................. 134
Interested Director Transactions.............................................................................. 134
Preemptive Rights............................................................................................. 135
AFFILIATES' RESTRICTION ON SALE OF ATC COMMON STOCK............................................................. 135
LEGAL MATTERS................................................................................................... 135
EXPERTS......................................................................................................... 135
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................................... 136
FINANCIAL STATEMENTS............................................................................................ F-1
Consolidated Financial Statements of ATC...................................................................... F-3
Consolidated Financial Statements of IQI...................................................................... F-30
Financial Statements of InterServ Services Corporation........................................................ F-58
Consolidated Financial Statements of Lexi International, Inc.................................................. F-83
APPENDICES
Appendix A--Agreement and Plan of Merger...................................................................... A-1
Appendix B--Fairness Opinion of CIBC Oppenheimer Corp......................................................... B-1
Appendix C--New York Appraisal Rights and Procedures.......................................................... C-1
Appendix D--ATC 1998 Stock Option Plan........................................................................ D-1
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QUESTIONS AND ANSWERS ABOUT THE ATC/IQI MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: The Merger combines the customer service (inbound teleservices) and
information technology strengths of ATC with the customer acquisition (outbound
telemarketing), database management and custom marketing research strengths of
IQI. Management of ATC and IQI believe that the combined company will be able to
offer complete, integrated marketing services to leading corporations. On a pro
forma basis as of March 31, 1998, the combined company would have had over 8,500
employees (approximately 7,000 of which are teleservices representatives
("TSRs")), over 5,600 teleservices workstations, 26 call centers (seven of which
are managed centers), and 10 marketing research facilities. As such, the
combined company will have the critical mass to compete more effectively for
complex, large-scale outsourcing contracts.
Q: WHAT DO ATC AND IQI STOCKHOLDERS NEED TO DO NOW?
A: You should mail your signed proxy in the enclosed return envelope as soon as
possible, so that your shares may be represented at the ATC Annual Meeting and
IQI Special Meeting, as the case may be. The ATC Annual Meeting and IQI Special
Meeting will both take place on June 30, 1998. The Boards of Directors of both
ATC and IQI have recommended voting in favor of the proposed merger.
Q: IF MY ATC SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER HAVING MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
ATC Annual Meeting or IQI Special Meeting, as the case may be. You can do this
in one of three ways. First, you can send a written notice stating that you
would like to revoke your proxy. Second, you can complete and submit a new proxy
card. If you choose either of these methods, you must submit your notice of
revocation or your new proxy card to the addressee named in the enclosed proxy
card prior to the ATC Annual Meeting or IQI Special Meeting, as the case may be.
Third, you can attend the stockholder meeting and vote in person. Simply
attending the meeting, however, will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions received
from your broker to change your vote.
Q: WILL MY ATC SHARES CONTINUE TO BE PUBLICLY TRADED ON THE NASDAQ NATIONAL
MARKET SYSTEM?
A: Yes. ATC Shares will continue to be traded on the NASDAQ National Market
System under the symbol "ATCT", until the closing of the Merger, at which time,
ATC will change its corporate name to Aegis Communications Group, Inc. and begin
trading on NASDAQ under the symbol "AGIS".
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: ATC stockholders will retain their current number of ATC shares and will
retain the same rights as before. IQI shareholders will receive 9.7513 shares of
ATC common stock for each share of IQI common stock. We will not issue
fractional shares. IQI stockholders who would otherwise be entitled to receive a
fractional share instead will receive one full share of ATC common stock.
Example:
- IF YOU CURRENTLY OWN 1,000 SHARES OF ATC COMMON STOCK, THEN AFTER THE
MERGER YOU WILL OWN 1,000 SHARES OF NEW ATC COMMON STOCK.
- IF YOU CURRENTLY OWN 1,000 SHARES OF IQI COMMON STOCK, THEN AFTER THE
MERGER YOU WILL BE ENTITLED TO RECEIVE 9,752 SHARES OF NEW ATC STOCK.
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Q: UPON COMPLETION OF THE MERGER, HOW MUCH OF ATC WILL IQI STOCKHOLDERS OWN?
A: IQI stockholders will own an aggregate of approximately 57.5% of the common
stock and common stock equivalents of ATC.
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We are working towards completing the Merger as quickly as possible. In
addition to stockholder approvals by each of ATC's and IQI's stockholders, we
must also obtain regulatory approvals. We expect to complete the Merger by June
30, 1998.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The exchange of shares resulting from the Merger will be tax-free for
federal income tax purposes, except for IQI stockholders, if any, who elect to
exercise dissenters' appraisal rights. We suggest that you review the tax
consequences to stockholders in greater detail beginning on page 63 and consult
with your tax advisor.
Q: WHAT OTHER MATTERS SHOULD I BE AWARE OF THAT WILL REQUIRE MY VOTE AT THE
STOCKHOLDERS' MEETINGS?
A: In addition to voting for the proposed Merger, ATC stockholders will be
asked at the ATC Annual Meeting to approve or ratify the following matters: the
increase in the number of authorized shares of ATC Common Stock, changing the
name of the company, an amendment to the ATC Charter classifying the board of
directors, election of the proposed board of directors, the ATC 1998 Stock
Option Plan, and the selection of Price Waterhouse LLP to serve as ATC's
independent auditors for the 1998 fiscal year. Please see the section titled
"The ATC Annual Meeting" beginning on page 42 for more detail.
Q: DO MY KENNETH RESOURCES, INC. OR NRP, INC. STOCK CERTIFICATES REPRESENT
VALID OWNERSHIP IN ATC?
A: Yes. Kenneth Resources, Inc. and NRP, Inc. stock certificates do represent
valid ownership in ATC.
Q: WHAT DO I NEED TO DO WITH MY ATC STOCK CERTIFICATES?
A: Nothing. ATC, Kenneth Resources, Inc. and NRP, Inc. stock certificates will
continue to represent valid ownership of an equal number of shares of ATC common
stock following consummation of the Merger.
Q: WHAT DO I NEED TO DO WITH MY IQI STOCK CERTIFICATES?
A: Promptly after the Merger, you will receive a letter of transmittal from
ATC's transfer agent containing written instructions for exchanging your stock
certificates. Do not send your certificates to ATC or IQI.
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SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/ PROSPECTUS DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE AND THE
APPENDICES ATTACHED HERETO. THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO ATC AND ITS AFFILIATES HAS BEEN SUPPLIED BY
ATC, AND THE INFORMATION WITH RESPECT TO IQI AND ITS AFFILIATES HAS BEEN
SUPPLIED BY IQI. CERTAIN CAPITALIZED TERMS WHICH ARE USED BUT NOT DEFINED IN
THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
SEE "THE PROPOSED MERGER-- ATC'S REASONS FOR THE MERGER," "THE PROPOSED
MERGER--IQI'S REASONS FOR THE MERGER" AND "RISK FACTORS" FOR CERTAIN INFORMATION
THAT SHOULD BE REVIEWED CAREFULLY IN CONSIDERING THE MERGER.
THIS JOINT PROXY STATEMENT/PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION
27A OF THE SECURITIES 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 THE USE OF TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES,"
"PREDICTS," "POTENTIAL," OR "CONTINUE," OR THE NEGATIVE THEREOF OR OTHER
COMPARABLE TERMINOLOGY. ALTHOUGH ATC AND IQI BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE,
THEY CAN GIVE NO ASSURANCE THAT SUCH 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 SET FORTH IN THE
SECTION "RISK FACTORS."
THE COMPANIES
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ATC......................................... ATC Communications Group, Inc. is a leading
provider of outsourced
telecommunications-based marketing, customer
service and call center management services in
the United States. The principal executive
offices of ATC are located at 5950 Berkshire
Lane, Suite 1650, Dallas, Texas 75225, and its
telephone number is (214) 361-9870. See
"Information Concerning ATC."
Sub......................................... ATC Merger Sub, Inc. is a newly formed New
York corporation and a wholly-owned subsidiary
of ATC. The principal executive offices of Sub
are located at 5950 Berkshire Lane, Suite
1650, Dallas, Texas 75225, and its telephone
number is (214) 361-9870.
IQI......................................... IQI, Inc. is a leading provider of marketing
services in the United States, offering full
service marketing research, inbound
teleservicing, outbound telemarketing and
database management. The principal executive
offices of IQI are located at 1645 North Vine
Street, 7th Floor, Los Angeles, California
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90028, and its telephone number is (213)
848-5500. See "Information Concerning IQI."
ATC ANNUAL MEETING
Time and Location........................... The ATC Annual Meeting will be held on
Tuesday, June 30, 1998, at the offices of
Paul, Hastings, Janofsky & Walker LLP, 399
Park Avenue, 31st Floor, New York, NY 10022,
at 10:00 a.m., local time, for the purpose of
considering and voting on proposals to (i)
approve the Merger, (ii) amend the ATC Charter
to increase the number of authorized shares of
ATC Common Stock from 27,500,000 to
100,000,000, (iii) amend the ATC Charter to
change the name of ATC to Aegis Communications
Group, Inc., which amendment shall become
effective only upon consummation of the
Merger, (iv) amend the ATC Charter to classify
the ATC Board into three classes of four
directors each, which amendment shall become
effective only upon consummation of the
Merger, (v) elect a board of directors to
serve until each of their respective
successors shall have been duly elected and
qualified, (vi) approve the 1998 Plan, (vii)
ratify the selection of Price Waterhouse LLP
to serve as ATC's independent auditors for the
1998 fiscal year; and (viii) transact such
other business as may properly come before the
ATC Annual Meeting. Only holders of record of
shares of ATC Common Stock at the close of
business on May 28, 1998 will be entitled to
notice of and to vote at the ATC Annual
Meeting. See "The ATC Annual Meeting--Place,
Date and Time"; "The ATC Annual
Meeting--Matters to be Considered"; and "The
ATC Annual Meeting--Record Date and Voting."
Voting...................................... The affirmative vote of the holders of shares
of ATC Common Stock, having a plurality of the
voting power of ATC, in person or by proxy, is
required to elect directors. The affirmative
vote of the holders of shares of ATC Common
Stock, having a majority of the voting power
of the total issued and outstanding shares of
ATC Common Stock (regardless of the number of
shares actually voting at the Annual Meeting)
in person or by proxy, is required to approve
the proposed amendments to the ATC Charter.
The affirmative vote of the holders of shares
of the ATC Common Stock, having a majority of
the voting power of the shares actually voted
at the ATC Annual Meeting, either in person or
by proxy, is required to approve the Merger,
adopt the 1998 Plan and ratify the selection
of ATC's independent
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auditors. See "The ATC Annual Meeting--Vote
Required."
IQI SPECIAL MEETING
Time and Location........................... The IQI Special Meeting will be held on
Tuesday, June 30, 1998, at the offices of
Paul, Hastings, Janofsky & Walker, LLP, 399
Park Avenue, 31st Floor, New York, NY 10022 at
10:30 a.m., local time, for the purpose of
considering and voting on a proposal to
approve the Merger and to transact such other
business as may properly come before the IQI
Special Meeting. Only holders of record of
shares of IQI Common Stock at the close of
business on May 15, 1998, will be entitled to
notice of and to vote at the IQI Special
Meeting. See "The IQI Special Meeting--Place,
Date and Time"; "The IQI Special
Meeting--Matters to be Considered"; and "The
IQI Special Meeting--Record Date and Voting."
Voting...................................... The affirmative vote of two-thirds of the
total issued and outstanding shares of IQI
Common Stock (regardless of the number of
shares actually voting at the IQI Special
Meeting) is required to approve the Merger.
THAYER, ITC SERVICE COMPANY, THE EDWARD BLANK
1995 GRANTOR RETAINED ANNUITY TRUST AND EDWARD
BLANK, IQI STOCKHOLDERS WHO IN THE AGGREGATE
OWN APPROXIMATELY 85% OF THE VOTING CAPITAL
STOCK OF IQI, HAVE EXECUTED AN IRREVOCABLE
PROXY AGREEMENT PURSUANT TO WHICH A DESIGNEE
OF ATC HAS BEEN AUTHORIZED TO VOTE SUCH SHARES
IN FAVOR OF THE MERGER, WHICH VOTE IS
SUFFICIENT UNDER THE NEW YORK BUSINESS
CORPORATION LAW (THE "NYBCL") AND THE IQI
BYLAWS TO APPROVE THE MERGER. See "The IQI
Special Meeting--Vote Required" and "Other
Transactions Related to the Merger--Proxy
Agreement with Certain Stockholders of IQI."
THE MERGER
General Terms............................... On April 7, 1998, IQI, ATC, and Sub entered
into the Merger Agreement, in which the
parties set forth the terms and conditions of
the merger of Sub with and into IQI. A copy of
the Merger Agreement is included in this Joint
Proxy Statement/Prospectus as Appendix A. See
"The Merger Agreement."
By virtue of the Merger, each share of IQI
Common Stock issued and outstanding
immediately prior to the Effective Time of the
Merger will automatically be converted into
the right to receive 9.7513 shares of ATC
Common Stock (the "EXCHANGE RATIO"). See
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"The Proposed Merger--Description of the
Merger" and "The Merger Agreement--Exchange
Ratio."
Fractional Shares........................... No fractional shares of ATC Common Stock will
be issued in connection with the Merger. In
lieu of any fractional shares of ATC Common
Stock that would otherwise be issued, each IQI
stockholder will receive one full share of ATC
Common Stock. See "The Merger
Agreement--Fractional Shares."
Treatment of IQI Options and IQI Warrants... At the Effective Time, ATC will assume each
unexercised option to purchase IQI Common
Stock that is outstanding under the IQI 1996
Incentive Stock Option Plan and substitute
options to purchase shares of ATC Common Stock
for the shares of IQI Common Stock purchasable
under each assumed option at the Exchange
Ratio (the "EXCHANGED OPTION SHARES"). The
exercise price for each assumed option will be
equal to the existing exercise price set forth
in the option divided by the Exchange Ratio.
ATC has agreed to file a registration
statement on Form S-8 with respect to the
Exchanged Option Shares. See "The Merger
Agreement--Effect on IQI Stock Options and IQI
Warrants."
At the Effective Time, ATC will assume each
unexercised warrant to purchase IQI Common
Stock that is outstanding and substitute
warrants to purchase shares of ATC Common
Stock for the shares of IQI Common Stock
purchasable under each assumed warrant at the
Exchange Ratio. The exercise price for each
assumed warrant will be equal to the existing
exercise price set forth in the warrant
divided by the Exchange Ratio. The shares of
ATC Common Stock issuable upon exercise of
such warrants are being registered pursuant to
the Registration Statement. See "The Merger
Agreement--Effect on IQI Stock Options and IQI
Warrants."
Issuance and Exchange of Share At the Effective Time, each holder of a
Certificates.............................. certificate that represented IQI Common Stock
prior to consummation of the Merger will be
entitled, upon surrender of the certificate,
to receive a certificate or certificates
representing the number of whole shares of ATC
Common Stock to which such holder is entitled
pursuant to the Merger Agreement. Certificates
representing shares of ATC Common Stock will
not be delivered until an IQI stockholder's
certificate evidencing IQI Common Stock has
been surrendered by the stockholder or his or
her nominee. Promptly after the Effective
Time, IQI stockholders will be furnished
separately a letter of
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transmittal to facilitate the delivery of IQI
Common Stock certificates to ATC and the
delivery of certificates of ATC Common Stock
to such stockholders. PLEASE DO NOT DELIVER
YOUR STOCK CERTIFICATES EVIDENCING IQI COMMON
STOCK TO ATC UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM ATC'S
TRANSFER AGENT. See "The Merger
Agreement--Surrender of IQI Common Stock
Certificates."
Comparison of Rights of Stockholders of IQI
and ATC................................... The rights of IQI's stockholders are currently
governed by New York law and by IQI's
Certificate of Incorporation, as amended (the
"IQI CHARTER"), and IQI's bylaws, as amended
(the "IQI BYLAWS"). Upon the effectiveness of
the Merger, IQI's stockholders will become
stockholders of ATC, a Delaware corporation,
and their rights as ATC stockholders will be
governed by Delaware law and by the ATC
Charter and the ATC bylaws, as amended (the
"ATC BYLAWS"). See "Comparative Rights of
Stockholders of ATC and IQI."
Conditions to Merger........................ The obligations of IQI and ATC to consummate
the Merger are subject to the satisfaction of
certain customary and other conditions set
forth in the Merger Agreement, including,
among other things, (i) the Registration
Statement shall have become effective, (ii)
the Merger has been approved by the requisite
vote of the stockholders of ATC and IQI, (iii)
the number of Dissenters' Shares shall not
exceed 5% of the aggregate number of issued
and outstanding shares of IQI Common Stock at
the Effective Time, (iv) ATC shall have
received all material permits and other
authorizations, if any, required under
applicable securities laws for the issuance of
ATC Common Stock in the Merger, (v) Thayer,
Edward Blank, The Edward Blank 1995 Grantor
Retained Annuity Trust, ITC Service Company,
Codinvest Limited, Michael G. Santry and
Darryl D. Pounds shall have entered into a
stockholders' agreement, (vi) up to $2.0
million in financial accommodations
contemplated by the Thayer Commitment Letter
shall have been rendered, (vii) the 1998 Plan
shall have been adopted by the stockholders of
ATC with the number of shares of ATC Common
Stock available thereunder sufficient to
provide for the issuance of the Exchanged
Option Shares, (viii) the shares of ATC Common
Stock to be issued to IQI stockholders in the
Merger shall have been authorized for listing
on
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NASDAQ, (ix) Michael G. Santry shall have made
a payment of not less than one-half of the
principal, together with all accrued and
unpaid interest, under the terms of that
certain promissory note dated September 16,
1997, as amended, made by Michael G. Santry in
favor of ATC, and (x) the fairness opinion of
CIBC Oppenheimer Corp. to the ATC Board that
the Exchange Ratio is fair to the holders of
shares of ATC Common Stock from a financial
point of view shall not have been withdrawn
prior to the Closing of the Merger. ATC and
IQI filed notification and report forms under
the Hart-Scott-Rodino Antitrust Improvement
Act of 1976 ("HSR Act") on May 20, 1998 and
have requested early termination of the
waiting period under the HSR Act.
Amendment to ATC Bylaws..................... Pursuant to the Merger Agreement, ATC has
agreed to amend its bylaws, effective upon the
Closing, to require approval of seven of
twelve directors before ATC may take certain
actions, including (i) selling a material
portion of its assets, (ii) dissolving ATC,
(iii) merging or consolidating with another
entity, (iv) purchasing assets in excess of
$1.0 million or more, except as approved in
the annual operating plan and capital
expenditure budget, (v) creating, issuing or
selling any capital stock ranking in any
manner superior to ATC Common Stock, (vi)
creating, issuing or selling any debt
security, (vii) amending the ATC Charter or
ATC Bylaws, (viii) entering into any
transaction with an Affiliate of ATC with a
value in excess of $50,000, (ix) issuing,
selling or exchanging any equity security of
any subsidiary, (x) removing or electing a
Chief Executive Officer, President or Chief
Financial Officer or approving compensation
increases for such executive officers, and
(xi) approving an annual operating plan and
capital expenditure budget. See "The Merger
Agreement--Amendment to ATC Bylaws."
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Indemnification............................. Pursuant to the Merger Agreement, the
stockholders of IQI have agreed to defend,
indemnify and hold ATC harmless from and
against any and all damages arising out of or
resulting from (i) any inaccuracy in or breach
of any representation, warranty, covenant or
agreement made by IQI in the Merger Agreement
or (ii) the failure of IQI to perform or
observe fully any covenant, agreement or
provision to be performed or observed by IQI
pursuant to the Merger Agreement. The IQI
stockholders' liability for these
indemnification obligations shall be allocated
among them pro rata in accordance with their
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IQI holdings, and any claims will be satisfied
by delivery of Escrow Shares. See "The Merger
Agreement--Indemnification."
Pursuant to the Merger Agreement, ATC has
agreed to defend, indemnify and hold the IQI
stockholders harmless from and against any and
all damages arising out of or resulting from
(i) any inaccuracy in or breach of any
representation, warranty, covenant or
agreement made by ATC in the Merger Agreement
or (ii) the failure of ATC to perform or
observe fully any covenant, agreement or
provision to be performed or observed by ATC
pursuant to the Merger Agreement. See "The
Merger Agreement-- Indemnification."
The indemnification obligations of the IQI
stockholders and ATC under the Merger
Agreement (i) shall apply only to the extent
that the amount of damages suffered by ATC or
the IQI stockholders, respectively, exceeds an
accumulated total of $500,000 in the
aggregate, at which point the obligations of
the IQI stockholders or ATC, as the case may
be, shall be to indemnify only for the damages
in excess of such accumulated total; (ii)
shall be limited, in the case of the IQI
stockholders, to the Escrow Shares, and the
ATC indemnified parties shall have no recourse
against the IQI stockholders pursuant to the
Merger Agreement beyond recovery of the Escrow
Shares; and (iii) shall be limited, in the
case of ATC, to the Additional Shares, and the
IQI stockholders shall have no recourse
against ATC pursuant to the Merger Agreement
beyond recovery of the Additional Shares. See
"The Merger Agreement-- Indemnification."
Escrow Shares............................... On the Closing Date, ATC will deliver to the
Escrow Agent a certificate (issued in the name
of the Escrow Agent or its nominee)
representing 1,506,092 shares of ATC Common
Stock (the "ESCROW SHARES") for the purpose of
securing the indemnification obligations of
the IQI stockholders set forth in the Merger
Agreement. The Escrow Shares shall be
apportioned pro rata among the IQI
stockholders. The Escrow Shares shall be held
by the Escrow Agent pursuant to the terms of
the Escrow Agreement. The Escrow Shares shall
be held as a trust fund and shall not be
subject to any lien, attachment, trustee
process or other judicial process of any
creditor of any party to the Merger Agreement,
and shall be held and disbursed solely for the
purposes, and in accordance
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with the terms, of the Escrow Agreement. In
the event that the IQI stockholders are
required to satisfy a claim for
indemnification by ATC, a number of Escrow
Shares equal to the indemnification amount
divided by $1.78125 shall be deducted from the
trust fund and returned to ATC. See "The
Merger Agreement--Escrow Shares."
Additional Shares........................... In the event that ATC is required to satisfy a
claim for indemnification by the IQI
stockholders, such claim shall be satisfied by
dividing the amount thereof by $1.78125 (the
same valuation per share set forth in the
Escrow Agreement) and issuing to the IQI
stockholders, pro rata in accordance with the
number of shares of IQI Common Stock owned by
each of them, a number of shares of ATC Common
Stock equal to such quotient; provided,
however, that ATC shall not be obligated to
issue an aggregate number of shares of ATC
Common Stock in excess of 1,506,092, a number
equal to the Escrow Shares (the "ADDITIONAL
SHARES"), in satisfaction of all its
indemnification obligations under the Merger
Agreement. See "The Merger Agreement--
Indemnification."
Termination, Waiver and Amendment........... The Merger Agreement may be terminated at any
time prior to the Closing (a) by the mutual
consent of ATC and IQI, (b) by either party if
(i) the requisite ATC or IQI stockholder
approval is not obtained, (ii) there has been
a material misrepresentation, breach of
warranty or breach of covenant in the Merger
Agreement by the other party or any of the
conditions precedent to Closing have not been
met on the Closing Date and the terminating
party is not in material default of its
obligations, or (iii) the Merger is not
consummated by July 31, 1998, (c) by ATC if
the ATC Board, in its good faith exercise of
its business judgment, determines, after
consulting with counsel, that continuing to
recommend to its stockholders the approval of
the Merger would be reasonably likely to be a
breach of its fiduciary duties, (d) by IQI if,
prior to the ATC Annual Meeting, the ATC
Board, in the exercise of its fiduciary duties
under applicable law, withdraws or modifies in
any manner adverse to IQI its approval or
recommendation of the Merger Agreement or the
Merger, approves or recommends any Acquisition
Proposal by any party other than ATC, or
resolves to take any of the foregoing actions
or (e) by IQI if ATC materially breaches its
covenant to not solicit or encourage an
Acquisition Proposal or provide any non-public
information regarding an Acquisition
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<S> <C>
Proposal to any party other than IQI. See "The
Merger Agreement--Termination; Termination
Fee."
Except as otherwise required by law or the
rules of NASDAQ, the Merger Agreement may be
amended or modified and any condition
specified therein may be waived without
re-submission to the stockholders of ATC and
IQI by the mutual written consent of ATC and
IQI. See "The Merger Agreement--Waiver and
Amendment."
Termination Fees; Expenses.................. Fees and expenses will be borne by the party
incurring such fees and expenses, except that
certain fees and expenses will be shared
equally by ATC and IQI, including the filing
fees associated with this Joint Proxy
Statement/Prospectus and filing fees for
notification reports under the HSR Act. If the
Merger Agreement is terminated pursuant to
clauses (c), (d) or (e) as set forth in
"--Termination, Waiver and Amendment," ATC
would be required to pay to IQI upon
termination of the Merger Agreement a fee of
$1,000,000, plus reasonable and documented
expenses incurred by IQI in connection with
the Merger and the Merger Agreement up to but
not exceeding $500,000. See "The Merger
Agreement-- Termination; Termination Fee."
Accounting Treatment........................ The Merger is anticipated to be accounted for
under the "reverse purchase" method of
accounting, pursuant to which IQI will be
treated as the acquiring entity for accounting
purposes and the assets and liabilities of ATC
will be recorded at their respective fair
values and added to those of IQI at the
Effective Time. See "The Proposed
Merger--Accounting Treatment."
Tax Consequences of The Merger.............. The Merger will constitute a reorganization
for federal income tax purposes within the
meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE"),
and, accordingly, (i) no gain or loss will be
recognized by ATC, Sub or IQI as a result of
the Merger, (ii) no gain or loss will be
recognized by the stockholders of IQI who
exchange their IQI Common Stock solely for
shares of ATC Common Stock pursuant to the
Merger, (iii) the aggregate basis of the
shares of ATC Common Stock received by
stockholders of IQI in the Merger will be the
same as the aggregate basis of IQI Common
Stock surrendered in exchange therefor, and
(iv) the holding period of the shares of ATC
Common Stock received by the stockholders of
IQI in the Merger will include the period
during which the shares of IQI Common Stock
surrendered in exchange therefor
</TABLE>
17
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<TABLE>
<S> <C>
were held, provided that such shares were held
as a capital asset at the Effective Time. See
"The Proposed Merger--Certain Federal Income
Tax Consequences."
Dissenters' Rights.......................... Under the NYBCL, each stockholder of record of
IQI at the close of business on May 15, 1998
will be entitled to enforce its right to
receive payment of the fair value of its
shares and the other rights and benefits
provided by section 910 of the NYBCL (the
"DISSENTING SHARES") if, in accordance with
section 623 of the NYBCL, the stockholder (i)
has filed with IQI either prior to the IQI
Special Meeting or at such meeting, but before
the vote, written objection to the Merger and
(ii) after receiving written notice of the
authorization of the Merger by the requisite
stockholder vote, has filed with IQI written
notice of its election to dissent and demand
payment of the fair value of its shares. "FAIR
VALUE" for purposes of dissenters' rights will
be determined excluding any element of value
arising from the accomplishment or expectation
of the Merger.
IN ORDER TO EXERCISE RIGHTS AS A DISSENTING
STOCKHOLDER, A STOCKHOLDER OF IQI MUST COMPLY
WITH ALL OF THE PROCEDURAL REQUIREMENTS OF
SECTION 623 OF THE NYBCL. THE REQUIRED
PROCEDURES MUST BE FOLLOWED EXACTLY OR
DISSENTERS' RIGHTS MAY BE LOST.
See "The Proposed Merger--Dissenters'
Appraisal Rights" and Appendix C--New York
Appraisal Rights and Procedures.
Management of ATC Following the Merger...... The principal officers of ATC following the
Merger will be Stephen A. McNeely (the current
President and Chief Executive Officer of IQI),
Chief Executive Officer, and Matthew S. Waller
(the current Chief Financial Officer of ATC),
Chief Financial Officer. The nominees for
directors of ATC following the Merger are:
William G. Moore, Jr. (Class I), Darryl D.
Pounds (Class I), Peter V. Ueberroth (Class
I), Drew Lewis (Class I), Michael G. Santry
(Class II), Matthew S. Waller (Class II),
Frederic V. Malek (Class II), Paul G. Stern
(Class II), David L. Malcolm (Class III),
Daniel H. Chapman (Class III), Stephen A.
McNeely (Class III), and Edward Blank (Class
III). See "Management and Operations after the
Merger."
Interests of Certain Persons in the A number of directors and executive officers
Merger.................................... of ATC will receive substantial consideration
if the Merger
</TABLE>
18
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<S> <C>
becomes effective. See "The Proposed Merger--
Interests of Certain Persons in the Merger".
OTHER TRANSACTIONS RELATED TO THE MERGER
New Senior Loan............................. The Bank of Nova Scotia ("SCOTIABANK") and
Credit Suisse First Boston ("CSFB") have
issued a letter to IQI (the "BANK COMMITMENT
LETTER") pursuant to which (i) Scotiabank and
CSFB have committed to roll over and continue
their commitments aggregating $53.0 million
under the existing credit agreement with IQI
and (ii) Scotiabank has committed to provide
IQI an additional $12.0 million in revolving
loans (the "ADDITIONAL LOAN") upon the
effectiveness of the Merger. This will result
in a total facility of approximately $65.0
million. The proceeds of the Additional Loan
will be used upon consummation of the Merger
to refinance the existing bank indebtedness of
Advanced Telemarketing Corporation, a
wholly-owned subsidiary of ATC ("ADVANCED"),
and for the general corporate and working
capital needs of IQI and the other
wholly-owned subsidiaries of ATC. The
obligations of Scotiabank and CSFB under the
Bank Commitment Letter are subject to
customary conditions, plus a requirement that
Thayer shall have funded approximately $8.0
million in subordinated debt, comprised of (a)
the $2.0 million of accommodations to Advanced
contemplated by the Thayer Commitment Letter,
(b) $2.0 million advanced to IQI by Thayer in
April 1998 for working capital to fund growth
in the inbound teleservices area and (c) an
additional $4.0 million to be funded upon
consummation of the Merger. See "Other
Transactions Related to the Merger--New Senior
Loan."
Thayer Commitment Letter.................... In connection with the proposed Merger, Thayer
issued the Thayer Commitment Letter pursuant
to which Thayer agreed to provide ATC with a
guaranty of, or other credit enhancement
relating to, up to $2.0 million in additional
indebtedness to be incurred under ATC's Credit
Agreement with Bank One Texas, N.A., or in the
alternative, to provide $2.0 million in
subordinated debt to ATC. In consideration of
such commitment, pursuant to a Securities
Purchase and Registration Rights Agreement,
ATC agreed to issue Thayer for the purchase
price of $110,000 warrants (the "FIRST
WARRANT") to purchase up to 1.1 million shares
of ATC Common Stock at an exercise price per
share of $1.96 (110% of the average of the
high and low
</TABLE>
19
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<S> <C>
prices of ATC Common Stock on April 7, 1998,
the day before the announcement of the
proposed Merger). ATC may redeem, or Thayer
may put, the First Warrant for $110,000 if the
Merger is not consummated for any reason. In
addition, ATC agreed to grant Thayer a second
warrant ("SECOND WARRANT"), at an exercise
price of $2.00 per share, that would entitle
Thayer to acquire a number of shares of ATC
Common Stock equal to the amount drawn on the
guaranty divided by $2.00 or, if Thayer makes
a subordinated loan to ATC, a number of shares
of ATC Common Stock equal to the funded
indebtedness divided by $2.00. Alternatively,
Thayer may make an election to convert the
amount of any funded indebtedness into ATC
Common Stock at a conversion rate of $2.00 per
share. See "Other Transactions Related to the
Merger--Thayer Commitment Letter."
Proxy Agreement with Certain Stockholders of
IQI....................................... Holders of shares of IQI Common Stock,
representing in the aggregate approximately
85% of the shares of IQI Common Stock entitled
to vote on the Merger, have executed an
Irrevocable Proxy Agreement pursuant to which
a designee of ATC has been authorized to vote
such shares in favor of the Merger, which vote
is sufficient under the NYBCL and the IQI
Bylaws to approve the Merger. ATC requested
those stockholders of IQI to enter into the
Irrevocable Proxy Agreement to give ATC
additional assurance that the Merger would be
consummated. Such stockholders agreed to
execute the Irrevocable Proxy Agreement as an
inducement to ATC to enter into the Merger
Agreement. See "Other Transactions Related to
the Merger--Proxy Agreement with Certain
Stockholders of IQI."
Pursuant to the Irrevocable Proxy Agreement,
the IQI stockholders party thereto have
granted to ATC a proxy to vote all their
shares of IQI Common Stock in favor of the
Merger and as ATC shall deem proper with
respect to any acquisition proposal relating
to IQI. Accordingly, the Merger and the Merger
Agreement will have been approved without the
vote or consent of any other IQI stockholder.
ATC does not expect to be required to exercise
any of its other rights under the Irrevocable
Proxy Agreement. These other rights include a
proxy to execute and deliver any written
consents in connection with the IQI Special
Meeting or any adjournment thereof; if no such
meeting is held and no action is taken in
connection with the Merger, to call a meeting
of
</TABLE>
20
<PAGE>
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<S> <C>
stockholders to vote on the Merger, any
acquisition proposal relating to IQI or the
replacement of any or all of the members of
the IQI Board (to the extent permitted by the
NYBCL and the IQI Charter); and to waive for
the term of the Irrevocable Proxy Agreement
any appraisal rights. Each IQI stockholder who
executed the Irrevocable Proxy Agreement
agreed not to enter into any voting agreement
with respect to his or its shares of IQI
Common Stock covered by the proxy agreement,
to sell or transfer such IQI Common Stock
(unless the transferee agrees in writing to be
bound by the terms of the proxy agreement) or
to encourage or participate in any discussions
regarding an acquisition proposal relating to
IQI. The Irrevocable Proxy Agreement
terminates on the earlier to occur of (i) the
Effective Time or (ii) the termination of the
Merger Agreement in accordance with its terms.
See "Other Transactions Related to the
Merger--Proxy Agreement with Certain
Stockholders of IQI."
Stockholders' Agreement..................... Certain stockholders of ATC and IQI will enter
into a Stockholders' Agreement (the
"STOCKHOLDERS' AGREEMENT") upon the
consummation of the Merger whereby such
stockholders agree to vote their shares of ATC
Common Stock following the Merger in favor of
the election of certain nominees to the ATC
Board. The voting agreement will have a term
of two years, commencing upon the closing of
the Merger. The IQI parties to the
Stockholders' Agreement will be Thayer, ITC
Service Company, The Edward Blank 1995 Grantor
Retained Annuity Trust and Edward Blank, and
the ATC parties to the Stockholders' Agreement
will be Codinvest Limited, Michael G. Santry
and Darryl D. Pounds. See "Other Transactions
Related to the Merger--Stockholders'
Agreement."
Registration Rights Agreement............... Pursuant to the Securities Purchase and
Registration Rights Agreement, ATC has granted
Thayer the right to demand one registration on
a form other than Form S-3, and up to three
registrations on Form S-3, of the shares of
ATC Common Stock issuable upon exercise of the
First Warrant. Holders of at least 200,000
shares of ATC Common Stock are required to
request registration. In addition, Thayer has
unlimited "piggyback" registration rights and
may seek to include shares of ATC Common Stock
issuable upon exercise of the First Warrant in
any registration statement filed by ATC for
its own purposes, subject to customary
"cut-back" rights of ATC's underwriter to
reduce the number of shares to
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
be included in the registration if the number
requested to be included exceeds, in the
underwriter's good faith judgment, the number
that can be sold in the offering. See "Other
Transactions Related to the
Merger--Registration Rights Agreement."
REASONS FOR THE MERGER
ATC's Reasons for Merger.................... In reaching its determination to approve the
Merger Agreement, the ATC Board considered a
variety of factors, although it did not assign
any relative or specific weight to the factors
considered. The factors considered included
the following: (i) the Merger would result in
a larger and more diversified company in the
teleservices marketplace that should enhance
ATC's competitiveness in existing markets and
facilitate more rapid entry into other markets
through IQI's existing operations; (ii) the
businesses of ATC and IQI are compatible and
the Merger should enable ATC to combine its
strengths in inbound teleservices and
information technology with IQI's expertise in
outbound teleservices, its pay-for-performance
pricing model, database analysis capability
and custom marketing research to provide a
more complete, single source solution for its
customers' needs; (iii) the Merger offers
increased sales and marketing opportunities
through the addition of the IQI sales force,
the client base of IQI's custom marketing
research division, Elrick & Lavidge, and the
extensive business contacts and relationships
of IQI's controlling stockholder, Thayer; (iv)
the Merger should create synergies and
economies of scale through the reduction of
operational and management redundancies that
should help ATC improve its cash flow and
operating margins; (v) the Merger should
permit improved access to the capital markets
due to the resulting increased capitalization
and profitability; (vi) the Merger and the
cash investment in ATC by Thayer pursuant to
the Thayer Commitment Letter, which was
conditioned on the execution of the Merger
Agreement, would provide interim financial
support required by ATC for working capital
needs; (vii) the terms and conditions of the
proposed Merger Agreement, generally, are
favorable to the ATC stockholders; and (viii)
CIBC Oppenheimer's opinion that the Exchange
Ratio is fair, from a financial point of view,
to the holders of shares of ATC Common Stock.
See "The Proposed Merger-- ATC's Reasons for
the Merger."
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
IQI's Reasons for Merger.................... In reaching its determination to approve the
Merger Agreement, the IQI Board considered a
variety of factors, although it did not assign
any relative or specific weight to the factors
considered. The factors considered included
the following: (i) the Merger would result in
a larger and more diversified company in the
teleservices marketplace that should enhance
IQI's competitiveness in existing markets and
facilitate more rapid entry into other markets
through ATC's existing operations; (ii) the
businesses of IQI and ATC are compatible and
the Merger should enable IQI to combine its
expertise in outbound teleservices, its
pay-for-performance pricing model, database
analysis and customer marketing research with
ATC's strengths in inbound teleservices and
information technology to provide a more
complete, single source solution for its
customers' needs; (iii) IQI has reviewed
financial statements and financial projections
for both IQI and ATC, including combined
financial projections on a pro-forma basis,
and has determined that the synergies and
economies of scale through the reduction of
operational and management redundancies
anticipated to be derived from the Merger are
more favorable to IQI and its stockholders
than those that could be derived by IQI
continuing to operate independently; (iv) the
Merger should provide enhanced liquidity to
the current stockholders of IQI as the result
of the proposed conversion and exchange of IQI
Common Stock for ATC Common Stock; (v) the
Merger should permit improved access to the
capital markets due to the resulting increased
capitalization and profitability; and (vi) the
IQI Board reviewed valuations on companies
comparable to ATC and similarly situated and
has performed or caused to be performed
valuations on ATC using a variety of valuation
techniques and concluded that the terms and
conditions of the proposed Merger Agreement,
generally, are favorable to the stockholders
of IQI. See "The Proposed Merger--IQI's
Reasons for the Merger."
RECOMMENDATION OF THE ATC BOARD
Approval by the ATC Board................... The ATC Board has unanimously approved the
Merger Agreement and determined that the
Merger Agreement and the Merger are fair to,
and in the best interests of, ATC and its
stockholders. THE ATC BOARD RECOMMENDS THAT
ATC STOCKHOLDERS VOTE FOR THE MERGER.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
For a discussion of factors considered by the
ATC Board in reaching its decision, see "The
Proposed Merger--ATC's Reasons for the Merger"
and "The Proposed Merger--ATC Board
Recommendation of the Merger."
Fairness Opinion............................ Among the factors considered by the ATC Board
was the receipt of the opinion of CIBC
Oppenheimer Corp. to the effect that the
Exchange Ratio is fair, from a financial point
of view, to the holders of shares of ATC
Common Stock. See "The Proposed
Merger--Opinion of Financial Advisor to ATC"
and Appendix B--Fairness Opinion of CIBC
Oppenheimer Corp.
RECOMMENDATION OF THE IQI BOARD
Approval by the IQI Board................... The IQI Board has unanimously approved the
Merger Agreement and the Merger and determined
that the Merger is in the best interests of
IQI and its stockholders. THE IQI BOARD
RECOMMENDS THAT IQI STOCKHOLDERS VOTE FOR
APPROVAL OF THE MERGER. For a discussion of
the factors considered by the IQI Board in
reaching its decision, see "The Proposed
Merger-- IQI's Reasons for the Merger" and
"The Proposed Merger--IQI Board Recommendation
of the Merger."
</TABLE>
24
<PAGE>
MARKET PRICE DATA
ATC Common Stock has been publicly traded on NASDAQ since 1985 and has been
traded under the symbol "ATCT" since 1994. IQI is a privately held corporation.
The following table sets forth the range of high and low closing prices for ATC
Common Stock for the periods from July 1, 1995 through May 27, 1998, as reported
on NASDAQ. The price quotations on NASDAQ reflect inter-dealer prices, without
adjustment for retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
ATC
------------------------
HIGH LOW
---------- ----------
<S> <C> <C>
Fiscal Year Ended June 30, 1998
Fourth Quarter (through May 27,
1998)............................... $ 3 3/16 $ 1 19/32
Third Quarter......................... 2 3/4 1 3/8
Second Quarter........................ 4 1/8 1 9/32
First Quarter......................... 5 9/16 4
Fiscal Year Ended June 30, 1997
Fourth Quarter........................ $ 6 5/8 $ 2 9/16
Third Quarter......................... 15 5
Second Quarter........................ 26 1/4 11 3/8
First Quarter......................... 19 3/4 11 1/4
Fiscal Year Ended June 30, 1996
Fourth Quarter........................ $ 15 3/4 $ 8 3/8
Third Quarter......................... 9 5/8 4 3/4
Second Quarter........................ 6 2 15/16
First Quarter......................... 3 7/8 2 1/4
</TABLE>
On April 7, 1998, the last trading day prior to the public announcement of
the Merger, the closing sale price per share of ATC Common Stock as reported by
NASDAQ was $1 7/8. On April 7, 1998, there were 763 holders of record of ATC
Common Stock, and there were 21,478,624 shares of ATC Common Stock issued and
outstanding.
IQI is a privately held corporation, and consequently there is no
established trading market for IQI Common Stock. On April 7, 1998, there were 50
holders of record of IQI Common Stock, and there were 3,089,006 shares of IQI
Common Stock issued and outstanding.
Following the Merger, ATC Common Stock will continue to be traded on NASDAQ
under the symbol "AGIS." Because the market price of ATC Common Stock is subject
to fluctuation, the market value of the shares of ATC Common Stock that holders
of IQI Common Stock will receive in the Merger may vary from the prices shown
above prior to and after the Effective Date. See "Risk Factors--Exchange Ratio"
and "Risk Factors--Shares Available for Future Sale."
DIVIDEND POLICY
To date, ATC has not declared a cash dividend on ATC Common Stock. ATC
intends to retain earnings for use in the operation and expansion of its
business, and therefore does not anticipate declaring a cash dividend in the
foreseeable future. Pursuant to ATC's existing $12.0 million credit facility
with Bank One Texas, N.A. (the "ATC CREDIT FACILITY"), ATC's operating
subsidiary's ability to pay dividends is restricted, thus limiting ATC's ability
to pay dividends to its stockholders. Any future determination to pay dividends
will be at the discretion of the ATC Board and will be dependent upon then
existing conditions, including ATC's financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and such
other factors as the ATC Board deems relevant. See "Selected Financial
25
<PAGE>
Information" and "ATC Management's Discussion and Analysis of Financial
Condition and Results of Operations."
To date, IQI has not declared a cash dividend on IQI Common Stock. IQI
intends to retain earnings for use in the operation and expansion of its
business, and therefore does not anticipate declaring a cash dividend in the
foreseeable future. Pursuant to IQI's existing bank credit agreement, IQI is
restricted from paying dividends to its stockholders. Any future determination
to pay dividends will be at the discretion of the IQI Board and will be
dependent upon then existing conditions, including IQI's financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and such other factors as the IQI Board deems relevant. See "Selected
Financial Information--IQI Management's Discussion and Analysis of Financial
Condition and Results of Operations."
If the Merger is consummated, it is anticipated that ATC will continue its
policy of not paying any cash dividends on ATC Common Stock. Pursuant to the new
senior loan to be entered into pursuant to the Bank Commitment Letter, ATC's
operating subsidiaries' ability to pay dividends is restricted, thus limiting
ATC's ability to pay dividends to its stockholders. Any future determination to
pay dividends will be at the discretion of the ATC Board and will be dependent
upon then existing conditions, including ATC's financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and such other factors as the ATC Board deems relevant. See "Selected Financial
Information" and "ATC Management's Discussion and Analysis of Financial
Condition and Results of Operations."
26
<PAGE>
SUMMARY ATC HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents summary historical consolidated financial data
of ATC for each of the five fiscal years in the period ended June 30, 1997,
which have been derived from the audited consolidated financial statements of
ATC. The audited consolidated financial statements of ATC for each of the three
years in the period ended June 30, 1997 appear elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical consolidated financial data for the
nine-month periods ended March 31, 1997 and 1998 have been derived from the
unaudited consolidated financial statements of ATC which, in the opinion of
management, include all material, normal and recurring adjustments, necessary
for a fair presentation of the results for the unaudited periods. The unaudited
consolidated financial statements of ATC for the nine-month periods ended March
31, 1997 and 1998 appear elsewhere in this Joint Proxy Statement/ Prospectus.
The summary historical consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, "Selected ATC
Historical Consolidated Financial Information," "ATC Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the accompanying notes thereto included elsewhere in this Joint
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31,
-----------
YEAR ENDED JUNE 30,
----------------------------------------------------- (UNAUDITED)
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues(1)............................................... $ 17,829 $ 37,447 $ 61,354 $ 94,314 $ 97,629 $ 76,140
Gross profit.............................................. 5,513 10,586 18,239 31,150 29,347 23,650
Operating expenses........................................ 5,959 8,134 13,246 18,035 22,847 15,602
Depreciation and amortization............................. 492 1,113 2,238 2,937 3,619 2,594
Income (loss) from continuing operations.................. (939) 1,339 2,755 10,177 2,882 5,455
Interest expense.......................................... 379 903 946 853 617 396
Interest and other income................................. 80 84 87 94 119 74
Income (loss) from continuing operations before income
taxes................................................... (1,238) 520 1,897 9,418 2,384 5,133
Net income (loss) from continuing operations.............. (817 (2) 340 1,445 5,850 1,429 3,384
Net income (loss)(3)...................................... 1,182(4) 2,996 1,335 5,850 1,429 3,384
Diluted earnings (loss) from continuing operations per
share(5)................................................ $ (0.07) $ 0.02 $ 0.06 $ 0.25 $ 0.06 $ 0.14
Diluted earnings (loss) per share(5)...................... $ 0.08 $ 0.21 $ 0.05 $ 0.25 $ 0.06 $ 0.14
Weighted average number of common and common equivalent
shares outstanding...................................... 13,294 13,685 18,441 21,177 22,150 22,230
OTHER DATA
EBITDA(6)................................................. $ (447) $ 2,452 $ 4,994 $ 13,114 $ 6,501 $ 8,048
Net cash provided by (used in) operating activities....... (2,065) (192) 5,279 732 4,067 2,138
Net cash provided by (used in) investing activities....... (636) 1,589 (4,456) (2,521) (3,248) (3,155)
Net cash provided by (used in) financing activities....... 2,615 1,878 (3,508) 1,031 (1,909) (154)
Call center facilities at end of period................... 2 5 6 6 6 6
Teleservices workstations at end of period................ 500 1,472 2,946 3,275 3,238 3,238
<CAPTION>
1998
-----------
<S> <C>
STATEMENTS OF OPERATIONS DATA
Revenues(1)............................................... $ 64,766
Gross profit.............................................. 15,895
Operating expenses........................................ 17,817
Depreciation and amortization............................. 3,124
Income (loss) from continuing operations.................. (5,046)
Interest expense.......................................... 739
Interest and other income................................. 178
Income (loss) from continuing operations before income
taxes................................................... (5,606)
Net income (loss) from continuing operations.............. (3,725)
Net income (loss)(3)...................................... (3,725)
Diluted earnings (loss) from continuing operations per
share(5)................................................ $ (0.17)
Diluted earnings (loss) per share(5)...................... $ (0.17)
Weighted average number of common and common equivalent
shares outstanding...................................... 21,484
OTHER DATA
EBITDA(6)................................................. $ (1,921)
Net cash provided by (used in) operating activities....... (894)
Net cash provided by (used in) investing activities....... (2,780)
Net cash provided by (used in) financing activities....... 3,097
Call center facilities at end of period................... 6
Teleservices workstations at end of period................ 3,191
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE
30, 1997
-----------
(IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA
Working capital........................................................................................... $ 15,080
Total assets.............................................................................................. 41,223
Long-term obligations (less current maturities)........................................................... 4,754
Total liabilities......................................................................................... 12,602
Shareholders' equity...................................................................................... 28,621
<CAPTION>
AS OF MARCH
(UNAUDITED)
-------------
<S> <C>
BALANCE SHEET DATA
Working capital........................................................................................... $ 5,283
Total assets.............................................................................................. 45,095
Long-term obligations (less current maturities)........................................................... 3,706
Total liabilities......................................................................................... 21,124
Shareholders' equity...................................................................................... 23,971
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
27
<PAGE>
- ------------------------------
(1) Includes revenues generated by ATC's teleservices subsidiary only. ATC sold
its non-teleservices subsidiaries in fiscal 1994 and 1995; therefore, sales
of discontinued operations are omitted.
(2) Includes an income tax benefit of $421, or $0.03 per diluted share,
resulting from a change in the accounting method used to record deferred
income taxes.
(3) Includes (i) in fiscal 1993, 1994 and 1995, income (loss) from operations of
discontinued business segments of $1,999, or $0.15 per diluted share, $109,
or $0.01 per diluted share, and $(109), or $(0.01) per diluted share,
respectively, net of applicable taxes, and (ii) in fiscal 1994, the gain on
the disposition of the assets of a discontinued business segment of $2,547,
or $0.18 per diluted share, net of applicable taxes.
(4) Includes an income tax benefit of $819, or $0.06 per diluted share,
resulting from a change in the accounting method used to record deferred
income taxes.
(5) Calculated pursuant to Statement of Financial Accounting Standards No. 128
("SFAS 128"), which was adopted by ATC effective December 31, 1997. All
prior periods have been restated pursuant to SFAS 128.
(6) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization. While it should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities or other measures of financial performance and
liquidity under generally accepted accounting principles ("GAAP"), EBITDA is
presented here to provide additional information about the Company's ability
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation.
28
<PAGE>
SUMMARY IQI HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data for IQI and subsidiaries (formerly Edward Blank Associates, Inc.) for the
year ended December 31, 1997, for the five month period ended December 31, 1996,
and for each of the four fiscal years in the period ended July 31, 1996, which
have been derived from the audited consolidated financial statements of IQI. The
unaudited summary historical consolidated financial data for the three-month
periods ended March 31, 1997 and 1998 have been derived from the unaudited
consolidated financial statements of IQI, which, in the opinion of IQI's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
periods. The audited consolidated financial statements of IQI for each of the
two fiscal years in the period ended July 31, 1996, for the five-month period
ended December 31, 1996, and for the year ended December 31, 1997 and the
unaudited consolidated financial statments for the three-month period ended
March 31, 1998, appear elsewhere in this Joint Proxy Statement/Prospectus. The
summary historical financial data set forth below should be read in conjunction
with, and are qualified by reference to, "Selected IQI Historical Financial
Information," "IQI Management's Discussion and Analysis of Financial Condition
and Results of Operations", and the financial statements and the accompanying
notes thereto included elsewhere in this Joint Proxy Statement/ Prospectus.
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER YEAR ENDED
YEAR ENDED JULY 31, (1) 31, DECEMBER 31,
------------------------------------------ -------------- --------------
1993 1994 1995 1996 1996 (2) 1997 (3)
--------- --------- --------- --------- -------------- --------------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices................................ $ 20,069 $ 31,033 $ 56,179 $ 57,543 $ 26,756 $ 115,609
Marketing research services................. -- -- -- -- -- 18,223
--------- --------- --------- --------- ------- --------------
Total revenues................................ 20,069 31,033 56,179 57,543 26,756 133,832
Gross profit.................................. 6,670 11,457 18,207 16,834 6,092 45,642
Operating expenses............................ 5,120 7,057 16,444 13,588 8,760 36,312
Depreciation and amortization................. 888 907 856 1,314 1,024 6,093
--------- --------- --------- --------- ------- --------------
Operating income (loss)....................... 662 3,493 907 1,932 (3,692) 3,237
Other income, net............................. 107 142 437 877 648 --
Interest expense, net......................... 236 112 72 190 450 3,626
--------- --------- --------- --------- ------- --------------
Income (loss) before income taxes............. 533 3,523 1,272 2,619 (3,494) (389)
Income tax expense (benefit)(1)............... 45 109 314 17 1,794 595
--------- --------- --------- --------- ------- --------------
Net income (loss)(5).......................... $ 488 $ 3,414 $ 958 $ 2,602 $ (5,288) $ (984)
--------- --------- --------- --------- ------- --------------
--------- --------- --------- --------- ------- --------------
OTHER DATA
EBITDA(4)(5).................................. $ 1,657 $ 4,542 $ 2,200 $ 4,123 $ (2,020) $ 9,330
Net cash provided by (used in) operating
activities.................................. 827 1,098 368 2,915 (139) 2,016
Net cash provided by (used in) investing
activities.................................. (74) (237) (1,846) (5,858) 1,596 (25,794)
Net cash provided by (used in) financing
activities.................................. (652) (209) 2,113 1,651 665 26,805
Call center facilities at end of period....... 20
Teleservices workstations at end of period.... 2,462
Marketing research workstations at end of
period...................................... 360
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
(UNAUDITED)
1997 1998
--------- ---------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices................................ $ 23,438 $ 34,194
Marketing research services................. -- 8,019
--------- ---------
Total revenues................................ 23,438 42,213
Gross profit.................................. 7,733 15,384
Operating expenses............................ 6,440 11,991
Depreciation and amortization................. 1,058 2,377
--------- ---------
Operating income (loss)....................... 235 1,016
Other income, net............................. -- --
Interest expense, net......................... 543 1,216
--------- ---------
Income (loss) before income taxes............. (308) (200)
Income tax expense (benefit)(1)............... (36) 260
--------- ---------
Net income (loss)(5).......................... $ (272) $ (460)
--------- ---------
--------- ---------
OTHER DATA
EBITDA(4)(5).................................. $ 1,293 $ 3,393
Net cash provided by (used in) operating
activities.................................. (1,089) 1,115
Net cash provided by (used in) investing
activities.................................. (1,060) (2,158)
Net cash provided by (used in) financing
activities.................................. 1,249 (288)
Call center facilities at end of period....... 20
Teleservices workstations at end of period.... 2,462
Marketing research workstations at end of
period...................................... 360
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
AS OF DECEMBER 1998
31, 1997 (UNAUDITED)
-------------- ------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............................................................................ $ 5,288 $ 3,957
Total assets......................................................................................... 101,736 104,899
Total debt (less current maturities)................................................................. 51,257 51,071
Stockholders' equity................................................................................. 30,573 30,113
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
</TABLE>
29
<PAGE>
- ------------------------------
(1) Through July 31, 1996, IQI had a fiscal year end of July 31. IQI operated as
a subchapter S-corporation through November 17, 1996, at which time it
became a C-corporation for tax purposes and changed its fiscal year from
July 31 to December 31.
(2) Represents operations of IQI for the period from August 1, 1996 to December
31, 1996. Amounts include the acquisition of Lexi International, Inc.
("Lexi") on November 22, 1996.
(3) Includes the acquisition of InterServ Services Corporation ("InterServ") as
of July 12, 1997 (the "InterServ Acquisition").
(4) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization. While it should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other measures of financial performance and
liquidity under GAAP. EBITDA is presented here to provide additional
information about the Company's ability to meet its future debt service,
capital expenditure or working capital requirements. EBITDA is not
necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the method of calculation.
(5) The historical results of operations include certain non-recurring expenses
which are summarized in the table below.
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER YEAR ENDED
YEAR ENDED JULY 31, 31, DECEMBER 31,
------------------------------------------ --------------- -----------------
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actual officer's salary....................... $ 476 $ 1,312 $ 7,063 $ 2,417 $ 116 $ --
Lexi and IQI bonuses and compensation, legal
and audit fees, and software licensing
expenses..................................... -- -- -- 810 2,490 443
--------- --------- --------- --------- ------ -----
Total non-recurring expenses.................. $ 476 $ 1,312 $ 7,063 $ 3,227 $ 2,606 $ 443
--------- --------- --------- --------- ------ -----
--------- --------- --------- --------- ------ -----
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Actual officer's salary....................... $ -- $ --
Lexi and IQI bonuses and compensation, legal
and audit fees, and software licensing
expenses..................................... 123 --
--------- ---------
Total non-recurring expenses.................. $ 123 $ --
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma statement of operations data of
New ATC for the year ended December 31, 1997 and the three-month period ended
March 31, 1998 give effect to: (i) the Merger, (ii) the transactions described
under the heading "Other Transactions Related to the Merger", each as if they
had occurred at the beginning of the respective periods. The summary unaudited
pro forma statement of operations data for the year ended December 31, 1997 also
give effect to the InterServ Acquisition as if it had occurred on January 1,
1997. The "IQI As Adjusted" data reflect the InterServ Acquisition as if it had
occurred on January 1, 1997. The unaudited pro forma balance sheet data as of
March 31, 1998 give effect to the transactions described in items (i) and (ii)
above as if such transactions had occurred on such date. The Merger will be
accounted for using the "reverse purchase" method of accounting, pursuant to
which IQI will be treated as the acquiring entity for accounting purposes and
the assets and liabilities of ATC will be recorded at their respective fair
values and added to those of IQI as of the Effective Time.
This pro forma information may not be indicative of the results that would
have occurred had the transactions described above been completed on the dates
indicated or New ATC's actual or future results or financial position. The
summary pro forma statement of operations, balance sheet and other data should
be read in conjunction with the "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for IQI and ATC and the financial statements and the accompanying
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 MARCH 31, 1998
------------------------------------------------------ ------------------------
IQI IQI AS ATC NEW ATC PRO IQI ATC
HISTORICAL ADJUSTED HISTORICAL FORMA HISTORICAL HISTORICAL
-------------- --------- ----------- -------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices.............................. $ 115,609 $ 122,010 $ 89,610 $ 211,620 $ 34,194 $ 21,125
Marketing research services............... 18,223 37,143 -- 37,143 8,019 --
-------------- --------- ----------- -------------- ----------- -----------
Total revenues.............................. 133,832 159,153 89,610 248,763 42,213 21,125
Gross profit................................ 45,642 54,178 23,900 78,078 15,384 5,391
Operating expenses.......................... 36,312 43,486 25,625 69,111 11,991 5,484
Depreciation and amortization............... 6,093 7,533 3,981 12,671 2,377 1,090
-------------- --------- ----------- -------------- ----------- -----------
Operating income (loss)..................... 3,237 3,159 (5,706) (3,704) 1,016 (1,183)
Interest expense, net....................... 3,626 4,512 640 5,549 1,216 210
-------------- --------- ----------- -------------- ----------- -----------
Loss before provision for income taxes...... (389) (1,353) (6,346) (9,253) (200) (1,393)
Income tax expense (benefit)................ 595 780 (2,015) (1,394) 260 (457)
-------------- --------- ----------- -------------- ----------- -----------
Net loss.................................... $ (984) $ (2,133) $ (4,331) $ (7,859) $ (460) $ (936)
-------------- --------- ----------- -------------- ----------- -----------
-------------- --------- ----------- -------------- ----------- -----------
Pro forma loss per share.................... $ (0.04) $ (0.07) $ (0.21) $ (0.16) $ (0.02) $ (0.04)
-------------- --------- ----------- -------------- ----------- -----------
-------------- --------- ----------- -------------- ----------- -----------
Pro forma weighted average number of shares
outstanding(1)............................ 27,233 29,259 20,905 50,164 29,869 21,478
-------------- --------- ----------- -------------- ----------- -----------
-------------- --------- ----------- -------------- ----------- -----------
OTHER DATA
EBITDA(2)................................... $ 9,330 $ 10,692 $ (1,725) $ 8,967 $ 3,393 $ (93)
Call center facilities at end of period..... 20 20 5 25 20 6
Teleservices workstations at end of period.. 2,462 2,462 2,855 5,317 2,462 3,191
Marketing research workstations at end of
period.................................... 360 360 -- 360 360 --
<CAPTION>
NEW ATC PRO
FORMA
-----------
<S> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices.............................. $ 55,319
Marketing research services............... 8,019
-----------
Total revenues.............................. 63,338
Gross profit................................ 20,775
Operating expenses.......................... 17,475
Depreciation and amortization............... 3,720
-----------
Operating income (loss)..................... (420)
Interest expense, net....................... 1,525
-----------
Loss before provision for income taxes...... (1,945)
Income tax expense (benefit)................ (237)
-----------
Net loss.................................... $ (1,708)
-----------
-----------
Pro forma loss per share.................... $ (0.03)
-----------
-----------
Pro forma weighted average number of shares
outstanding(1)............................ 51,347
-----------
-----------
OTHER DATA
EBITDA(2)................................... $ 3,300
Call center facilities at end of period..... 26
Teleservices workstations at end of period.. 5,653
Marketing research workstations at end of
period.................................... 360
</TABLE>
<TABLE>
<CAPTION>
NEW ATC AS OF
MARCH 31, 1998
----------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA
Working capital................................................................................................. $ 21,934
Total assets.................................................................................................... 178,529
Long-term obligations (less current maturities)................................................................. 61,328
Total liabilities............................................................................................... 100,818
Shareholders' equity............................................................................................ 77,711
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
31
<PAGE>
- ------------------------------
(1) Pro forma net loss per share is based on the weighted average shares
outstanding after giving effect to 29,255,372 shares assumed to be issued in
connection with the Merger on the basis of a January 1, 1997 transaction
date. Upon completion of the Merger in 1998, the actual number of shares to
be issued is expected to be 30,121,824 shares based on the number of IQI
shares outstanding on April 7, 1998, the date of the Merger Agreement. Had
the Merger occurred on March 31, 1998, 29,870,338 shares would have been
issued in connection with the Merger. The weighted average number of shares
outstanding for IQI on a historical and an "as-adjusted" basis reflect the
actual weighted average number of shares outstanding multiplied by the
Exchange Ratio of 9.7513, but exclude common equivalent shares from stock
options issued and warrants because their effects would be antidilutive.
(2) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization. While it should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other measures of financial performance and
liquidity under GAAP, EBITDA is presented here to provide additional
information about the Company's ability to meet its future debt service,
capital expenditure and working capital requirements. EBITDA is not
necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the method of calculation.
32
<PAGE>
COMPARATIVE PER SHARE DATA OF ATC AND IQI
Set forth below are the income (loss) from continuing operations and book
value per common share data of ATC and IQI on an historical basis, a pro forma
basis for ATC, and an equivalent pro forma basis for IQI. No dividends per share
data has been presented as no dividends were declared or paid by ATC or IQI
during the periods presented.
The ATC pro forma data was derived by combining historical consolidated
financial information of ATC and IQI, giving effect to the Merger under the
"reverse purchase" method of accounting for business combinations. The
equivalent pro forma data for IQI was calculated by multiplying the New ATC pro
forma combined per common share data by the Exchange Ratio of 9.7513.
The information set forth below should be read in conjunction with the
respective audited consolidated financial statements and related notes of ATC
and IQI included elsewhere in this Joint Proxy Statement/Prospectus and the
unaudited pro forma combined financial information and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED MARCH
JUNE 30, YEAR ENDED DECEMBER 31, 1997 31, 1998
1997 -------------------------------------------------- -----------
----------- EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL
ATC ATC(1) NEW ATC IQI IQI ATC
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Book value per share............................. $1.31 $ 1.14 $ 1.51 $ 9.98 $14.74 $ 1.10
Basic earnings (loss) per share from continuing
operations..................................... $0.07 $(0.21 ) $(0.16 ) $ (0.35 ) $ (1.57 ) $ (0.04)
Diluted earnings (loss) per share from continuing
operations..................................... $0.06 $(0.21 ) $(0.16 ) $(0.35 ) $(1.57 ) $ (0.04)
Weighted average shares outstanding, basic....... 18,076 20,905 50,164 2,793 N/A 21,478
Weighted average shares outstanding,
diluted(2)..................................... 22,150 20,905 50,164 2,793 N/A 21,478
<CAPTION>
EQUIVALENT
PRO FORMA HISTORICAL PRO FORMA
NEW ATC IQI IQI
----------- ----------- -----------
<S> <C> <C> <C>
Book value per share............................. $ 1.50 $ 9.83 $ 14.63
Basic earnings (loss) per share from continuing
operations..................................... $ (0.03 ) $ (0.15 ) $ (0.29 )
Diluted earnings (loss) per share from continuing
operations..................................... $ (0.03 ) $ (0.15 ) $ (0.29 )
Weighted average shares outstanding, basic....... 51,347 3,063 N/A
Weighted average shares outstanding,
diluted(2)..................................... 51,347 3,063 N/A
</TABLE>
- ------------------------
(1) Represents the historical results for ATC for the four quarters ended
December 31, 1997.
(2) The weighted average shares outstanding presented for the year ended
December 31, 1997 and the three months ended March 31, 1998 do not include
common stock equivalents because their inclusion would be antidilutive.
33
<PAGE>
OTHER PROPOSALS TO BE PRESENTED AT THE ATC ANNUAL MEETING
At the ATC Annual Meeting, stockholders of ATC will also be asked to
consider and act upon the following proposals:
<TABLE>
<S> <C>
Proposal No. To approve an amendment to the ATC Charter to increase the number of
2. authorized shares of ATC Common Stock from 27,500,000 to 100,000,000. THE
ATC BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ATC VOTE FOR THE
INCREASE IN THE NUMBER OF AUTHORIZED SHARES. See "The ATC Annual
Meeting--Matters to be Considered."
Proposal No. To approve an amendment to the ATC Charter to change the corporate name of
3. ATC to Aegis Communications Group, Inc., which amendment will become
effective only upon consummation of the Merger. THE ATC BOARD RECOMMENDS
THAT THE STOCKHOLDERS OF ATC VOTE FOR THE CHANGE OF CORPORATE NAME. See "The
ATC Annual Meeting--Matters to be Considered."
Proposal No. 4 To approve an amendment to the ATC Charter classifying the ATC Board into
three classes of four directors each, which amendment will become effective
only upon consummation of the Merger. THE ATC BOARD UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF ATC VOTE FOR THE PROPOSED AMENDMENT. See "The ATC
Annual Meeting--Matters to be Considered."
Proposal No. To elect a board of directors to serve until each of their respective
5. successors shall have been duly elected and qualified. THE ATC BOARD
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ATC VOTE FOR THE NOMINEES
FOR DIRECTOR DESCRIBED HEREIN. See "The ATC Annual Meeting--Matters to be
Considered."
Proposal No. To approve the ATC 1998 Stock Option Plan. THE ATC BOARD UNANIMOUSLY
6. RECOMMENDS THAT THE STOCKHOLDERS OF ATC VOTE FOR THE ATC 1998 STOCK OPTION
PLAN. See "The ATC Annual Meeting--Matters to be Considered."
Proposal No. 7 To ratify the selection of Price Waterhouse LLP as ATC's independent
auditors for the 1998 fiscal year. THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF ATC VOTE FOR THE RATIFICATION OF PRICE WATERHOUSE LLP AS
ATC'S INDEPENDENT AUDITORS. See "The ATC Annual Meeting--Matters to be
Considered."
</TABLE>
34
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED BY THE ATC
STOCKHOLDERS AND THE IQI STOCKHOLDERS BEFORE VOTING ON THE PROPOSALS SET FORTH
HEREIN. FOR THE PURPOSES OF THIS JOINT PROXY STATEMENT/PROSPECTUS, THE TERM "NEW
ATC" SHALL MEAN AND REFER TO THE COMBINED BUSINESSES OF ATC AND IQI, AFTER
GIVING EFFECT TO THE MERGER.
RISKS RELATED TO THE MERGER
IMPLEMENTATION OF BUSINESS STRATEGY
The success of the Merger will depend, to a large extent, upon whether the
integration of ATC's and IQI's businesses is accomplished in an efficient and
effective manner. As such, ATC and IQI will be subject to the risks normally
involved in the development and implementation of a new business strategy, which
will involve the integration of each company's operating, administrative,
finance, sales and marketing organizations, as well as each company's
communication technologies and the coordination of sales efforts and
streamlining facilities and backoffice operations. In addition, each company's
customers will need to be reassured that their services will continue
uninterrupted. Moreover, New ATC will be dependent upon a new management group
to effectuate and administer the new business plan successfully. Execution of
this strategy will place significant demands on New ATC's financial and
management resources, and there can be no assurance that such demands will not
adversely affect New ATC's future financial performance or that New ATC will be
successful in fully implementing its estimated cost savings or in identifying,
acquiring, managing or integrating additional operations. The diversion of
management attention and any difficulties encountered in the transition process
could have an adverse impact on the revenue and operating results of New ATC.
Implementation of New ATC's strategy could also be affected by a number of
factors beyond New ATC's control, such as loss of personnel, the response of
competitors and regulatory developments. There can be no assurance that New ATC
will be able to implement successfully the strategies that it intends to pursue
and achieve profitable operations in the near and long term.
NEW MANAGEMENT
New ATC's future success depends, to a large extent, on the efforts and
abilities of the members of its management team. At the Effective Time, the
Chief Executive Officer of New ATC will be Stephen A. McNeely (the current
President and Chief Executive Officer of IQI) and the Chief Financial Officer of
New ATC will be Matthew S. Waller (the current Chief Financial Officer of ATC).
Although each of these individuals has experience with his prior company, each
will have to acquaint himself with the specific operations of the other company
and the resulting combined operations of New ATC. The need for New ATC's new
management team to further acquaint itself with the combined business and
operations, particularly when coupled with the risks associated with
implementing the business strategy, may have an adverse impact on the
profitability of New ATC.
In addition, the board of directors of New ATC will initially include five
nominees of ATC, five nominees of IQI and two nominees mutually agreed upon by
ATC and IQI, with Michael G. Santry of ATC and Paul G. Stern of IQI as
Co-Chairmen of the board. ATC has agreed to amend its bylaws to require the
approval of seven directors for certain transactions (see "The Merger
Agreement--Amendment to ATC Bylaws"). Although management of ATC and IQI expect
that the board of directors of New ATC will be able to resolve major business
issues, there can be no assurance that, given the equal allocation of board
seats to each party to the Merger, deadlocks will not occur. Stockholders owning
more than a majority of the voting stock of New ATC have entered into a
Stockholders' Agreement whereby, for a period of two years from the date of the
Merger Agreement, each such stockholder has agreed to vote its shares of New ATC
capital stock in favor of the two nominees to the board of directors of New ATC
selected by the representative of the other party's stockholder group.
35
<PAGE>
INCREASED LEVERAGE; FUTURE CAPITAL REQUIREMENTS
Following consummation of the Merger, New ATC will have substantially higher
debt than historical ATC. On a pro forma basis as of March 31, 1998, New ATC
would have approximately $58.4 million in principal amount of senior debt
outstanding and $4.3 million in subordinated indebtedness, which would result in
a total debt to total capitalization ratio of approximately 45%. New ATC's
tangible net book value on the same pro forma basis would be approximately $1.6
million. Following consummation of the Merger, management expects that New ATC
would also have additional subordinated financing provided by Thayer of
approximately $4.7 million (an aggregate of approximately $8.0 million). The
actual amount of indebtedness of New ATC could vary. The degree to which New ATC
will be leveraged could adversely affect New ATC's ability to obtain additional
financing for working capital, acquisitions or other purposes and could make it
more vulnerable to economic downturns and competitive pressures. New ATC's
future capital requirements and the sufficiency of available funds will depend
on numerous factors that are difficult to predict, including results of
operations, the timing and cost of acquisitions and efforts to expand existing
operations. If funds available through the Bank Commitment Letter and cash flows
from operations are insufficient to meet current or planned operating
requirements, New ATC will be required to obtain additional funds through equity
or debt financings or from other sources. The terms of any equity financings may
be dilutive to ATC stockholders and the terms of any debt financings are likely
to contain restrictive covenants which limit New ATC's ability to pursue certain
courses of action. In addition, the terms of the Bank Commitment Letter will
limit ATC's ability to incur debt other than pursuant to the existing
facilities. There can be no assurance that additional funding will be available
on acceptable terms, if at all. If adequate funds are not available, New ATC may
be required to restructure its existing indebtedness or forego strategic
decisions or delay, scale back or eliminate certain aspects of its operations,
which could have a material adverse effect on New ATC's business, financial
condition and results of operations.
FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH
New ATC anticipates that its future growth will be driven primarily by
industry trends toward outsourcing of telephone-based sales, marketing, and
customer service operations and increased penetration by New ATC of new and
existing clients and markets. Future growth will also depend on a number of
factors, including the effective and timely initiation and development of client
relationships, the opening of new call centers and the recruitment, motivation
and retention of qualified personnel. Sustaining growth will also require the
implementation of enhanced operational and financial systems and will require
additional management, operational and financial resources. There can be no
assurance that New ATC will be able to manage expanding operations effectively
or maintain or accelerate growth.
CONTROL BY PRINCIPAL SHAREHOLDER
Thayer owns approximately 64% of the outstanding shares of the common stock
of IQI. Upon consummation of the Merger, Thayer will beneficially own
approximately 37% of the voting stock of ATC. As a result, Thayer will be able
to exercise significant control over the outcome of substantially all matters
requiring action by ATC's shareholders. Such voting concentration may have the
effect of discouraging, delaying or preventing a change in control of ATC.
Moreover, stockholders owning more than a majority of the voting stock of New
ATC (including Thayer) have entered into a Stockholders' Agreement whereby, for
a period of two years from the date of the Merger Agreement, each such
stockholder has agreed to vote its shares of New ATC capital stock in favor of
the two nominees to the board of directors of New ATC selected by the
representative of the other party's stockholder group.
EXCHANGE RATIO
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of
9.7513 shares of ATC Common Stock for each share of IQI Common Stock (subject to
adjustment for a stock split or a dividend
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of securities prior to the Effective Time). Accordingly, the Exchange Ratio will
not be adjusted in the event of an increase or decrease in the price of either
ATC Common Stock or IQI Common Stock. The price of ATC Common Stock at the
Effective Time may vary from its price at the date the Exchange Ratio was fixed
and/or from its price at the date of the ATC Annual Meeting and the IQI Special
Meeting. These latter variations may be the result of changes in the business,
operations or prospects of ATC or IQI, market assessments of the likelihood that
the Merger will be consummated and the timing thereof, general market and
economic conditions and other factors. Because the Effective Time may occur at a
date later than the ATC Annual Meeting or the IQI Special Meeting, there can be
no assurance that the price of ATC Common Stock on the date of the ATC Annual
Meeting or IQI Special Meeting will be indicative of its price at the Effective
Time. The stockholders of IQI and ATC are urged to obtain current market
quotations for ATC Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of ATC Common Stock has been, and in the future could be,
subject to significant fluctuations in response to variations in quarterly
operating results of ATC, the depth and liquidity of the market for ATC Common
Stock, investor perception of New ATC after the Merger and the industry in which
it competes, the gain or loss of significant customer contracts, changes in
management or new services by New ATC or competitors, general trends in the
industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations, which have particularly
affected the market price for many companies in similar industries and which
have often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of ATC Common
Stock. From October 1, 1996 through May 27, 1998, the market price per share of
ATC Common Stock as reported on NASDAQ reached a high of $26 1/4 and a low of $1
3/16. Stockholders of IQI and ATC are urged to obtain current market quotations
of ATC Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales by former IQI
stockholders, will have on the market price of New ATC Common Stock prevailing
from time to time. Sales of substantial amounts of New ATC Common Stock
(including shares issued upon the exercise of stock options), or the perception
that such sales could occur, may adversely affect prevailing market prices for
New ATC Common Stock. As of the IQI Record Date, Thayer owns approximately 64%
of the issued and outstanding shares of IQI Common Stock, and upon consummation
of the Merger will own approximately 37% of the issued and outstanding common
stock of New ATC. Although Thayer, Edward Blank and other affiliates of New ATC
will be restricted from reselling their respective shares of New ATC common
stock under Rule 144 and Rule 145 of the Securities Act, certain IQI
stockholders have the right to nominate two of the directors to the New ATC
board of directors per year for the next two years. Upon a vote of seven
directors, the board may elect to register shares of common stock with the
Commission for resale to the public.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
New ATC 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 selling,
general and administrative expenses to acquire and support such new business and
changes in ATC's and IQI's revenue mix among its various service offerings. In
connection with certain contracts, ATC and IQI could incur costs in periods
prior to recognizing revenue under those contracts. In addition, New ATC 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 New ATC's operating results for that quarter. Historically,
revenue growth has tended to minimize significant quarterly fluctuations in
ATC's and IQI's business. However, each of ATC's and IQI's business tends to be
slower in
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the first and third quarters due to client marketing programs which are
typically slower in the post-holiday and summer months.
DEPENDENCE ON KEY PERSONNEL
The success of ATC and IQI depends in large part upon the abilities and
continued service of its executive officers and other key employees. There can
be no assurance that New ATC will be able to retain the services of such
officers and employees. The loss of key personnel could have a material adverse
effect on New ATC. In order to support its growth, New ATC will be required to
effectively recruit, develop and retain additional qualified management
personnel.
GENERAL AND INDUSTRY RISKS
RELIANCE ON MAJOR CLIENTS
A significant portion of ATC's and IQI's revenues is derived from relatively
few clients. In fiscal 1997, approximately 44% of ATC's revenues originated from
AT&T and approximately 19% originated from American Express; in fiscal 1996,
approximately 44% of ATC's revenues originated from AT&T, approximately 12%
originated from Pacific Bell, approximately 11% originated from American Express
and approximately 10% originated from U S West Communications. As a result of
the reorganization of its teleservicing efforts, subsequent to June 30, 1997,
ATC's largest client negotiated a price reduction in certain of its programs and
reduced its service volumes. In fiscal 1997, approximately 43% of IQI's
consolidated net revenue originated from one client, AT&T. 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 pressure on
the client may inhibit its ability to purchase services from outside providers
or prompt the client to negotiate lower fees for services provided. Moreover,
many of ATC's and IQI's clients are concentrated in the telecommunications,
financial services, insurance and publishing industries. A significant downturn
in any of these industries or a trend in any of these industries not to use, or
to reduce their use of, telephone-based sales, marketing or customer management
services could have a materially adverse effect on each of ATC's and IQI's
business. Although each of ATC and IQI believes its relations with its major
clients are good, the loss of one or more of these clients could have a material
adverse effect on New ATC.
RISKS ASSOCIATED WITH ATC'S AND IQI'S CONTRACTS
ATC's and IQI's contracts do not ensure that they will generate a minimum
level of revenue, and the profitability of each client program may fluctuate,
sometimes significantly, throughout the various stages of such program. Although
each of ATC and IQI seeks to sign long-term contracts with their clients, the
contracts generally enable the client to terminate the contract, or terminate or
reduce program call volumes, on relatively short notice. Although many of such
contracts require the client to pay a contractually agreed amount in the event
of early termination, there can be no assurance that ATC or IQI will be able to
collect such amount or that such amount, if received, will sufficiently
compensate ATC and IQI for its investment in the canceled program or for the
revenues it may lose as a result of early termination.
DEPENDENCE ON OUTSOURCING TREND AND INDUSTRIES SERVED
ATC's and IQI's growth is dependent in part on continued demand for ATC's
and IQI's services prompted by the trend toward outsourcing, as well as
continued demand from the industries served by
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ATC and IQI. If the interest in outsourcing wanes or there is a significant
downturn in the telecommunications, financial services, insurance, publishing or
other industries, New ATC could be materially and adversely affected.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the Federal and state
levels. The Federal Communications Commission's (the "FCC") rules under the
Federal Telephone Consumer Protection Act of 1991 prohibit telemarketing firms
from initiating telephone solicitations to residential telephone 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 rules require telemarketing firms to maintain a list of
residential consumers who have stated that they do not want to receive telephone
solicitations and to avoid making calls to such consumers.
The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of
1994 broadly authorized the Federal Trade Commission (the "FTC") to issue
regulations prohibiting misrepresentation in telephone sales. In August 1995,
the FTC issued its telemarketing sales rules which became effective December 31,
1995. Generally, these rules prohibit abusive telephone solicitation practices
and impose disclosure and record keeping requirements on telemarketers.
In addition to the rules and regulations promulgated by the FCC and the FTC,
from time to time, bills are introduced in Congress, which, if enacted, would
regulate the use of credit information. Neither ATC nor IQI can predict whether
this legislation will be enacted and what effect, if any, it would have on the
telemarketing industry.
Most states have also enacted or are considering legislation to regulate
telephone solicitations. For example, 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. For instance,
persons selling insurance products are required to be licensed by various state
insurance commissions and participate in regular continuing education programs.
The industries served by ATC and IQI are subject to various state government
regulation with regard to selling practices and consumer disclosure
requirements.
There can be no assurance that additional Federal or state legislation, or
changes in regulatory implementation, would not limit the activities of either
ATC or IQI or their respective clients in the future or significantly increase
the cost of regulatory compliance.
DEPENDENCE ON LABOR FORCE
ATC's and IQI's business is very labor intensive and characterized by high
personnel turnover. Although by industry standards each of ATC and IQI believes
its employees are highly qualified and well-trained, many employees receive
modest hourly wages and many are part-time employees. A higher turnover rate
among ATC's and IQI's employees would increase New ATC's recruiting and training
costs and decrease operating efficiencies and productivity. Some of ATC's and
IQI's operations, such as insurance product sales, require specially trained
employees. Growth in ATC's and IQI's business will require New ATC to recruit
and train qualified personnel at an accelerated rate from time to time. There
can be no assurance that New ATC will be able to continue to hire, train and
retain a sufficient labor force of qualified employees. A significant portion of
ATC's and IQI's costs consists of wages paid to hourly workers. An increase in
hourly wages, costs of employee benefits or employment taxes could materially
adversely affect New ATC. To date, neither ATC nor IQI has experienced material
difficulty in attracting qualified employees, but each may experience such
difficulty in the future.
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COMPETITION
The telecommunications-based marketing, customer service and call center
management services industry in which ATC and IQI are engaged is very
competitive and highly fragmented. Competitors range in size from very small
firms offering special applications or short term projects to large independent
firms and the in-house operations of many clients and potential clients. A
number of competitors have capabilities and resources equal to, or greater than,
ATC's or IQI's. Some of ATC's and IQI's services also
compete with direct mail, television, radio and other advertising media. There
can be no assurance that, as ATC's and IQI's industry continues to evolve,
additional competitors with greater resources than ATC and IQI will not enter
the industry (or particular segments of the industry) or that ATC's and IQI's
clients will not choose to conduct more of their telephone-based sales,
marketing or customer service activities internally.
The development of new forms of direct sales and marketing techniques, such
as interactive home shopping through television, computer networks and other
media, could have an adverse effect on the demand for New ATC's services. In
addition, the increased use of new telephone-based technologies, such as
interactive voice response systems, and increased use of the Internet could
reduce the demand for certain of New ATC's offered services. Moreover, the
effectiveness of marketing by telephone could also decrease as a result of
consumer saturation and increased consumer resistance to this direct marketing
tool. Although ATC and IQI attempt to monitor industry trends and respond
accordingly, there can be no assurance that New ATC will be able to anticipate
and successfully respond to such trends in a timely manner.
RELIANCE ON TECHNOLOGY; COMPUTER SYSTEMS
Each of ATC and IQI has invested significantly in sophisticated and
specialized telecommunications and computer technology and has focused on the
application of this technology to provide customized solutions to meet its
clients' needs. Each of ATC and IQI anticipates that it will be necessary to
continue to select, invest in and develop new and enhanced technology on a
timely basis in the future in order to maintain its competitiveness. New ATC's
future success will also depend in part on its ability to continue to develop
information technology solutions which keep pace with evolving industry
standards and changing client demands. In addition, each of ATC's and IQI's
business is highly dependent on its computer and telephone equipment and
software systems, and the temporary or permanent loss of such equipment or
systems, through casualty or operating malfunction, could have a materially
adverse effect on New ATC's business.
TELEPHONE SERVICE DEPENDENCE
Each of ATC's and IQI's business is materially dependent on service provided
by various local and long distance telephone companies. A significant increase
in the cost of telephone services that is not recoverable through an increase in
the price of New ATC's services, or any significant interruption in telephone
services, could have a materially adverse impact on New ATC.
RISK OF BUSINESS INTERRUPTION
ATC's and IQI's operations are dependent upon their respective ability to
protect their call centers, computer and telecommunications equipment and
software systems against damage from fire, power loss, telecommunications
interruption or failure, technology failure or sabotage, natural disaster and
other similar events. In the event New ATC experiences a temporary or permanent
interruption at one or more of its call centers, through casualty, operating
malfunction or otherwise, New ATC's business could be materially adversely
affected and New ATC may be required to pay contractual damages to some clients
or allow some clients to terminate or renegotiate their contracts with New ATC.
ATC and IQI maintain
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property and business interruption insurance; however, such insurance may not
adequately compensate New ATC for any losses it may incur.
YEAR 2000 COMPLIANCE
Due to the known risk of computational errors with respect to computer
systems utilizing dates after December 31, 1999, each of ATC and IQI is
currently in the process of assessing its information technology infrastructure
to prepare for any potential Year 2000 impact with its clients and suppliers.
Although neither ATC nor IQI has yet estimated the total costs needed for Year
2000 compliance, neither expects that these costs will have a material impact on
its results of operations and financial position. Although each of ATC and IQI
is committed to making its information technology infrastructure Year 2000
compliant as soon as practical, it is uncertain as to the extent its clients and
suppliers may be affected by Year 2000 issues that may cause disruptions in
their businesses. In the event that any significant clients or suppliers do not
successfully and timely achieve Year 2000 compliance, New ATC's business or
operations could be adversely affected.
OTHER UNCERTAINTIES
Other operating, financial or legal risks or uncertainties are discussed in
this Joint Proxy Statement/ Prospectus or in ATC's other filings with the
Commission from time to time in specific contexts. New ATC would be subject to
general economic risks, the risk of loss of a major customer and other risks and
uncertainties.
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THE ATC ANNUAL MEETING
PLACE, DATE AND TIME
The ATC Annual Meeting will be held at the offices of Paul, Hastings,
Janofsky & Walker LLP, 399 Park Avenue, 31st Floor, New York, NY 10022, on
Tuesday, June 30, 1998, at 10:00 a.m., local time.
MATTERS TO BE CONSIDERED
At the ATC Annual Meeting, the stockholders of ATC will be asked to consider
and vote upon proposals to (i) approve the Merger; (ii) approve an amendment to
the ATC Charter to increase the number of authorized shares of ATC Common Stock
from 27,500,000 to 100,000,000; (iii) approve an amendment to the ATC Charter
changing the name of ATC to "Aegis Communications Group, Inc.", which amendment
will only become effective upon consummation of the Merger; (iv) approve an
amendment to the ATC Charter classifying the ATC Board into three classes of
four directors each, which amendment will only become effective upon
consummation of the Merger, (v) elect a board of directors to serve until each
of their respective successors shall have been duly elected and qualified; (vi)
approve the 1998 Plan; (vii) ratify the selection of Price Waterhouse LLP to
serve as ATC's independent auditors for the 1998 fiscal year; and (viii) such
other business as may come before the ATC Annual Meeting or any adjournments or
postponements thereof.
PROPOSAL ONE--THE MERGER
At the ATC Annual Meeting, stockholders of ATC will be asked to consider and
vote upon a proposal by the ATC Board to approve the Merger on the terms and
subject to the conditions set forth in the Merger Agreement. The Merger will be
accomplished in accordance with the Merger Agreement by the merger of Sub with
and into IQI, pursuant to which each outstanding share of IQI Common Stock will
be converted into the right to receive shares of ATC Common Stock at the
Exchange Ratio. As a result of the Merger, IQI will become a wholly-owned
subsidiary of ATC and holders of IQI Common Stock will become stockholders of
ATC. See "The Proposed Merger"; "The Merger Agreement"; and Appendix A--
Agreement and Plan of Merger.
The Merger is being submitted to the stockholders of ATC for approval in
accordance with the rules for quotation inclusion on NASDAQ. Among other things,
the NASDAQ quotation inclusion rules generally require that ATC's stockholders
approve an acquisition transaction or series of related transactions that will
result in the issuance of shares of ATC Common Stock if the new shares will have
20% or more of the voting power outstanding before such issuance. Because the
issuance of shares of ATC Common Stock pursuant to the Merger Agreement would
exceed 20% of the voting power currently outstanding, the proposal is being
submitted to ATC stockholders for approval in accordance with NASDAQ rules. See
"The Proposed Merger."
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE
MERGER.
PROPOSAL TWO--AMENDMENT TO THE ATC CHARTER INCREASING THE NUMBER OF AUTHORIZED
SHARES OF ATC COMMON STOCK
At the ATC Annual Meeting, the ATC stockholders will be asked to consider
and vote upon a proposal to amend the ATC Charter to increase the number of
shares of ATC Common Stock authorized for issuance from 27,500,000 to
100,000,000. This amendment was adopted by the ATC Board on April 7, 1998,
subject to stockholder approval.
ATC's authorized capital stock currently consists of a total of 27,500,000
shares of ATC Common Stock and 1,000,000 shares of preferred stock, $.01 par
value per share ("ATC PREFERRED STOCK"). There are no preemptive rights
associated with any of ATC's Common Stock. As of the ATC Record Date, there
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were outstanding 21,478,624 shares of ATC Common Stock, options to purchase
approximately 3,719,000 shares of ATC Common Stock, warrants to purchase up to
2,100,000 shares of ATC Common Stock and rights to convert shares of common
stock in ATC's operating subsidiary for 55,384 shares of ATC Common Stock. There
are 29,778 shares of ATC Preferred Stock issued and outstanding, which are
convertible into 59,556 shares of ATC Common Stock.
The Merger will require the issuance of approximately 34,247,000 shares
(including shares issuable upon the exercise of IQI Stock Options and warrants)
of ATC Common Stock. In addition to the shares issued in connection with the
Merger, the ATC Board believes that it is in the best interests of ATC to have
additional shares of ATC Common Stock available for issuance at its discretion
for possible future acquisitions, stock splits, stock dividends, employee
benefit plans, equity financing and other corporate purposes.
The additional shares of ATC Common Stock to be authorized by adoption of
the amendment would have rights identical to the currently outstanding shares of
ATC Common Stock. Adoption of the proposed amendment and issuance of ATC Common
Stock would not affect the rights of the holders of currently outstanding ATC
Common Stock, except for effects incidental to increasing the number of shares
of ATC Common Stock outstanding, including possible dilution of the equity
interests of existing stockholders or reduction of the proportionate voting
power of existing stockholders. In addition, the issuance of additional shares
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of ATC, thereby delaying, deferring or
preventing a change in control of ATC, although this is not the intention of
this proposal. If the amendment is adopted, it will become effective upon the
filing of a Certificate of Amendment to the ATC Charter with the Secretary of
State of Delaware.
The additional shares of ATC Common Stock may be issued, subject to certain
exceptions, by the ATC Board at such times, in such amounts, and upon such terms
as the ATC Board may determine without further approval of the stockholders.
Stockholders have no preemptive rights to subscribe to additional shares when
issued. To accomplish this proposed increase in ATC Common Stock, the first
sentence of Article Fourth of the ATC Charter must be amended to be and read as
follows:
"FOURTH. The total number of shares of all classes of capital stock that
the Corporation shall have the authority to issue is 101,000,000 shares,
consisting of (a) 100,000,000 shares of Common Stock, par value $0.01 per
share, and (b) 1,000,000 shares of Preferred Stock, par value $.01 per
share."
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE ATC CHARTER.
PROPOSAL THREE--AMENDMENT TO THE ATC CHARTER CHANGING THE NAME OF ATC TO "AEGIS
COMMUNICATIONS GROUP, INC."
At the ATC Annual Meeting, the ATC stockholders will also be asked to
consider and vote upon a proposal to amend the ATC Charter to change the name of
ATC to "Aegis Communications Group, Inc." This amendment was adopted by the ATC
Board on April 7, 1998, subject to stockholder approval, and will only become
effective upon consummation of the Merger.
To accomplish this change in the name of ATC, Article First of the ATC
Charter must be amended to be and read as follows:
"FIRST. The name of the Corporation is Aegis Communications Group, Inc."
THE ATC BOARD RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE AMENDMENT TO
THE ATC CHARTER.
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PROPOSAL FOUR--AMENDMENT TO THE ATC CHARTER CLASSIFYING THE ATC BOARD INTO THREE
CLASSES
On April 7, 1998, the ATC Board approved a proposed amendment to Article
Seventh of the ATC Charter, which will divide the ATC Board into three classes
of four directors each, with one class having an initial term of one year, one
class having an initial term of two years, and one class having an initial term
of three years. At each annual meeting of ATC stockholders, commencing with the
annual meeting of stockholders to be held in 1999, four directors will be
elected to succeed those directors whose terms have expired, and each newly
elected director will serve for a three-year term. This proposed amendment will
only become effective upon consummation of the Merger.
As set forth in the ATC Bylaws, any vacancy occurring in the ATC Board may
be filled by the affirmative vote of a majority of the remaining directors. A
director so elected to fill a vacancy shall serve for the unexpired term of his
predecessor in office. ATC believes that a classified board of directors will
help assure the continuity and stability of the ATC Board and ATC's business
strategies and policies. The classified board provision could increase the
likelihood that, in the event of a takeover of ATC by a third party, incumbent
directors will retain their positions. In addition, the classified board
provision will help ensure that the ATC Board, if confronted with an unsolicited
acquisition proposal from a third party that has acquired a block of the voting
stock of ATC, will have sufficient time to review the proposal and appropriate
alternatives and to seek the best available result for all stockholders. In
addition, a classified board could have the effect of making it more difficult
for a third party to obtain control of the ATC Board, thereby delaying,
deferring or preventing a change in control of ATC, although this is not the
intention of this proposal.
To accomplish this change in the ATC Charter, Article Seventh of the ATC
Charter must be amended to be and read as follows:
"SEVENTH. NUMBER, ELECTION, AND TERMS OF DIRECTORS. Subject to the
rights, if any, of the holders of any series of Preferred Stock to elect
additional directors under circumstances specified in a Preferred Stock
designation, the number of the directors of the Company will not be less
than two nor more than twelve and will be fixed from time to time in the
manner described in the bylaws of the Company. The directors will be
divided into three classes designated as Class I, Class II, and Class
III. Each Class of directors will stand for election at the 1998 annual
stockholders' meeting for the following terms: Class I directors will be
elected for a three-year term; Class II directors will be elected for a
two-year term; and Class III directors will be elected for a one-year
term. At each following annual stockholders' meeting, commencing with the
1999 annual stockholders' meeting, each of the successors to the
directors of the Class whose term will expire at such annual meeting will
be elected for a term running until the third annual meeting succeeding
his or her election and until his or her successor has been duly elected
and qualified."
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE ATC CHARTER.
PROPOSAL FIVE--ELECTION OF DIRECTORS
The ATC Annual Meeting will also include the election of directors. In the
event Proposal No. 1 and Proposal No. 4 are approved, the ATC Annual Meeting
will also include the election of four Class I directors to serve for an initial
three-year term, four Class II directors to serve for an initial two-year term,
and four Class III directors to serve for an initial one-year term. Five of the
nominees for director have been nominated by the ATC Board, five of the nominees
for director have been nominated by the IQI Board, and two of the nominees have
been jointly nominated by the ATC Board and the IQI Board, as required by the
Merger Agreement. See "ATC Management--Directors and Executive Officers of ATC"
and "Management and Operations after the Merger."
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In the event Proposal No. 1 is approved and Proposal No. 4 is not approved,
the ATC Annual Meeting will also include the election of twelve directors to
serve until the next annual meeting of ATC stockholders and until their
successors have been duly elected and qualified. Five of the nominees for
director have been nominated by the ATC Board, five of the nominees for director
have been nominated by the IQI Board, and two of the nominees have been jointly
nominated by the ATC Board and the IQI Board, as required by the Merger
Agreement. See "ATC Management--Directors and Executive Officers of ATC" and
"Management and Operations after the Merger."
In the event Proposal No. 1 is not approved, the ATC Annual Meeting will
also include the election of seven directors to serve until the next annual
meeting of ATC stockholders and until their successors have been duly elected
and qualified, all of which have been nominated by the ATC Board. See "ATC
Management--Directors and Executive Officers of ATC."
If Proposal No. 1 and Proposal No. 4 are approved, the ATC Board's nominees
for the ATC Board are William G. Moore, Jr. (Class I), Darryl D. Pounds (Class
I), Michael G. Santry (Class II), Matthew S. Waller (Class II), David L. Malcolm
(Class III), and Daniel H. Chapman (Class III). The IQI Board's nominees for the
ATC Board are Peter V. Ueberroth (Class I), Drew Lewis (Class I), Frederic V.
Malek (Class II), Paul G. Stern (Class II), Stephen A. McNeely (Class III), and
Edward Blank (Class III), all of whom are current members of the IQI Board. If
Proposal No. 1 is approved and Proposal No. 4 is not approved, the nominees for
the ATC Board are the twelve individuals listed above. For more information
regarding the nominees for directors to the ATC Board, see "ATC
Management--Directors and Executive Officers of ATC" and "Management and
Operations after the Merger."
In the event Proposal No. 1 is not approved, the ATC Board's nominees for
director are Michael G. Santry, Matthew S. Waller, Patrick V. Stark, Jerry L.
Sims, Jr., Darryl D. Pounds, J. Michael Allred and J. Frank Mermoud. All of the
foregoing seven nominees are currently members of the ATC Board. For a
description of the business experience of each of the seven nominees for
director to the ATC Board, see "ATC Management--Directors and Executive Officers
of ATC."
Shares represented by proxies returned duly executed will be voted, unless
otherwise specified, in favor of the twelve nominees for the ATC Board as
described herein. The proxies cannot be voted for more than twelve nominees. The
nominees have indicated that they are able and willing to serve as directors. If
any (or all) such persons should be unable to serve, the persons named in the
enclosed proxy will vote the shares covered thereby for such substitute nominee
(or nominees) as the ATC Board may select. Stockholders may withhold authority
to vote for any nominee by entering the name of such nominee in the space
provided for such purpose on the proxy card.
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR EACH
OF THE NOMINEES FOR DIRECTOR.
PROPOSAL SIX--ADOPT THE ATC 1998 STOCK OPTION PLAN
At the ATC Annual Meeting, ATC stockholders will be asked to consider and
vote upon the 1998 Plan. The terms of the 1998 Plan were adopted by the ATC
Board on April 7, 1998, subject to stockholder approval. Certain options granted
under the 1998 Plan are intended to qualify as "incentive stock options"
pursuant to Section 422 of the Code ("INCENTIVE STOCK OPTIONS") while certain
other options granted under the 1998 Plan will constitute nonqualified options.
The 1998 Plan is being submitted for approval by the stockholders of ATC to
permit the granting of Incentive Stock Options and to ensure full deductibility
by ATC of option exercises by executives under the Code. A summary of the
material features of the 1998 Plan follows. This summary does not purport to be
complete and is qualified in its entirety by reference to the text of the 1998
Plan, a copy of which is attached as Appendix D and is incorporated herein by
reference.
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PURPOSE OF THE 1998 PLAN. The purposes of the 1998 Plan are to (a) provide
a sufficient number of shares of ATC Common Stock subject to options that are to
be issued by ATC upon the assumption by ATC of the issued and outstanding IQI
options and (b) furnish additional equity incentives to directors, consultants,
officers and key employees of ATC. The additional equity incentives are designed
to increase shareholder value and to advance the interests of ATC by furnishing
incentives to attract and retain the best available personnel for positions of
substantial responsibility and to provide incentives to such personnel to
promote the success of the business of ATC. Because ATC has successfully used
stock options to attract and retain directors, advisory directors, consultants,
officers and key employees in the past, the ATC Board determined that it would
be in ATC's best interest to adopt a new stock option plan.
SHARES ISSUABLE THROUGH THE 1998 PLAN. The total number of shares of ATC
Common Stock issuable under the 1998 Plan shall be 7,500,000 shares, provided,
however, that on January 1 of each year (commencing on January 1, 1999), the
aggregate number of shares of ATC Common Stock then issuable upon the exercise
of options shall be increased by the same percentage that the total number of
issued and outstanding shares of ATC Common Stock increased from the preceding
January 1 to the following December 31 (if such percentage is positive). Shares
of ATC Common Stock subject to stock options that are canceled, terminated or
forfeited will again be available for issuance under the 1998 Plan. The
aggregate number of shares of ATC Common Stock with respect to which options may
be granted to any single executive officer in any one calendar year shall not
exceed 1,500,000.
The 1998 Plan is submitted to the stockholders for approval in order to
comply with the provisions of Section 162(m) of the Code. Section 162(m) limits
the tax deduction available to a company with respect to compensation paid to
certain of its executive officers unless, among other conditions, the
compensation is "performance based" and is paid pursuant to a plan approved by
stockholders.
Each stock option granted under the 1998 Plan will be evidenced by a stock
option agreement containing such terms and provisions as are approved by ATC's
Compensation Committee and executed on behalf of ATC by an appropriate officer.
The per share exercise price of each stock option is determined by the
Compensation Committee, but will in no event be less than the fair market value
of ATC Common Stock at the time the stock option is granted. Vesting of the
stock options will be determined by the Compensation Committee, under terms and
conditions set forth in each stock option agreement. However, no Incentive Stock
Option shall be exercisable at any time after the expiration of ten (10) years
from the date of grant; provided, however, that if a participant with respect to
an Incentive Stock Option is a 10% shareholder on the date of grant of such
Incentive Stock Option, then such Incentive Stock Option shall not be
exercisable after the expiration of five (5) years from its date of grant.
Upon exercise of a stock option under the 1998 Plan, the exercise price for
the purchased shares will be immediately payable in cash, by check, or at the
Compensation Committee's election, shares of ATC Common Stock that the optionee
has owned for at least six months, having a fair market value on the date
immediately preceding the exercise date equal to the exercise price. The
Compensation Committee may, but is not required to, make financing available to
the participant for the purchase of shares of ATC Common Stock pursuant to such
stock option on such terms as it shall specify.
The ATC Board has the discretion at the time of a grant or at any time prior
to or upon the occurrence of a change of control or potential change of control,
to provide in whole or in part for the accelerated exercisability of each option
outstanding at the time of such change of control.
Options granted under the 1998 Plan are not assignable or transferable other
than by will or the laws of descent and distribution, and during the optionee's
lifetime, the option may be exercised only by such optionee.
TERMINATION OF EMPLOYMENT. If a participant dies or becomes disabled, all
vested options may be exercised at any time within one year (or the remaining
term of the stock option, if less). If a participant
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ceases to be an ATC officer or employee for any other reason, he or she must
exercise any vested options within three months (or their remaining term, if
less).
ADMINISTRATION OF THE 1998 PLAN. The Compensation Committee of the ATC
Board will administer the 1998 Plan. The Compensation Committee is generally
empowered to interpret the 1998 Plan, to prescribe, and rescind rules and
regulations relating to it, and to determine the terms and provisions of the
respective stock option agreements. The ATC Board or the Compensation Committee
may amend or discontinue the 1998 Plan at any time subject to certain
restrictions set forth in the 1998 Plan. Except in limited circumstances, no
amendment or discontinuance may adversely affect any previously granted stock
option award without the consent of the recipient thereof. Shareholder approval
is required if the number of shares issuable under the 1998 Plan is increased or
the class of eligible employees is changed.
FEDERAL INCOME TAX CONSEQUENCES. The following general description of
federal income tax consequences is based upon current statutes, regulations and
interpretations and does not purport to be complete. Reference should be made to
the applicable provisions of the Code. There also may be state, local and
foreign income tax consequences applicable to transactions involving stock
options.
Under existing federal income tax provisions, a participant who receives
stock options will not normally realize any income, nor will ATC normally
receive any deduction for federal income tax purposes upon the grant of a stock
option.
When a nonqualified stock option granted pursuant to the 1998 Plan is
exercised, the employee generally will realize ordinary income (compensation)
measured by the difference between the aggregate purchase price of the ATC
Common Stock as to which the stock option is exercised and the aggregate fair
market value of the ATC Common Stock on the exercise date, and ATC generally
will be entitled to a deduction in the year the stock option is exercised equal
to the amount the employee is required to treat as ordinary income. Any taxable
income recognized in connection with a nonqualified stock option exercised by an
optionee who is also an employee of ATC will be subject to tax withholding by
ATC. The basis for determining gain or loss upon a subsequent disposition of ATC
Common Stock acquired upon the exercise of a nonqualified stock option will be
the purchase price paid to ATC for the ATC Common Stock increased by an amount
included in the optionee's taxable income resulting from the exercise of such
stock option. The holding period for determining the rate of tax on gain or loss
on such subsequent disposition generally begins on the date on which the
optionee acquires the ATC Common Stock.
An employee generally will not recognize any income upon the exercise of an
Incentive Stock Option, but the exercise may, depending on particular factors
relating to the employee, subject the employee to the alternative minimum tax.
An employee will recognize capital gain or loss in the amount of the difference
between the exercise price and the sale price on the sale or exchange of stock
acquired pursuant to the exercise of an Incentive Stock Option, provided that
the employee does not dispose of such stock within two years from the date of
grant and one year from the date of exercise of the Incentive Stock Option (the
"REQUIRED HOLDING PERIODS"). An employee disposing of such shares before the
expiration of the Required Holding Periods will recognize ordinary income equal
to the lesser of (i) the difference between the stock option price and the fair
market value of the stock on the date of exercise, or (ii) the total amount of
gain realized. The remaining gain or loss is generally treated as capital gain
or loss, with the tax rate depending on how long the shares are held. ATC will
not be entitled to a federal income tax deduction in connection with the
exercise of an Incentive Stock Option, except where the employee disposes of the
shares of ATC Common Stock received upon exercise before the expiration of the
Required Holding Periods.
THIS SUMMARY OF THE EFFECT OF THE FEDERAL INCOME TAX UPON THE PARTICIPANTS
IN THE 1998 PLAN DOES NOT PURPORT TO BE COMPLETE, AND IT IS RECOMMENDED THAT THE
PARTICIPANTS CONSULT THEIR OWN TAX ADVISORS FOR COUNSELING. THE TAX TREATMENT
UNDER FOREIGN, STATE, OR LOCAL LAW IS NOT COVERED IN THIS SUMMARY.
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OTHER. The 1998 Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), nor is it
qualified under Section 401(a) of the Code. The 1998 Plan does not provide any
person with the right to create a lien on any funds, securities or other
property held under the 1998 Plan.
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE 1998 PLAN.
PROPOSAL SEVEN--RATIFICATION OF PRICE WATERHOUSE LLP AS ATC'S INDEPENDENT
AUDITORS
The Audit Committee of the ATC Board has selected Price Waterhouse LLP to
serve as ATC's independent auditors for the 1998 fiscal year.
THE ATC BOARD UNANIMOUSLY RECOMMENDS THAT ATC STOCKHOLDERS VOTE FOR THE
RATIFICATION OF PRICE WATERHOUSE LLP TO SERVE AS ATC'S INDEPENDENT
AUDITORS FOR THE 1998 FISCAL YEAR.
RECORD DATE AND VOTING
Only holders of record of ATC Common Stock on the ATC Record Date are
entitled to notice of, and to vote at, the ATC Annual Meeting. There were issued
and outstanding 21,478,624 shares of ATC Common Stock on the ATC Record Date.
Each holder of ATC Common Stock will be entitled to one vote, in person or by
proxy, for each share of ATC Common Stock standing in his or her name on the
books of ATC on the ATC Record Date on any matter submitted to a vote of the ATC
stockholders. The presence, in person or by proxy, of holders of record of a
majority of the shares entitled to vote constitutes a quorum for action at the
ATC Annual Meeting. Abstentions and broker nonvotes are counted for purposes of
determining the presence or absence of a quorum for transaction of business.
Abstentions are counted in tabulations of the votes cast on proposals presented
to stockholders to determine total number of votes cast. Abstentions are not
counted as votes for or against any such proposal. Broker nonvotes are not
counted as votes cast for purposes of determining whether a proposal has been
approved.
VOTE REQUIRED
The affirmative vote of the holders of shares of ATC Common Stock, having a
plurality of the voting power of ATC, in person or by proxy, is required to
elect directors. The affirmative vote of the holders of shares of ATC Common
Stock, having a majority of the voting power of the total issued and outstanding
common stock of ATC (regardless of the number of shares actually voting at the
ATC Annual Meeting), in person or by proxy, is required to approve the proposed
amendments to the ATC Charter. The affirmative vote of the holders of shares of
the ATC Common Stock, having a majority of the voting power of the shares
actually voted at the ATC Annual Meeting, either in person or by proxy, at the
ATC Annual Meeting, is required to approve the Merger, adopt the 1998 Plan and
ratify the selection of ATC's independent auditors.
PROXY SOLICITATION, REVOCATION AND EXPENSES
All proxies that are properly completed, signed and returned prior to the
ATC Annual Meeting will be voted as indicated on the proxy. If the enclosed
proxy is signed and returned, it may, nevertheless, be revoked at any time prior
to the voting thereof at the pleasure of the stockholder signing it, either by
(i) filing a written notice of revocation received by the person or persons
named therein, (ii) the stockholder attending the ATC Annual Meeting and voting
the shares covered thereby in person, or (iii) delivering another duly executed
proxy dated subsequent to the date thereof to the addressee named in the
enclosed proxy.
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Shares represented by duly executed proxies in the accompanying form will be
voted in accordance with the instructions indicated on such proxies, and, if no
such instructions are indicated thereon, will be voted in favor of each of the
proposals considered and of each of the nominees for director named herein.
The expense of preparing, printing and mailing this Joint Proxy
Statement/Prospectus and the material used in this solicitation of proxies from
ATC stockholders will be borne by ATC. It is contemplated that ATC proxies will
be solicited through the mail. ATC has retained D.F. King, Inc. to assist in the
solicitation of proxies and has agreed to pay D.F. King, Inc. a $5,000 base fee,
$3 per shareholder contact, plus out of pocket expenses, for such services.
DISSENTERS' APPRAISAL RIGHTS
Holders of ATC Common Stock will not have any dissenters' appraisal rights
in connection with, or as a result of, the matters to be acted upon at the ATC
Annual Meeting. See "The Proposed Merger-- Dissenters' Appraisal Rights."
THE IQI SPECIAL MEETING
PLACE, DATE, AND TIME
The IQI Special Meeting will be held at the offices of Paul, Hastings,
Janofsky & Walker LLP, 399 Park Avenue, 31st Floor, New York, NY 10022, on
Tuesday, June 30, 1998, at 10:30 a.m., local time.
MATTERS TO BE CONSIDERED
The purpose of the IQI Special Meeting is to consider and vote upon a
proposal by the IQI Board to approve the Merger on the terms and conditions set
forth in the Merger Agreement and such other matters as may properly come before
the IQI Special Meeting. The Merger will be accomplished in accordance with the
Merger Agreement by a statutory merger of Sub with and into IQI, pursuant to
which each outstanding share of IQI Common Stock will be converted into the
right to receive 9.7513 shares of ATC Common Stock. As a result of the Merger,
IQI will become a wholly-owned subsidiary of ATC and holders of IQI Common Stock
will become stockholders of ATC. See "The Proposed Merger" and Appendix
A--Agreement and Plan of Merger. Under the NYBCL and the IQI Bylaws, no
substantive business other than that referred to in the accompanying Notice of
Special Meeting of Stockholders may be transacted at the IQI Special Meeting.
THE IQI BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER AND RECOMMENDS THAT IQI STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
MERGER.
RECORD DATE AND VOTING
The IQI Board has fixed the close of business on May 15, 1998, the IQI
Record Date, as the record date for the determination of stockholders entitled
to notice of and to vote at the IQI Special Meeting. On the IQI Record Date
there were 3,098,433 shares of IQI Common Stock outstanding held by 52
stockholders of record.
The presence in person or by proxy of holders of IQI Common Stock entitled
to cast a majority of all the votes entitled to be cast at the IQI Special
Meeting will constitute a quorum for the transaction of business. In the event
that a quorum is not present at the IQI Special Meeting or that the shares of
IQI Common Stock voting for the proposal to approve the Merger are not
sufficient to approve the Merger, it is anticipated that the IQI Special Meeting
will be adjourned to solicit additional proxies, unless the shares of IQI Common
Stock voted against the proposal to approve the Merger are sufficient to defeat
the proposal. In the event the IQI Special Meeting is adjourned to solicit
additional proxies, all proxies will be
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voted in the same manner as such proxies would have been voted at the original
convening of the IQI Special Meeting, except for proxies that have effectively
been revoked or withdrawn.
VOTE REQUIRED
The affirmative vote of at least two-thirds of all the votes entitled to be
cast by holders of IQI Common Stock is required to approve the Merger.
THAYER, ITC SERVICE COMPANY, THE EDWARD BLANK 1995 GRANTOR RETAINED ANNUITY
TRUST AND EDWARD BLANK, IQI STOCKHOLDERS WHO IN THE AGGREGATE OWN APPROXIMATELY
85% OF THE VOTING CAPITAL STOCK OF IQI, HAVE EXECUTED AN IRREVOCABLE PROXY
AGREEMENT PURSUANT TO WHICH A DESIGNEE OF ATC HAS BEEN GRANTED AUTHORITY TO VOTE
THEIR RESPECTIVE SHARES IN FAVOR OF THE MERGER, WHICH VOTE IS SUFFICIENT UNDER
THE NYBCL AND THE IQI BYLAWS TO APPROVE THE MERGER.
PROXY SOLICITATION, REVOCATION AND EXPENSES
All proxies that are properly completed, signed and returned prior to the
IQI Special Meeting will be voted as indicated on the proxy. If the enclosed
proxy is signed and returned, it may, nevertheless, be revoked at any time prior
to the voting thereof at the pleasure of the stockholder signing it, either by
(i) filing a written notice of revocation received by the person or persons
named therein, (ii) the stockholder attending the IQI Special Meeting and voting
the shares covered thereby in person, or (iii) delivering another duly executed
proxy statement dated subsequent to the date thereof to the addressee named in
the enclosed proxy.
Shares represented by duly executed proxies in the accompanying form will be
voted in accordance with the instructions indicated on such proxies, and, if no
such instructions are indicated thereon, will be voted in favor of the Merger.
The expense of preparing and printing this Joint Proxy Statement/Prospectus
and the material used in this solicitation of proxies from IQI stockholders will
be borne by ATC. The expense of mailing such materials to IQI stockholders will
be borne by IQI. It is contemplated that IQI proxies will be solicited through
the mail.
DISSENTERS' APPRAISAL RIGHTS
Under the NYBCL, stockholders of record of IQI at the close of business on
May 15, 1998 will be entitled to enforce their right to receive payment of the
fair value of their shares and the other rights and benefits provided by section
910 of the NYBCL if, in accordance with section 623 of the NYBCL, the
stockholder (i) has filed with IQI either prior to the special meeting of
stockholders to be held on June 30, 1998 or at such meeting, but before the
vote, written objection to the Merger and (ii) after receiving written notice of
the authorization of the Merger by the requisite stockholders, has filed with
IQI written notice of his election to dissent and demand payment of the fair
value of his shares. "FAIR VALUE" for purposes of dissenters' rights will be
determined excluding any element of value arising from the accomplishment or
expectation of the Merger.
IN ORDER TO EXERCISE RIGHTS AS A DISSENTING STOCKHOLDER, A STOCKHOLDER OF
IQI MUST COMPLY WITH ALL OF THE PROCEDURAL REQUIREMENTS OF SECTION 623 OF THE
NYBCL. THE REQUIRED PROCEDURES MUST BE FOLLOWED EXACTLY OR DISSENTERS' RIGHTS
MAY BE LOST.
See "The Proposed Merger--Dissenters' Appraisal Rights"; "The Merger
Agreement--Conditions to Consummation of the Merger" and Appendix C--New York
Appraisal Rights and Procedures.
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THE PROPOSED MERGER
A copy of the Merger Agreement is attached as Appendix A and incorporated
herein by reference. The Merger Agreement contains certain representations and
covenants of ATC, Sub and IQI, certain conditions to the consummation of the
Merger, and other terms and provisions respecting the Merger and related
transactions. Capitalized terms which are used but not defined in this section
shall have the meaning assigned to such terms in the Merger Agreement.
SUMMARIES OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT SET FORTH HEREIN DO
NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE PROVISIONS OF THE MERGER AGREEMENT. ALL ATC AND IQI STOCKHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Sub will merge
with and into IQI, and IQI will become a wholly-owned subsidiary of ATC. By
virtue of the Merger, (i) each share of IQI Common Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares) will
automatically be converted into the right to receive shares of ATC Common Stock
based on the Exchange Ratio, and (ii) each share of Sub common stock issued and
outstanding immediately prior to the Effective Time will be converted into and
become one share of common stock, $.01 par value per share, of the Surviving
Corporation.
At the Effective Time, each IQI stock option which is outstanding
immediately prior to the Effective Time will be assumed by ATC and converted
automatically into a new option to purchase shares of ATC Common Stock based on
the Exchange Ratio, provided that any fractional shares of ATC Common Stock
resulting from such conversion will be rounded up to the nearest whole share.
The exercise price for each assumed option will be equal to the existing
exercise price set forth in the IQI stock option divided by the Exchange Ratio,
provided that such exercise price will be rounded down to the nearest cent.
After the Effective Time, each new option will be exercisable and will vest upon
the same terms and conditions as were applicable to the IQI stock option
immediately prior to the Effective Time. See "The Merger Agreement--Effect on
IQI Stock Options and IQI Warrants."
At the Effective Time, each warrant to purchase IQI Common Stock that is
outstanding immediately prior to the Effective Time will be assumed by ATC and
converted automatically into a new warrant to purchase shares of ATC Common
stock based on the Exchange Ratio, provided that any fractional shares of ATC
Common stock resulting from such conversion will be rounded up to the nearest
whole share. The exercise price per share of ATC Common Stock under each new
warrant shall be equal to the exercise price per share of IQI Common Stock in
the existing warrant divided by the Exchange Ratio. After the Effective Time,
each new warrant will be exercisable and will vest upon the same terms and
conditions as were applicable to the related IQI warrant immediately prior to
the Effective Time. See "The Merger Agreement--Effect on IQI Stock Options and
IQI Warrants."
Based on the number of shares of IQI Common Stock outstanding on the IQI
Record Date, ATC will issue approximately 34,247,000 shares, or rights to
acquire shares, of ATC Common Stock pursuant to the Merger (assuming no
Dissenting Shares) and holders of IQI Common Stock and IQI stock options and
warrants would be entitled to receive in a tax-free exchange approximately 57.5%
of the post-Merger, fully-diluted outstanding shares of ATC Common Stock.
The vesting of certain outstanding options to acquire shares of ATC Common
Stock under the existing 1996 ATC Stock Option and Restricted Stock Plan, or
530,334 shares of ATC Common Stock, and under the existing 1992 ATC Stock Option
Plan, or 554,000 shares of ATC Common Stock, will accelerate upon consummation
of the Merger because the Merger constitutes a change of control under each such
plan and the underlying stock option agreements provide for such acceleration.
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BACKGROUND OF THE MERGER
On March 24, 1997, Paul G. Stern, a partner of Thayer, met with the
management of ATC for a general overview of ATC's business and a tour of some of
its facilities. Dr. Stern also met with Michael G. Santry, the Chairman of ATC
to discuss the progress and business prospects of IQI. The introduction and
meeting was arranged by J. Frank Mermoud, a director of ATC.
On April 16, 1997, Mr. Santry and Mr. Mermoud met with Rick Rickertsen and
Dr. Stern, partners of Thayer, at a meeting at Thayer's offices in Washington,
D.C.
On April 30, 1997, ATC entered into a mutual confidentiality agreement with
IQI.
On May 12, 1997, Mr. Santry and other representatives of ATC met at Thayer's
offices with Mr. Rickertsen and other representatives of Thayer to discuss the
parties' interest in a business combination.
On July 8, 1997, ATC engaged the investment banking firm of CIBC Oppenheimer
Corp. to serve as ATC's financial advisor in identifying and negotiating
possible strategic alternatives and financing transactions for ATC, which
included a possible combination with IQI.
On August 12, 1997, Stephen A. McNeely, several representatives from IQI and
representatives of CIBC Oppenheimer and Thayer met in ATC's offices with Arthur
Chavoya, ATC's then Chief Executive Officer and President, and several members
of senior management from ATC to exchange and review information with regard to
the operations of their respective companies.
On October 21, 1997, Eric Croson, Chief Financial Officer of IQI, met at
ATC's offices with Matthew S. Waller, Chief Financial Officer of ATC, and Scott
D. Guffey, Vice President of Mergers and Acquisitions of ATC, to discuss the
potential operational efficiencies and savings that could be achieved in a
merger of ATC and IQI.
On November 18, 1997, Mr. Santry and Mr. Rickertsen met in New York to
discuss the terms of the proposed merger.
On or about November 24, 1997, Thayer and IQI sent an initial draft of the
proposed terms of a merger for review by ATC and CIBC Oppenheimer. Based upon
the initial draft of the proposed terms, the executive officers of ATC
authorized CIBC Oppenheimer to explore the possible terms of a business
combination, including possible exchange ratios. From November 25, 1997 through
February 24, 1998, representatives from CIBC Oppenheimer and the executive
officers of ATC negotiated the proposed terms of a merger with IQI.
On February 18, 1998, the ATC Board met, together with its executive
officers, to consider the possible strategic benefits of the proposed merger and
the economic terms on which the proposed merger might be beneficial to ATC.
After deliberations, the ATC Board authorized Mr. Santry and its other executive
officers with the assistance of CIBC Oppenheimer to proceed with the
negotiations with representatives of IQI and Thayer.
On February 20, 1998, Mr. McNeely and representatives of IQI management and
Thayer met via conference call with Mr. Santry and Mr. Waller about a
preliminary due diligence schedule.
On February 24, 1998, the executive officers of IQI and representatives of
Thayer met with the executive officers of ATC and representatives from CIBC
Oppenheimer to negotiate the key terms and logistics of the proposed merger, the
refinancing of ATC's debt and a proposed capital infusion by Thayer in the
combined enterprise. The parties then signed a letter of intent setting forth
the key terms of the proposed merger.
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From February 24, 1998 through April 7, 1998, senior management of the two
companies and representatives of Thayer, together with outside legal counsel and
CIBC Oppenheimer, continued negotiation of a definitive merger agreement and
related agreements and continued their due diligence review of each other's (and
their respective subsidiaries') business, operations and financial condition.
The principal terms negotiated during this time included, without limitation,
the conditions precedent to the proposed merger, the percentage ownership that
ATC equity holders would hold in the combined enterprise, corporate governance
issues, the specific rights of the parties to terminate a merger agreement once
executed, the specific representations and warranties to be made by each party,
the definitive terms of voting agreements by the principal stockholders of IQI
and ATC, and the terms on which Thayer would provide interim working capital
financing or other accommodations for ATC. In addition, IQI negotiated waivers
and additional commitments with its senior lenders regarding the transaction
contemplated by the proposed merger.
On March 5, 1998, members of the IQI Board and management met informally to
consider the
proposed merger. IQI's management reviewed for members of the IQI Board such
matters as the history of the negotiations and proposed terms of the proposed
merger, pertinent information obtained regarding ATC and preliminary plans for
integrating the two companies. In addition to the foregoing and the benefits of
the proposed transaction described under "IQI's Reasons for the Merger" below,
there was also considered the percentage ownership that the IQI stockholders and
option holders would hold in the combined entity, the financial and strategic
business implications of the proposed merger and the potential risks of the
transaction. After full discussion, it was determined that IQI would continue to
pursue the Merger, subject to satisfactory negotiation of final documentation
and due diligence.
Between March 5, 1998 and April 2, 1998, members of the IQI Board had
numerous discussions between and among themselves regarding the Merger and the
terms of the proposed Merger Agreement and related transaction documents. On
April 2, 1998, the IQI Board, by unanimous written consent, concluded that the
Merger is advisable and in the best interests of IQI and its stockholders and
approved the Merger and the Merger Agreement.
On April 6, 1998, the ATC Board held a special meeting to consider the
proposed merger. At the special meeting, members of ATC's senior management,
together with its legal and financial advisors, reviewed with the ATC Board the
results of ATC's due diligence examination, terms of the proposed Merger
Agreement and the other agreements related to the transaction, the background of
the transaction, the potential benefits and risks of the transaction, including
the strategic and financial rationale, and the status of ATC's due diligence
review of IQI. CIBC Oppenheimer reported on the procedures and analyses that it
had performed to date and the outstanding issues or matters that needed to be
satisfied, in its sole discretion, in order to render its opinion to the ATC
Board that the Exchange Ratio is fair, from a financial point of view, to the
holders of shares of ATC Common Stock. All directors were present at this
meeting and voted unanimously to authorize management, subject to satisfactory
negotiation of final documentation and receipt of CIBC Oppenheimer's fairness
opinion, to enter into the Merger Agreement and to recommend to ATC stockholders
that they vote in favor of the Merger.
On April 7, 1998, the ATC Board held a special telephonic meeting to
consider the proposed Merger Agreement, the Thayer Commitment Letter and the
transactions contemplated thereby. At the meeting, the ATC Board, together with
its legal and financial advisors, approved the Merger and the definitive terms
of the Merger Agreement and the other agreements related to the transactions,
and reviewed the potential benefits and risks of the transactions, and a summary
of the financial and valuation analyses of the transactions. At the conclusion
of the presentation, CIBC Oppenheimer delivered its oral opinion that the
Exchange Ratio is fair, from a financial point of view, to the holders of shares
of ATC Common Stock. See "--Opinion of Financial Advisor to ATC" for a
discussion of the factors considered and the analytical methods employed by CIBC
Oppenheimer in delivering such opinion. The ATC Board, by unanimous vote of the
directors, likewise approved the Merger Agreement and the transactions
contemplated thereby.
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On April 7, 1998, ATC and IQI entered into the Merger Agreement, and the
related Thayer Commitment Letter, the Irrevocable Proxy Agreement, the Bank
Commitment Letter, the Securities Purchase and Registration Rights Agreement
were executed by the parties thereto.
On the morning of April 8, 1998, ATC and IQI issued a joint press release
announcing the Merger.
ATC'S REASONS FOR THE MERGER
On February 18, April 6 and April 7, 1998, the ATC Board met to consider the
advisability of the proposed Merger and the terms of the proposed Merger
Agreement and related transaction documents. The ATC Board concluded that the
Merger is advisable and in the best interests of ATC and its stockholders. In
reaching its determination to approve the Merger Agreement, the ATC Board
considered a variety of factors, although it did not assign any relative or
specific weight to the factors considered. The factors considered included the
following: (i) the Merger would result in a larger and more diversified company
in the teleservices marketplace that should enhance ATC's competitiveness in
existing markets and facilitate more rapid entry into other markets through
IQI's existing operations; (ii) the businesses of ATC and IQI are compatible and
the Merger should enable ATC to combine its strengths in inbound teleservices
and information technology with IQI's expertise in outbound teleservices, its
pay-for-performance pricing model, database analysis capability and custom
marketing research to provide a more complete, single source solution for its
customers' needs; (iii) the Merger offers increased sales and marketing
opportunities through the addition of the IQI sales force, the client base of
IQI's custom marketing research division, Elrick & Lavidge, and the extensive
business contacts and relationships of IQI's controlling stockholder, Thayer;
(iv) the Merger should create synergies and economies of scale through the
reduction of operational and management redundancies that should help ATC to
improve its cash flow and operating margins; (v) the Merger should permit
improved access to the capital markets due to the result of increased
capitalization and profitability; (vi) the Merger and the cash investment in ATC
by Thayer pursuant to the Thayer Commitment Letter, which was conditioned on the
execution of the Merger Agreement, would provide interim financial support
required by ATC for working capital needs; (vii) the terms and conditions of the
proposed Merger Agreement, generally, are favorable to the ATC Stockholders; and
(viii) CIBC Oppenheimer's opinion that the Exchange Ratio is fair, from a
financial point of view, to the holders of shares of ATC Common Stock.
The foregoing discussion of the information and factors considered and given
weight by the ATC Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the Merger, the ATC
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors and information considered in reaching
its determination. In addition, individual members of the ATC Board may have
given different weights to different factors. Moreover, there can be no
assurance that any of the expectations set forth in the preceding paragraphs
will be fulfilled or that any of the expected benefits of the Merger will be
realized.
ATC BOARD RECOMMENDATION OF THE MERGER
For the reasons stated under "ATC's Reasons for the Merger," the ATC Board
believes that the terms of the Merger Agreement and the Merger are fair to, and
in the best interests of, ATC and the ATC stockholders. All members of the ATC
Board were present at the meeting held on April 7, 1998, and they unanimously
approved the Merger Agreement, the Merger and the related transactions, and
recommended that the holders of ATC Common Stock vote "FOR" the approval of the
Merger. In considering the recommendation of the ATC Board, holders of ATC
Common Stock should be aware that certain officers and directors of ATC have
direct and indirect interests in the consummation of the Merger, apart from
their interests as stockholders of ATC, which are not identical to those of
unaffiliated stockholders of ATC. See "The Proposed Merger--Interests of Certain
Persons in the Merger."
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OPINION OF FINANCIAL ADVISOR TO ATC
CIBC Oppenheimer has acted as financial advisor to ATC in connection with
the Merger. On April 7, 1998, CIBC Oppenheimer delivered its oral opinion, which
opinion was subsequently confirmed in writing as of that date ("CIBC OPPENHEIMER
OPINION"), to the ATC Board to the effect that, subject to the assumptions,
factors, limitations and other matters set forth therein, as of the date of such
opinion, the Exchange Ratio is fair, from a financial point of view, to the
holders of shares of ATC Common Stock.
THE FULL TEXT OF THE CIBC OPPENHEIMER OPINION, WHICH SETS FORTH ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS OF ITS REVIEW, IS
ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS
OF ATC COMMON STOCK ARE URGED TO, AND SHOULD, READ THE CIBC OPPENHEIMER OPINION
CAREFULLY AND IN ITS ENTIRETY. THE CIBC OPPENHEIMER OPINION IS DIRECTED TO THE
BOARD OF DIRECTORS OF ATC AND IS LIMITED TO THE FAIRNESS OF THE EXCHANGE RATIO,
FROM A FINANCIAL POINT OF VIEW, TO THE HOLDERS OF ATC COMMON STOCK, AND IT DOES
NOT ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF ATC AS TO HOW SUCH STOCKHOLDER SHOULD VOTE
AT THE ATC ANNUAL MEETING. THE SUMMARY OF CIBC OPPENHEIMER'S OPINION SET FORTH
IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, CIBC Oppenheimer (i) reviewed the Merger
Agreement and related agreements, (ii) reviewed the Annual Reports on Form 10-K
of ATC for the two fiscal years ended June 30, 1997, (iii) reviewed audited
consolidated financial statements and other financial information as of and for
the fiscal year ended December 31, 1996 of IQI, (iv) reviewed unaudited
consolidated financial statements and other financial information as of and for
the fiscal year ended December 31, 1997 of IQI and certain internal financial
statements and other financial and operating data concerning IQI prepared by the
management of IQI, (v) reviewed Quarterly Reports on Form 10-Q of ATC for the
fiscal years 1997 and 1998 to date, (vi) reviewed certain internal financial
statements, management reports and other financial and operating data concerning
ATC prepared by the management of ATC, (vii) reviewed certain other
communications from ATC to its stockholders, (viii) reviewed certain internal
financial analyses and forecasts of ATC and IQI prepared by their respective
managements, (ix) held discussions with members of the managements of ATC and
IQI regarding the past and current business operations, financial condition and
future prospects of their respective companies and the estimates of the
operating savings and other benefits and cost reductions expected by the
respective managements to be realized from the Merger as well as considered the
strategic rationale for the Merger as outlined to CIBC Oppenheimer by the
managements of ATC and IQI, (x) reviewed the reported price and trading activity
for the shares of ATC Common Stock and compared certain financial and stock
market information, to the extent applicable, for ATC and IQI with similar
information for other companies whose securities are publicly traded, (xi) to
the extent publicly available, reviewed the financial terms of certain recent
business combinations in the teleservices and call center-based industries,
(xii) analyzed the pro forma financial impact of the Merger, and (xiii)
performed such other studies and analyses and considered such other financial,
economic and market criteria as it considered necessary.
In rendering its opinion, CIBC Oppenheimer, at the direction of the ATC
Board, relied upon and assumed the accuracy and completeness of all the
financial and other information reviewed by CIBC Oppenheimer for purposes of its
opinion, without assuming responsibility for the independent verification of
such information. In that regard, CIBC Oppenheimer assumed, at the direction of
the ATC Board, that the financial forecasts prepared by the respective
managements of ATC and IQI and other information as provided or otherwise
discussed were reasonably prepared on bases reflecting the best currently
available judgments and estimates of the prospects of ATC and IQI. CIBC
Oppenheimer has not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of ATC or IQI or any of their
subsidiaries, and has not been furnished with any such evaluation or appraisal,
nor did CIBC Oppenheimer make a physical inspection of all of the properties or
assets of ATC or IQI. CIBC Oppenheimer's opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of its opinion, and CIBC Oppenheimer has not
been
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requested, nor has undertaken any responsibility, to update its opinion in light
of future developments. CIBC Oppenheimer has further assumed, with the consent
of the ATC Board, that (i) the representations and warranties contained in the
Merger Agreement are true and correct in all material respects and (ii) the
Merger will be consummated in accordance with the terms described in the Merger
Agreement and related agreements, without any amendment thereto (including,
among other things, that the Merger will qualify as a tax-free reorganization
pursuant to Section 368(a) of the Code, and that the Merger will be accounted
for under the "reverse purchase" method of accounting whereby IQI will be
treated as the acquiring entity for accounting purposes), and without waiver by
ATC of any of the conditions to its obligation to close thereunder.
In connection with rendering its opinion to the ATC Board, CIBC Oppenheimer
performed a variety of financial analyses, the material portions of which are
summarized below. The summary set forth below does not purport to be a complete
description of the analyses performed by CIBC Oppenheimer. In addition, CIBC
Oppenheimer believes that its analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and the processes underlying CIBC Oppenheimer's opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not susceptible to partial analysis or summary description.
CIBC Oppenheimer performed certain procedures, including each of the financial
analyses described below, and reviewed with the managements of ATC and IQI the
assumptions on which such analyses were based and other factors, including the
current and projected financial results of such companies. The forecasts
provided by the managements of ATC and IQI underlying CIBC Oppenheimer's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such forecasts. Estimates of values
of companies do not purport to be appraisals or necessarily reflect the prices
at which companies or their securities actually may be sold. The range of
valuation for any particular analysis should not be taken to be the view of CIBC
Oppenheimer of the actual value of ATC or IQI.
The forecasts furnished to CIBC Oppenheimer were provided to or reviewed for
CIBC Oppenheimer by the management of each of ATC and IQI. ATC and IQI do not
publicly disclose internal management forecasts of the type provided to CIBC
Oppenheimer in connection with the review of the Merger. Such forecasts were not
prepared with a view toward public disclosure. The forecasts were based on
numerous variables and assumptions which are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions. Accordingly, actual results could vary significantly from those set
forth in such forecasts. The following is a brief summary of all material
financial analyses performed by CIBC Oppenheimer in connection with its opinion
and discussed with the ATC Board on April 6 and April 7, 1998.
VALUATION OF IQI
COMPARABLE COMPANY ANALYSIS. To obtain comparative market information and
other data, CIBC Oppenheimer compared certain historical and estimated earnings
and operating and financial data and ratios and multiples of income statement
and operating cash flow parameters of certain other publicly traded companies
deemed to be generally comparable to IQI. The comparable companies selected by
CIBC Oppenheimer for purposes of this analysis were: Precision Response
Corporation; Sykes Enterprises, Inc.; and TeleTech Holdings, Inc. within the
inbound teleservices sector; APAC Teleservices, Inc.; ICT Group, Inc.; RMH
Teleservices, Inc.; SITEL Corp.; TeleSpectrum Worldwide Inc.; and West
TeleServices Corporation within the outbound teleservices sector (collectively,
the "IQI COMPARABLE COMPANIES"). The IQI Comparable Companies were used in this
analysis because they were deemed by CIBC Oppenheimer to operate in the same
general industry sectors (teleservices and call center-based) as IQI. Although
CIBC Oppenheimer used the IQI Comparable Companies for comparison purposes, none
of such companies is directly comparable to IQI. Financial data compared
included market capitalization, firm value (defined as market capitalization
plus debt less cash), revenues, operating cash flow (defined as
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earnings before interest, taxes, depreciation and amortization ("EBITDA")),
operating income (defined as earnings before interest and taxes ("EBIT")), net
income, earnings per share ("EPS"), gross margin, operating margin, net margin,
historical revenues, EBITDA, net income and EPS growth, projected EPS and EPS
growth rates, balance sheet data and certain expenses and expense ratio data.
Multiples compared included firm value to revenues, firm value to EBITDA, firm
value to EBIT, firm value to projected calendar year 1998 EBITDA and EBIT and
price per share to actual and projected EPS. All projected EPS for the IQI
Comparable Companies were obtained from First Call Corporation (a division of
Thomson Financial Services), a third party service which summarizes the
published estimates made by research analysts employed by investment banking
firms, including analysts employed by CIBC Oppenheimer. Projected EPS for IQI
were based upon IQI management estimates.
Such analysis indicated that the IQI Comparable Companies traded at multiple
ranges of firm value to revenues, EBITDA and EBIT, all for the trailing twelve
months ended December 31, 1997, of 0.5x to 1.5x, 5.9x to 10.4x and 8.6x to
16.3x, respectively. The analysis also indicated that the IQI Comparable
Companies traded at multiple ranges of firm value to projected 1998 EBITDA and
EBIT of 4.5x to 8.5x and 5.7x to 14.6x, respectively. The analysis also
indicated that the IQI Comparable Companies traded at a multiple range of price
to projected 1998 and 1999 net income of 15.0x to 25.5x and 10.7x to 16.7x,
respectively. Based upon historical and projected financial results for IQI, the
above analyses resulted in a range of equity values of approximately $24.0
million to $73.0 million for IQI. CIBC Oppenheimer noted that the price for IQI
contemplated by the Exchange Ratio was within this range of values. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
COMPARABLE M&A TRANSACTION ANALYSIS. CIBC Oppenheimer analyzed the
multiples of certain financial performance measures implied by the consideration
paid in twelve completed merger and acquisition transactions since October 1995
involving companies in the teleservices and call center-based sectors. Among
other factors, CIBC Oppenheimer considered that the merger and acquisition
transaction environment varies over time because of macroeconomic factors that
include, but are not limited to, interest rate and equity market fluctuations
and microeconomic factors that include, but are not limited to, industry results
and growth expectations. To the extent that information was publicly available
for these transactions, multiples analyzed were firm transaction value (defined
as transaction value plus debt less cash) to trailing twelve months
("TTM")revenues, EBITDA and EBIT. Recent teleservices and call center-based
sector transactions included the following (acquiree/acquiror): AT&T Solutions
Customer Care/Cincinnati Bell--MATRIXX, Union Corporation/Outsourcing Solutions,
Inc., Pro Tel Marketing/Opinion Research, McQueen International Ltd./Sykes
Enterprises Inc., First Notice Systems, Inc./CRA Managed Care Inc., Payco
American Corporation/OSI Holdings Corporation, Market USA/HA LO Industries Inc.,
Mitre plc/ SITEL Corporation, Teleaction S.A./SITEL Corporation, PRO Direct
Response Corp./DiMark, Inc., Access 24 Service Corporation/TeleTech Holdings,
Inc., Edward Blank Associates, Inc./Thayer Equity Investors III, L.P. No company
or transaction used in the analysis described above was directly comparable to
IQI or the proposed transaction. Accordingly, the analysis of the results of the
foregoing involved complex considerations and judgments concerning differences
in financial and operating characteristics of the companies that could affect
public trading values.
Such analysis indicated that the multiple range paid in firm transaction
value to TTM revenues, EBITDA and EBIT were 0.8x to 1.6x, 4.5x to 10.6x and 5.0x
to 17.8x, respectively. Based upon historical financial results for IQI, the
above analyses resulted in a range of equity values of approximately $72.0
million to $90.0 million for IQI. CIBC Oppenheimer noted that the price for IQI
contemplated by the Exchange Ratio was below the range of values. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
DISCOUNTED CASH FLOW ANALYSIS. CIBC Oppenheimer performed discounted cash
flow analysis of the projected unleveraged after-tax cash flows of IQI on a
stand-alone basis. In conducting its analysis, CIBC
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Oppenheimer relied on certain assumptions, financial forecasts and other
information provided by the management of IQI; specifically, CIBC Oppenheimer
relied upon the internal forecast of future results of operations of IQI
prepared by IQI's management for the fiscal years ending December 31, 1998
through 2002. CIBC Oppenheimer selected a range of terminal exit multiples of
18.0x to 22.0x net income and a range of discount rates of 13.0% to 17.0%. The
discount rate range was selected based upon a weighted average cost of capital
analysis of IQI. The terminal exit multiple represents an estimate of the value
of IQI's earnings at the end of the five year period. This analysis implied an
equity value range of approximately $95.0 million to $109.0 million. CIBC
Oppenheimer noted that the price contemplated by the Exchange Ratio was below
this range of values. CIBC Oppenheimer drew no specific conclusion from this
analysis but subjectively factored its observations from this analysis into its
qualitative assessment of the relevant facts and circumstances.
VALUATION OF ATC
COMPARABLE COMPANY ANALYSIS. To obtain comparative market information and
other data, CIBC Oppenheimer compared certain historical and estimated earnings
and operating and financial data and ratios and multiples of income statement
and operating cash flow parameters of certain other publicly traded companies
deemed to be generally comparable to ATC. The comparable companies used by CIBC
Oppenheimer in its analysis included Precision Response Corporation; Sykes
Enterprises, Inc.; and TeleTech Holdings, Inc. within the inbound teleservices
sector; and APAC Teleservices, Inc., ICT Group, Inc., RMH Teleservices, Inc.,
SITEL Corp., TeleSpectrum Worldwide Inc.; and West TeleServices Corporation
within the outbound teleservices sector. Such companies (the "ATC COMPARABLE
COMPANIES") were used in this analysis because they were deemed by CIBC
Oppenheimer to operate in the same general industry sector (teleservices and
call center-based) as ATC. Although CIBC Oppenheimer used the Comparable
Companies for comparison purposes, none of such companies is identical to ATC.
Financial data compared included market capitalization, firm value, revenues,
EBITDA, EBIT, net income, EPS, gross margin, operating margin, net margin,
historical revenues, EBITDA, net income and EPS growth, projected EPS and EPS
growth rates, balance sheet data and certain expenses and expense ratio data.
Multiples compared included firm value to revenues, firm value to EBITDA, firm
value to EBIT, firm value to projected calendar year 1998 EBITDA and EBIT and
price per share to actual and projected EPS. All projected EPS for the ATC
Comparable Companies were obtained from First Call Corporation (a division of
Thomson Financial Services), a third party service which summarizes the
published estimates made by research analysts employed by investment banking
firms, including analysts employed by CIBC Oppenheimer. Projected EPS for ATC
was based upon ATC management estimates.
Such analysis indicated that the ATC Comparable Companies traded at multiple
ranges of firm value to revenues, EBITDA and EBIT, all for the trailing twelve
months ended December 31, 1997, of 0.5x to 1.7x, 5.9x to 12.6x and 8.6x to
22.4x, respectively. The analysis also indicated that the ATC Comparable
Companies traded at a multiple range of firm value to projected 1998 EBITDA and
EBIT of 4.5x to 9.8x and 5.7x to 15.0x, respectively. The analysis also
indicated that the ATC Comparable Companies traded at a multiple range of equity
value to projected 1998 and 1999 net income of 15.0x to 27.0x and 10.7x to
18.2x, respectively. Based upon historical and projected financial results for
ATC, the above analyses resulted in a range of values of $1.29 to $2.26 per
share of ATC Common Stock. CIBC Oppenheimer noted that the price per share for
ATC Common Stock on April 1, 1998, $1.69, was within this range of values. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
DISCOUNTED CASH FLOW ANALYSIS. CIBC Oppenheimer performed discounted cash
flow analysis of the projected unlevered after tax cash flows of ATC on a
stand-alone basis. In conducting its analysis, CIBC Oppenheimer relied on
certain assumptions, financial forecasts and other information provided by the
management of ATC; specifically, CIBC Oppenheimer relied upon the internal
forecast of future results of operations of ATC prepared by ATC's management for
the calendar years ending December 31, 1998
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through 1999, and the extrapolation from these projections for the calendar
years ending December 31, 2000 through 2002 assuming business growth rates,
working capital requirements, and capital requirements based upon historical
trends and consultation with ATC's management. CIBC Oppenheimer selected a range
of terminal exit multiples of 18.0x to 22.0x net income and a range of discount
rates of 12.0% to 16.0%. The discount rate range was selected based upon a
weighted average cost of capital analysis of ATC. The terminal exit multiple
represents an estimate of the value of ATC's earnings at the end of the five
year period. This analysis implied an equity value range of $3.44 to $3.82 per
share of ATC Common Stock. CIBC Oppenheimer noted that the price per share for
ATC Common Stock on April 1, 1998 was below this range of values. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
MARKET TRADING ANALYSIS. CIBC Oppenheimer reviewed current and historical
market prices and trading data of the ATC Common Stock. CIBC Oppenheimer noted
that during the period from April 1, 1993 to April 1, 1998 (five business days
prior to the announcement of the transaction) ATC's Common Stock closing prices
ranged from a high of $24.63 per share to a low of $0.56 per share with an
average price of $4.76 per share; during the period April 1, 1997 through April
1, 1998, ATC's Common Stock closing prices ranged from a high of $6.13 per share
to a low of $1.28 per share and an average price of $3.51 per share. CIBC
Oppenheimer also compared the relative performance of the ATC Common Stock to
the ATC Comparable Companies Composite Index and the NASDAQ Composite Index over
the one-year period from April 1, 1997 to April 1, 1998. The Market Trading
Analysis was performed to provide background information and to add context to
the other analyses performed by CIBC Oppenheimer as described above. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
ANALYSIS OF COMBINED ATC/IQI
RELATIVE CONTRIBUTION ANALYSIS. CIBC Oppenheimer analyzed the pro forma
contribution of each of ATC and IQI to the combined entity, based on a
comparison of certain financial information and projections for each company on
a stand alone basis. Accordingly, this analysis did not consider any potential
operating savings or other benefits and cost reductions that may result from the
Merger. Such analysis included, among other things, relative contributions
determined in accordance with calendarized revenues, EBITDA, EBIT and net
income. CIBC Oppenheimer observed that ATC would contribute a range of 35.4% to
37.6% of 1998 to 2000 projected revenues, 21.3% to 31.9% of 1998 to 2000
projected EBITDA, 8.4% to 33.5% of 1998 to 2000 projected EBIT, and less than
0.0% to 50.5% of projected net income. On a corresponding basis IQI would
contribute a range of 62.4% to 64.6% of 1998 to 2000 projected revenues, 68.1%
to 78.7% of 1998 to 2000 projected EBITDA, 66.5% to 91.6% of 1998 to 2000
projected EBIT, and 49.5% to 126.2% of 1998 to 2000 projected net income. CIBC
Oppenheimer observed that the above pro forma contributions by ATC to the
combined company's pro forma projected operating results compare to the 42.5%
ownership position that the current holders of ATC Common Stock are anticipated
to have in the combined company following the consummation of the Merger. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
PRO FORMA MERGER IMPACT ANALYSIS. CIBC Oppenheimer analyzed certain pro
forma effects resulting from the Merger. In conducting its analysis, CIBC
Oppenheimer relied upon certain assumptions described above and the financial
forecasts prepared by the managements of ATC and IQI. CIBC Oppenheimer also
discussed, without independent verification, with the managements of ATC and IQI
the possible cost savings and synergies achievable as a result of the Merger.
Additionally, using the financial information and forecasts provided to CIBC
Oppenheimer by ATC's and IQI's respective managements, CIBC Oppenheimer reviewed
the accretion of or dilution to ATC's 1998 to 2000 pro forma projected
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earnings per share resulting from the Merger. Based on this analysis, CIBC
Oppenheimer observed that the Merger would be accretive to ATC's earnings per
share on the basis described herein. CIBC Oppenheimer drew no specific
conclusion from this analysis but subjectively factored its observations from
this analysis into its qualitative assessment of the relevant facts and
circumstances.
The summary set forth above does not purport to be a complete description of
the analyses performed and factors considered by CIBC Oppenheimer. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, an opinion is not
readily susceptible to partial analysis or summary description. Accordingly,
notwithstanding the separate factors summarized above, CIBC Oppenheimer believes
that its analysis must be considered as a whole and that selecting portions of
its analysis and the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying its opinion. Furthermore, in arriving at its fairness opinion, CIBC
Oppenheimer did not attribute any particular weight to any analysis, or factor
considered by it, but rather made subjective and qualitative judgments as to the
significance and relevance of each analysis and factor. In performing its
analyses, CIBC Oppenheimer made numerous assumptions with respect to industry
performance, business, market and economic conditions and other matters. The
analyses performed by CIBC Oppenheimer are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. No company or transaction used in the above analyses
for comparison is identical to ATC or IQI or the Merger and, accordingly, an
analysis of the results of the foregoing is not purely quantitative. The
analyses were prepared solely for purposes of CIBC Oppenheimer's providing its
opinion as to the fairness, from a financial point of view, of the Exchange
Ratio to the holders of shares of ATC Common Stock and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors and events beyond the control of
the parties or their respective advisors, none of ATC, IQI or CIBC Oppenheimer
or any other person assumes responsibility if future results are materially
different from those forecast. As described above, the CIBC Oppenheimer Opinion
was one of many factors taken into consideration by the ATC Board in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analysis performed by CIBC
Oppenheimer and is qualified by reference to the written opinion of CIBC
Oppenheimer set forth in Appendix B hereto.
ATC selected CIBC Oppenheimer as its financial advisor because CIBC
Oppenheimer is an internationally recognized investment banking firm and the
principals of CIBC Oppenheimer have substantial experience in transactions
similar to the Merger, are familiar with ATC, IQI and their respective
businesses and are familiar with the teleservices and call center-based
industries in general. As part of its investment banking business, CIBC
Oppenheimer is continually engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions, negotiated underwritings,
competitive biddings, secondary sales and distributions of listed and unlisted
securities, and private placements. In the ordinary course of business, CIBC
Oppenheimer and its affiliates may actively trade the securities of ATC for its
own account or for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities. CIBC Oppenheimer, or one
of its affiliated companies, currently makes a market in the securities of ATC
and its equity research department provides published research coverage of ATC.
Pursuant to a letter agreement dated July 8, 1997 (the "CIBC OPPENHEIMER
ENGAGEMENT LETTER"), ATC engaged CIBC Oppenheimer to act as its financial
advisor to explore strategic alternatives for the company. Pursuant to the terms
of the CIBC Oppenheimer Engagement Letter, ATC paid CIBC Oppenheimer $50,000
upon signing of the CIBC Oppenheimer Engagement Letter. In addition, ATC has
agreed to pay CIBC Oppenheimer a transaction fee, based on the average last sale
price for ATC Common Stock for the twenty trading days prior to the consummation
of the Merger, which such fee as of the
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execution of the Merger Agreement would be approximately $1.3 million according
to the following schedule: (i) $300,000 upon the delivery of CIBC Oppenheimer's
opinion to the ATC Board of Directors on April 7, 1998; (ii) $100,000 upon
execution of the Merger Agreement; and (iii) the balance of approximately $0.9
million upon consummation of the Merger. ATC has agreed to indemnify CIBC
Oppenheimer against certain liabilities, including certain liabilities under
United States federal securities laws.
IQI'S REASONS FOR THE MERGER
Between March 5, 1998 and April 2, 1998, members of the IQI Board had
numerous discussions between and among themselves regarding the Merger and the
terms of the proposed Merger Agreement and related transaction documents. On
April 2, 1998, the IQI Board, by unanimous written consent, concluded that the
Merger is advisable and in the best interests of IQI and its stockholders and
approved the Merger and Merger Agreement. In reaching its determination to
approve the Merger Agreement, the IQI Board considered a variety of factors,
although it did not assign any relative or specific weight to the factors
considered. The factors considered included the following: (i) the Merger would
result in a larger and more diversified company in the teleservices marketplace
that should enhance IQI's competitiveness in existing markets and facilitate
more rapid entry into other markets through ATC's existing operations; (ii) the
businesses of IQI and ATC are compatible and the Merger should enable IQI to
combine its expertise in outbound teleservices, the pay-for-performance pricing
model, database analysis and customer market research with ATC's strengths in
inbound teleservices and information technology to provide a more complete,
single source solution for its customers' needs; (iii) IQI has reviewed
financial statements and financial projections for both IQI and ATC, including
combined financial projections on a pro-forma basis, and has determined that the
synergies and economics of scale through the reduction of operational and
management redundancies anticipated to be derived from the Merger are more
favorable to IQI and its stockholders than those that could be derived by IQI
continuing to operate independently; (iv) the Merger should permit improved
access to the capital markets due to the result of increased capitalization and
profitability; (v) the IQI Board reviewed valuations on companies comparable to
ATC and similarly situated and has performed or caused to be performed
valuations on ATC using a variety of valuation techniques and concluded that the
terms and conditions of the proposed Merger Agreement, generally, are favorable
to the stockholders of IQI.
The foregoing discussion of the information and factors considered and given
weight by the IQI Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the Merger, the IQI
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors and information considered in reaching
its determination. In addition, individual members of the IQI Board may have
given different weights to different factors. Moreover, there can be no
assurance that any of the expectations set forth in the preceding paragraphs
will be fulfilled or that any of the expected benefits of the Merger will be
realized.
IQI BOARD RECOMMENDATION OF THE MERGER
For the reasons stated under "IQI's Reasons for the Merger," the IQI Board
believes that the Merger Agreement is fair to, and in the best interests of, IQI
and the holders of IQI Common Stock. On April 2, 1998, all members of the IQI
Board approved, by their unanimous written consent, the Merger Agreement and
recommended that the holders of IQI Common Stock vote "FOR" approval of the
Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
There is no affiliation between IQI or any of its affiliates, on the one
hand, and ATC or Sub or any of their affiliates, on the other. Neither ATC, Sub
nor any of their affiliates owns any shares of IQI Common Stock or IQI Preferred
Stock. A number of directors of IQI are either principals or members of the
advisory board of Thayer which, as the owner as of the IQI Record Date of
approximately 64% of the
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issued and outstanding shares of IQI Common Stock, will receive ATC Common Stock
in exchange for their IQI Common Stock in the Merger if it becomes effective.
Additionally, certain of the officers and directors of IQI are holders of IQI's
Common Stock or options or warrants which are exercisable for IQI Common Stock.
Accordingly, if the Merger is consummated, each such officer and director will
receive shares of ATC Common Stock for his shares of IQI Common Stock to the
same extent received by all other shareholders of IQI, and/or substitute ATC
options or warrants to the same extent received by all other IQI optionholders
and warrantholders.
The vesting of certain outstanding options to purchase shares of ATC Common
Stock issued under the ATC 1996 Stock Option and Restricted Stock Plan and under
the 1992 ATC Stock Option Plan will accelerate upon consummation of the Merger
because the Merger constitutes a "change of control" under each such plan.
In addition, on April 7, 1998, in connection with the ATC Board's approval
of the Merger, the ATC Board granted (i) Michael G. Santry, Chairman of the
Board, President and Chief Executive Officer of ATC, nonqualified options to
purchase 450,000 shares of ATC Common Stock under the ATC 1996 Stock Option and
Restricted Stock Plan at an exercise price equal to 1/16th over the closing bid
price of ATC Common Stock on the closing date of the Merger, vesting one-third
on the first, second and third anniversaries of the Effective Date,
respectively, all of which are contingent upon consummation of the Merger; and
(ii) J. Frank Mermoud, a current director of ATC, nonqualified options to
purchase 50,000 shares of ATC Common Stock under the ATC 1996 Stock Option and
Restricted Stock Plan at an exercise price equal to 110% of the closing price of
ATC Common Stock on April 7, 1998 (the date of the execution of the Merger
Agreement) all of which shall be deemed vested on the closing date of the Merger
and all of which are contingent upon consummation of the Merger. In addition,
ATC and IQI agreed that ATC would, upon consummation of the Merger, grant
Michael G. Santry, President, Chief Executive Officer and Chairman of ATC, and
Matthew S. Waller, Chief Financial Officer and Director of ATC, nonqualified
options to purchase 350,000 and 300,000 shares, respectively, of ATC Common
Stock under the 1998 Plan at an exercise price equal to 1/16th over the closing
bid price of ATC Common Stock on the closing date of the Merger. Two-thirds of
the options to be granted to Mr. Waller vest on the date of grant and one-third
vest on the first anniversary of the Effective Date. The options to be granted
to Mr. Santry vest one-third on the first, second, and third anniversaries of
the Effective Date, respectively.
GOVERNMENTAL AND REGULATORY APPROVALS
Certain federal or state regulatory approvals are required and must be
complied with in order to effect the Merger, including the approval of the Joint
Proxy Statement/Prospectus by the Commission, the declaration by the Commission
of the effectiveness of the Registration Statement under the Securities Act,
blue sky authorization from state authorities, and the filing of the Articles of
Merger with the Secretary of State Department of Assessments and Taxation of the
State of New York. ATC and IQI filed notification and report forms under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976 ("HSR Act") on May 20, 1998
and requested early termination of the waiting period under the HSR Act.
ACCOUNTING TREATMENT
Upon the consummation of the Merger, the current stockholders of IQI prior
to the Merger will own a larger percentage of the outstanding voting shares of
ATC than the current stockholders of ATC and, accordingly, IQI will be
considered to be the acquiring entity for financial accounting purposes. The
Merger will be accounted for using the reverse purchase method of accounting in
accordance with generally accepted accounting principles. Accordingly, the
assets and liabilities of ATC will be recorded at their respective fair values
and added to those of IQI as of the Effective Time. Financial statements of IQI
issued after the Effective Time will reflect such values and will not be
restated retroactively to reflect the historical financial position or results
of operations of ATC.
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DISSENTERS' APPRAISAL RIGHTS
Under the DGCL, holders of ATC Common Stock are not entitled to demand
appraisal of, or payment for, their shares as a result of the Merger or the
issuance of shares to IQI stockholders.
Under the NYBCL, stockholders of record of IQI at the close of business on
May 15, 1998 will be entitled to enforce their right to receive payment of the
fair value of their shares and the other rights and benefits provided by section
910 of the NYBCL if, in accordance with section 623 of the NYBCL, the
stockholder (i) has filed with IQI either prior to the special meeting of
stockholders to be held on June 30, 1998 or at such meeting, but before the
vote, written objection to the Merger and (ii) after receiving written notice of
the authorization of the Merger by the requisite stockholders, has filed with
IQI written notice of his election to dissent and demand payment of the fair
value of his shares. "Fair value" for purposes of dissenters' rights will be
determined excluding any element of value arising from the accomplishment or
expectation of the Merger.
IN ORDER TO EXERCISE RIGHTS AS A DISSENTING STOCKHOLDER, A STOCKHOLDER OF
IQI MUST COMPLY WITH ALL OF THE PROCEDURAL REQUIREMENTS OF SECTION 623 OF THE
NYBCL. THE REQUIRED PROCEDURES MUST BE FOLLOWED EXACTLY OR DISSENTERS' RIGHTS
MAY BE LOST. SEE APPENDIX C--APPRAISAL RIGHTS AND PROCEDURES.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material income tax considerations
of the Merger that are generally applicable to holders of IQI Common Stock. This
discussion does not deal with all income tax considerations that may be relevant
to particular IQI stockholders in light of their particular circumstances, such
as stockholders who are dealers in securities, foreign persons, or stockholders
who acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions. In addition, the following
discussion does not address the tax consequences of transactions effectuated
prior to or after the Merger (whether or not such transactions are in connection
with the Merger), including, without limitation, transactions in which shares of
IQI Common Stock were or are acquired or shares of ATC Common Stock were or are
disposed of. Furthermore, no foreign, state or local tax considerations are
addressed herein. ACCORDINGLY, IQI STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of ATC, Sub and IQI intended to qualify
as a "party to the reorganization" under Section 368(b) of the Code, in which
case the following tax consequences will generally result to the IQI
stockholders (subject to the limitations and qualifications referred to herein):
1. No gain or loss will be recognized by holders of IQI Common Stock
solely upon their receipt of ATC Common Stock in the Merger in exchange
therefor;
2. The aggregate tax basis of the ATC Common Stock received in the
Merger by an IQI stockholder will be the same as the aggregate tax basis of
IQI Common Stock surrendered in exchange therefor;
3. The holding period of the ATC Common Stock received in the Merger by
an IQI stockholder will include the period during which the stockholder held
the IQI Common Stock surrendered in exchange therefor, provided that the IQI
Common Stock is held as a capital asset at the time of the Merger;
4. An IQI stockholder who exercises dissenters' rights with respect to
all of such holder's shares of IQI Common Stock will generally recognize
gain or loss for federal income tax purposes, measured
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by the difference between the holder's basis in such shares and the amount
of cash received, provided that the payment is neither essentially
equivalent to a dividend within the meaning of Section 302 of the Code nor
has the effect of a distribution of a dividend within the meaning of Section
356(a)(2) of the Code (collectively, a "DIVIDEND EQUIVALENT TRANSACTION").
Such gain or loss will be capital gain or loss, provided that the IQI Common
Stock is held as a capital asset at the time of the Merger. A sale of IQI
Common Stock pursuant to an exercise of dissenters' rights will generally
not be a Dividend Equivalent Transaction if, as a result of such exercise,
the stockholder exercising dissenters' rights owns no shares of ATC Common
Stock or IQI Common Stock (either actually or constructively within the
meaning of Section 318 of the Code). If, however, a stockholder's sale for
cash of IQI Common Stock pursuant to an exercise of dissenters' rights is a
Dividend Equivalent Transaction, then such stockholder will generally
recognize ordinary income for federal income tax purposes in an amount equal
to the cash so received to the extent of IQI's current and accumulated
earnings and profit (with any excess being treated as a return of capital to
the extent of the stockholder's basis on his or her IQI Common Stock or as
capital gain for amounts exceeding such tax basis); and
5. None of ATC, Sub or IQI will recognize material amounts of gain or
loss solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. As a condition to the obligations of IQI
and ATC to consummate the Merger, IQI and ATC will receive opinions from their
respective legal counsel, Paul, Hastings, Janofsky & Walker LLP and Hughes &
Luce, L.L.P., to the effect that, for federal income tax purposes, the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Code. These opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. In addition, the Tax Opinions will be subject to certain assumptions
and qualifications and will be based on the truth and accuracy of certain
representations including representations made by ATC and IQI.
A successful IRS challenge to the "reorganization" status of the Merger
would result in an IQI stockholder recognizing gain or loss with respect to each
share of IQI Common Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the Effective
Time of the Merger, of the ATC Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the ATC Common Stock so received
would equal its fair market value and his or her holding period for such stock
would begin the day after the Merger.
Even if the Merger qualifies as a "reorganization," a recipient of shares of
ATC Common Stock may recognize income or gain to the extent that such shares
were considered to be received in exchange for services or property (other than
solely IQI Common Stock), in which case all or a portion of such income or gain
may be taxable as ordinary income. In addition, gain or loss may have to be
recognized to the extent that a IQI stockholder is treated as receiving
(directly or indirectly) consideration other than ATC Common Stock in exchange
for his or her IQI Common Stock.
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OTHER TRANSACTIONS RELATED TO THE MERGER
NEW SENIOR LOAN
IQI is currently a party to that certain Amended and Restated Credit
Agreement, dated as of June 30, 1997 (the "EXISTING CREDIT AGREEMENT"), with
Scotiabank, as Documentation Agent and Administrative Agent for various lenders
(the "LENDERS"), and CSFB, as Syndication Agent for the Lenders. The Existing
Credit Agreement provides for a $53.0 million facility to IQI as the borrower,
consisting of $35.0 million in term loans and $18.0 million in revolving loans.
On April 7, 1998, Scotiabank and CSFB issued the Bank Commitment Letter
pursuant to which (i) Scotiabank and CSFB have committed to roll over and
continue their commitments under the Existing Credit Agreement and (ii)
Scotiabank has committed to provide IQI the Additional Loan upon the
effectiveness of the Merger. This will result in a total facility total of
approximately $65.0 million. The proceeds of the Additional Loan will be used
upon consummation of the Merger to refinance the existing bank indebtedness of
Advanced and for the general corporate and working capital needs of IQI and the
other wholly-owned subsidiaries of ATC. All loans under the Bank Commitment
Letter, including both pursuant to the Existing Credit Agreement and the
Additional Loan, will be secured by substantially all of the assets of IQI and
its subsidiaries, Advanced, ATC and the other subsidiaries of ATC. The
obligations of Scotiabank and CSFB under the Bank Commitment Letter are subject
to customary conditions, plus a requirement that Thayer shall have funded
approximately $8.0 million in subordinated debt, comprised of (a) the $2.0
million of accommodations contemplated by the Thayer Commitment Letter, (b) $2.0
million advanced to IQI by Thayer in April 1998 for working capital to fund
growth in the inbound teleservices area and (c) an additional $4.0 million to be
funded upon consummation of the Merger. It is anticipated that the additional
$4.0 million in subordinated debt to be funded by Thayer upon consummation of
the Merger will be convertible into ATC Common Stock at a conversion price of
$2.00 per share.
THAYER COMMITMENT LETTER
In connection with the proposed Merger, Thayer issued the Thayer Commitment
Letter pursuant to which Thayer has provided ATC with a guaranty of $2.0 million
in additional indebtedness incurred under ATC's Credit Agreement with Bank One
Texas, N.A. In consideration of such commitment, pursuant to a Securities
Purchase and Registration Rights Agreement, ATC issued Thayer for the purchase
price of $110,000 the First Warrant to purchase up to 1.1 million shares of ATC
Common Stock at an exercise price per share of $1.96 (110% of the average of the
high and low prices of ATC Common Stock on April 7, 1998, the day before the
announcement of the proposed Merger). ATC may redeem, or Thayer may put, the
First Warrant for $110,000 if the Merger is not consummated for any reason. In
addition, ATC granted Thayer the Second Warrant at an exercise price of $2.00
per share that entitles Thayer to acquire a number of shares of ATC Common Stock
equal to the amount drawn on the guaranty divided by $2.00. Alternatively,
Thayer may make an election to convert the amount of any funded indebtedness
into ATC Common Stock at a conversion rate of $2.00 per share.
PROXY AGREEMENT WITH CERTAIN STOCKHOLDERS OF IQI
Holders of shares of IQI Common Stock, representing in the aggregate
approximately 85% of the shares of IQI Common Stock entitled to vote on the
Merger, have executed an Irrevocable Proxy Agreement pursuant to which a
designee of ATC has been granted authority to vote such shares in favor of the
Merger, which vote is sufficient under the NYBCL and the IQI Bylaws to approve
the Merger. ATC requested those stockholders of IQI to enter into the
Irrevocable Proxy Agreement to give ATC additional assurance that the Merger
would be consummated. Such stockholders agreed to execute the Irrevocable Proxy
Agreement as an inducement to ATC to enter into the Merger Agreement.
Pursuant to the Irrevocable Proxy Agreement, the IQI stockholders party
thereto have granted to ATC a proxy to vote all their shares of IQI Common Stock
in favor of the Merger and as ATC shall deem
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proper with respect to any acquisition proposal related to IQI. Accordingly, the
Merger and the Merger Agreement will have been approved without the vote or
consent of any other IQI stockholder, and ATC does not expect to be required to
exercise any of its other rights under the Irrevocable Proxy Agreement. These
other rights include a proxy to execute and deliver any written consents in
connection with the IQI Special Meeting or any adjournment thereof, if no such
meeting is held and no action is taken in connection with the Merger, to call a
meeting of stockholders to vote on the Merger, any acquisition proposal related
to IQI or the replacement of any or all of the members of the IQI board (to the
extent permitted by the NYBCL and the IQI Charter) and to waive for the term of
the Irrevocable Proxy Agreement any appraisal rights. Each IQI stockholder who
executed the Irrevocable Proxy Agreement agreed not to enter into any voting
agreement with respect to his or its shares of IQI Common Stock covered by the
proxy agreement, to sell or transfer such IQI Common Stock (unless the
transferee agrees in writing to be bound by the terms of the proxy agreement) or
to encourage or participate in any discussions regarding an acquisition proposal
related to IQI. The Irrevocable Proxy Agreement terminates on the earlier to
occur of (i) the Effective Time and (ii) the termination of the Merger Agreement
in accordance with its terms.
STOCKHOLDERS' AGREEMENT
Certain stockholders of ATC and IQI will enter into a Stockholders'
Agreement upon the consummation of the Merger whereby such stockholders agree to
vote their shares of ATC Common Stock following the Merger in favor of the
election of certain nominees to the ATC Board identified by the other group's
representative. The voting agreement will have a term of two years, commencing
upon the closing of the Merger. The IQI parties to the Stockholders' Agreement
will be Thayer, ITC Service Company, The Edward Blank 1995 Grantor Retained
Annuity Trust and Edward Blank, and the ATC parties to the Stockholders'
Agreement are Codinvest Limited, Michael G. Santry and Darryl D. Pounds.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Securities Purchase and Registration Rights Agreement, ATC
has granted Thayer the right to demand one registration on a form other than
Form S-3, and up to three registrations on Form S-3, of the shares of ATC Common
Stock issuable upon exercise of the First Warrant. Holders of at least 200,000
shares of ATC Common Stock are required to request registration. In addition,
Thayer has unlimited "piggyback" registration rights and may seek to include
shares of ATC Common Stock issuable upon exercise of the First Warrant in any
registration statement filed by ATC for its own purposes, subject to customary
"cut-back" rights of ATC's underwriter to reduce the number of shares to be
included in the registration if the number requested to be included exceeds, in
the underwriter's good faith judgment, the number that can be sold in the
offering.
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THE MERGER AGREEMENT
A copy of the Merger Agreement is attached as Appendix A and incorporated by
reference herein. The Merger Agreement contains certain representations and
covenants of ATC, Sub and IQI, certain conditions to the consummation of the
Merger and other terms and provisions respecting the Merger and related
transactions. Capitalized terms that are used but not defined in this section
shall have the meanings assigned to such terms in the Merger Agreement.
SUMMARIES OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT SET FORTH HEREIN DO
NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE PROVISIONS OF THE MERGER AGREEMENT. ALL ATC AND IQI STOCKHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
TERMS OF THE MERGER
The Merger Agreement provides that Sub will merge with and into IQI, with
IQI being the Surviving Corporation and becoming a wholly-owned subsidiary of
ATC. At the Effective Time, each issued and outstanding share of IQI Common
Stock will be converted at the Exchange Ratio into the right to receive 9.7513
shares of ATC Common Stock (subject to adjustment in the event of a stock split
of ATC Common Stock or dividend of ATC securities prior to the Effective Time).
Upon effectiveness of the Merger, each outstanding share of Sub Common Stock
will be converted into one share of common stock of the Surviving Corporation.
At the Effective Time, the certificate of incorporation of Sub, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation. The bylaws of the Sub, as in effect
immediately prior to the Effective Time, shall be the bylaws of the Surviving
Corporation.
The officers of the Surviving Corporation will be Michael G. Santry,
President, and Jerry L. Sims, Jr., Secretary. The officers of ATC following the
Merger will be Stephen A. McNeely (the current President and Chief Executive
Officer of IQI), Chief Executive Officer, and Matthew S. Waller (the current
Chief Financial Officer of ATC), Chief Financial Officer. The nominees for
directors of ATC upon consummation of the Merger are: William G. Moore, Jr.
(Class I), Darryl D. Pounds, (Class I), Peter V. Ueberroth, (Class I), Drew
Lewis (Class I), Michael G. Santry (Class II), Matthew S. Waller (Class II),
Frederick V. Malek (Class II), Paul G. Stern (Class II), David L. Malcolm (Class
III), Daniel H. Chapman (Class III), Stephen A. McNeely (Class III), and Edward
Blank (Class III). See "Management and Operations after the Merger".
EXCHANGE RATIO
The Exchange Ratio is equal to 9.7513 shares of ATC Common Stock for each
share of IQI Common Stock issued and outstanding immediately prior to the
Effective Time. Unless after the date of the Merger Agreement and prior to the
Effective Time ATC shall have declared a stock split (including a reverse split)
of ATC Common Stock or a dividend payable in ATC Common Stock, in which case the
Exchange Ratio shall be appropriately adjusted to reflect such split or dividend
of securities, the Exchange Ratio is not subject to adjustment and accordingly
will not increase or decrease as a result of fluctuations in the market price of
ATC Common Stock. Therefore, the value of ATC Common Stock received at the
Effective Time will have increased or decreased correspondingly with any market
fluctuations in ATC Common Stock prior to the Effective Time. The market price
of ATC Common Stock as of a recent date is set forth herein under
"Summary--Comparative Market Price Data," and IQI stockholders are urged to
obtain recent market quotations for ATC Common Stock. No assurance can be given
as to the market price of ATC Common Stock at the Effective Time or as to the
market price of ATC Common Stock thereafter.
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FRACTIONAL SHARES
No fractional shares of ATC Common Stock will be issued in connection with
the Merger. In lieu of any fractional shares of ATC Common Stock that would
otherwise be issued, each IQI stockholder will receive one full share of ATC
Common Stock.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a properly executed and
verified certificate of merger relating thereto filed with the Secretary of
State of New York in accordance with Section 104 of the NYBCL. The Merger
Agreement provides that the parties thereto will cause such certificate of
merger to be filed as soon as practicable after the holders of ATC Common Stock
and IQI Common Stock have approved the Merger, all required regulatory approvals
and actions have been obtained or taken and all other conditions to the
consummation of the Merger have been satisfied or waived. There can be no
assurance that the conditions precedent to the Merger will be satisfied. See
"--Regulatory Approvals Required" and "--Conditions to Consummation of the
Merger." Moreover, the Merger Agreement may be terminated by either ATC or IQI
under various conditions as specified in the Merger Agreement. See
"--Termination; Termination Fee." Thus, there can be no assurance as to whether
or when the Merger will become effective.
EFFECT ON IQI STOCK OPTIONS AND IQI WARRANTS
IQI OPTIONS. As of the Effective Time, by virtue of the Merger and without
any action on the part of the holders thereof, each Option that is outstanding
under IQI's 1996 Incentive Stock Option Plan (each a "PLAN OPTION," and,
collectively, the "PLAN OPTIONS") immediately prior to the Effective Time shall
be assumed by ATC in such a manner that each such Plan Option shall be
exercisable upon the same terms and conditions as under the IQI 1996 Incentive
Stock Option Plan and the applicable Plan Option agreement issued thereunder,
except that (i) each such Plan Option shall be exercisable for that number of
shares of ATC Common Stock (rounded up to the nearest whole share) equal to the
product of the number of shares of IQI Common Stock subject to such Plan Option
immediately prior to the Effective Time multiplied by the Exchange Ratio (the
"OPTION SHARES"), and (ii) the Plan Option price per share of ATC Common Stock
shall be an amount equal to the product of the Plan Option price per share of
IQI Common Stock subject to such Plan Option immediately prior to the Effective
Time divided by the Exchange Ratio (rounded up to the nearest whole cent);
PROVIDED, HOWEVER, that in the case of Plan Options intended to qualify as
"incentive stock options" pursuant to Section 422 of the Code, any such
adjustment shall be made in such manner as not to disqualify such Plan Options
as "incentive stock options." As soon as practicable after the Effective Time,
ATC will file a registration statement on Form S-8 (or any successor form) under
the Securities Act with respect to all of the Exchanged Option Shares that may
be issued pursuant to the Plan Options and shall use its best efforts to cause
and maintain the effectiveness of such registration statement. "EXCHANGED OPTION
SHARES" shall mean the number of shares of ATC Common Stock as is equal to the
aggregate number of Option Shares.
IQI WARRANTS. As of the Effective Time, by virtue of the Merger and without
any action on the part of the holders thereof, each warrant that is outstanding
(other than under the IQI 1996 Incentive Stock Option Plan) (each a "WARRANT,"
and, collectively, the "WARRANTS") immediately prior to the Effective Time shall
be assumed by ATC in such a manner that each such Warrant shall be exercisable
upon the same terms and conditions as under the applicable Warrant agreement
issued thereunder, except that (i) each such Warrant shall be exercisable for
that number of shares of ATC Common Stock (rounded up to the nearest whole
share) equal to the product of the number of shares of IQI Common Stock subject
to such Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio (the "WARRANT SHARES"), and (ii) the Warrant price per share of
ATC Common Stock shall be an amount equal to the product of the Warrant price
per share of IQI Common Stock subject to such Warrant immediately prior to the
Effective Time divided by the Exchange Ratio (rounded up to the nearest whole
cent). The shares of ATC Common
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Stock issuable upon exercise of the Warrants are being registered with the
Commission pursuant to the Registration Statement.
SURRENDER OF IQI COMMON STOCK CERTIFICATES
Prior to the Effective Time of the Merger, the Exchange Agent will send a
notice and transmittal form, with instructions, to each holder of IQI Common
Stock of record at the Effective Time advising such holder of the effectiveness
of the Merger and of the procedure for surrendering to the Exchange Agent the
certificates formerly evidencing IQI Common Stock in exchange for new
certificates evidencing shares of ATC Common Stock. IQI STOCKHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL
FORM AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
Upon surrender to the Exchange Agent of one or more certificates formerly
representing shares of IQI Common Stock, together with a properly completed and
executed letter of transmittal, there will be issued and mailed to the holder
thereof a new certificate or certificates representing the number of whole
shares of ATC Common Stock to which such holder is entitled under the Merger
Agreement, subject to the Escrow Provisions in the Merger Agreement. See
"--Escrow Shares." Until surrendered as described above, certificates formerly
representing shares of IQI Common Stock will, after the Effective Time,
represent only the right to receive, upon such surrender, a certificate or
certificates representing shares of ATC Common Stock. No dividends or
distributions that are declared on shares of ATC Common Stock will be paid to
persons entitled to receive certificates representing shares of ATC Common Stock
until such persons surrender their certificates formerly evidencing IQI Common
Stock.
A certificate representing shares of ATC Common Stock will be issued in a
name other than the name in which the surrendered IQI Common Stock certificate
was registered only if (i) the IQI Common Stock certificate surrendered is
properly endorsed or accompanied by appropriate stock powers and is otherwise in
proper form for transfer, and (ii) the person requesting the issuance of such
certificate either pays to the Exchange Agent any transfer or other taxes
required by reason of the issuance of such certificate in a name other than that
of the registered holder of the certificate surrendered or establishes to the
satisfaction of the Exchange Agent that such tax has been paid and is not
applicable.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of IQI made to ATC relating to, among other things: (i) IQI's
organization and similar corporate matters, (ii) conflicts under the IQI Charter
or IQI Bylaws, required consents or approvals and violations of any instruments
or law, (iii) IQI's capital structure, (iv) IQI's financial statements, accounts
receivable and the absence of undisclosed liabilities, (v) outstanding
indebtedness of IQI, (vi) threatened, pending or outstanding judgments or
litigation against IQI, (vii) certain tax, employee and employee benefit
matters, (viii) compliance with applicable law, including environmental law,
(ix) material contracts, (x) employment and severance arrangements, (xi) title
to assets, (xii) IQI's leased properties, (xiii) IQI subsidiaries, (xiv) absence
of certain material changes to IQI, and (xv) customers of IQI.
The Merger Agreement contains various customary representations and
warranties of ATC made to IQI relating to, among other things: (i) ATC's
organization and similar corporate matters, (ii) conflicts under the ATC Charter
or ATC Bylaws, required consents or approvals and violations of any instruments
or law, (iii) ATC's capital structure, (iv) ATC's financial statements, accounts
receivable and the absence of undisclosed liabilities, (v) accuracy of ATC's
filings with the Commission, (vi) threatened, pending or outstanding judgments
or litigation against ATC, (vii) certain tax, employee and employee benefit
matters, (viii) compliance with applicable law, including environmental law,
(ix) material contracts, (x) employment and severance arrangements, (xi) absence
of certain material changes to ATC, and (xii) customers of ATC.
The representations and warranties of ATC and IQI contained in the Merger
Agreement or in any certificate delivered pursuant thereto at the Closing
survive the execution and delivery of the Merger
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Agreement and the Closing and the consummation of the transactions contemplated
thereby (and any examination or investigation by or on behalf of any party
hereto) until the date which is the later of 60 days after completion of the
audited consolidated financial statements of ATC and IQI for the fiscal year
ending December 31, 1998 or April 30, 1999 (except for claims in respect thereof
pending at such time, which shall survive until finally resolved or settled).
CONDUCT OF ATC BUSINESS AND IQI BUSINESS PENDING THE MERGER
The Merger Agreement provides that from the date thereof through the Closing
Date, unless otherwise as expressly contemplated by the Merger Agreement or to
the extent waived by the parties, each of ATC and IQI will: (i) use commercially
reasonable efforts to maintain all qualifications to transact business and
remain in good standing in the foreign jurisdictions in which it owns or leases
any property, or conducts any business, so as to require such qualification, and
in which the failure to be so qualified and be in good standing would have a
Material Adverse Effect; (ii) use commercially reasonable efforts to conduct its
business in, and only in, the Ordinary Course and shall preserve intact its
current business organizations, keep available the services of its current
officers and employees and preserve its relationships with customers, suppliers
and others having business dealings with it to the end that its goodwill and
going business value shall be unimpaired at the Closing Date, and it and each of
its Subsidiaries will use its commercially reasonable efforts to maintain its
properties and assets in good condition and repair; (iii) not, and each of its
Subsidiaries will not, (a) amend its Certificate of Incorporation or Bylaws (or
equivalent documents), (b) acquire by merging or consolidating with, or agreeing
to merge or consolidate with, or purchase substantially all of the stock or
assets of, or otherwise acquire any business or any corporation, partnership,
association or other business organization or division thereof, (c) enter into
any partnership or joint venture, (d) declare, set aside, make or pay any
dividend or other distribution in respect of its capital stock or purchase or
redeem, directly or indirectly, any shares of its capital stock, (e) issue or
sell any shares of its capital stock of any class or any options, warrants,
conversion or other rights to purchase any such shares or any securities
convertible into or exchangeable for such shares except in connection with
Ordinary Course option exercises under existing employee stock option plans, or
(f) liquidate or dissolve or obligate itself to do; PROVIDED, HOWEVER, that ATC
may amend its Certificate of Incorporation to increase the number of authorized
shares of ATC Common Stock in order to enable ATC to consummate the transactions
contemplated by the Merger Agreement; (iv) other than in the Ordinary Course
not, and each of its Subsidiaries will not, incur any Indebtedness, sell any
debt securities, lend money to or guarantee the Indebtedness of any Person or
restructure or refinance its existing Indebtedness; (v) not, and each of its
Subsidiaries will not, make any change in the accounting principles, methods,
records or practices followed by it or depreciation or amortization policies or
rates theretofore adopted by it, and it and each of its Subsidiaries will
maintain its books, records and accounts in accordance with GAAP; (vi) and each
of its Subsidiaries will comply promptly in all material respects with all
requirements that applicable law may impose upon it and its operations and with
respect to the transactions contemplated by the Merger Agreement, and will
cooperate promptly with, and furnish information to, the other parties in
connection with any such requirements imposed upon such other party, or upon any
of its affiliates, in connection therewith or herewith; (vii) not, and each of
its Subsidiaries will not, sell, transfer, license, lease or otherwise dispose
of, or suffer or cause the encumbrance by any Lien (other than Permitted Liens)
upon any of, its properties or assets, tangible or intangible, or any interest
therein, except in the Ordinary Course; (viii) not, and each of its Subsidiaries
will not, (a) adopt or amend in any material respect any collective bargaining,
bonus, profit-sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other plan, agreement, trust, fund or arrangement
for the benefit of employees (whether or not legally binding) other than to
comply with any Legal Requirement or (b) pay, or make any accrual or arrangement
for payment of, any increase in compensation, bonuses or special compensation of
any kind, or any severance or termination pay to, or enter into any employment
or loan or loan guarantee agreement with, any of its current or former officers,
directors, employees or consultants; (ix) not, and each of its Subsidiaries will
not, terminate or modify, or commit or cause or suffer
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to be committed any act that will result in breach or violation of any term of,
or (with or without notice or passage of time, or both) constitute a default
under or otherwise give any person a basis for nonperformance under, any
indenture, mortgage, deed of trust, loan or credit agreement, lease, license or
other material agreement, instrument, arrangement or understanding, written or
oral, and it and each of its Subsidiaries will refrain from becoming a party to
any contract or commitment other than in the Ordinary Course and will meet all
of its contractual obligations in accordance with their respective terms; (x)
except for capital expenditures in an amount of which shall not exceed $3.5
million in the aggregate for IQI and its Subsidiaries and which shall not exceed
$750,000 in the aggregate for ATC and its Subsidiaries, not, and each of its
Subsidiaries will not, purchase or enter into any contract to purchase any
capital assets; (xi) use its commercially reasonable efforts to maintain its
insurance policies and bonds and self insurance arrangements in full force and
effect; (xii) not, and each of its Subsidiaries will not, cancel, compromise,
release or discharge any material claim of such party upon or against any person
or waive any of its rights of material value, and will not discharge any Lien
(other than Permitted Liens) upon any of its material assets or compromise any
of its debts or other obligations to any person other than Liens, debts or
obligations with respect to its current liabilities; (xiii) not, and each of its
Subsidiaries will not, institute, settle or agree to settle any Action before
any Governmental Entity; (xiv) and each of its Subsidiaries will maintain in
full force and effect, and comply with, all franchises, licenses, permits,
certificates, authorizations, rights and other approvals of Governmental
Entities necessary to conduct its business as currently conducted or proposed to
be conducted, the loss of which would have a Material Adverse Effect; and (xv)
and each of its Subsidiaries will furnish promptly to each of the other parties
a copy of all notices of proposed assessment or similar notices or reports that
are received from any taxing authority and which relate to its operations for
periods ending on or prior to the Closing Date.
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger requires that (i) the holders of the requisite number of shares
of IQI Common Stock approve and adopt the Merger and (ii) the holders of the
requisite number of shares of ATC Common Stock approve the Merger. IQI
Stockholders representing approximately 85% of the issued and outstanding voting
stock of IQI have executed an Irrevocable Proxy Agreement pursuant to which a
designee of ATC has been authorized to vote their respective shares in favor of
the Merger, which vote is sufficient under the NYBCL and the IQI Bylaws to
approve the Merger.
In addition, consummation of the Merger is subject to the satisfaction or
waiver (to the extent waiver is permitted by law) of certain other conditions. A
failure of any such conditions to be satisfied, if not waived, would prevent
consummation of the Merger.
In addition to the requisite stockholder approval by the stockholders of
each of ATC and IQI, the obligations of both ATC and IQI to consummate the
Merger are subject to the following conditions: (i) the number of Dissenters'
Shares shall not exceed five percent (5%) of the aggregate number of issued and
outstanding shares of IQI Common Stock as of the Effective Time; (ii) any Person
required in connection with the transactions contemplated hereby to file a
notification and report form in compliance with the HSR Act shall have filed
such form and the applicable waiting period with respect to each such form
(including any extension thereof by reason of a request for additional
information) shall have expired or been terminated; (iii) no Governmental Entity
(including a federal or state court) of competent jurisdiction shall have
enacted, issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which prevents or prohibits
consummation of the Merger or any material transaction contemplated by the
Merger Agreement; provided, however, that ATC and IQI shall use their reasonable
efforts to cause any such order, decree, judgment, injunction or other order to
be vacated or lifted; (iv) ATC shall have received all material permits and
other authorizations, if any, required under applicable securities laws for the
issuance of the Merger Shares; (v) the Registration Statement shall have been
declared effective in accordance with the provisions of the Securities Act, and
no stop order suspending such effectiveness shall have been issued and remain in
effect; (vi) all authorizations, consents, waivers and approvals by or from
third parties required for the consummation of the transactions contemplated
hereby shall have been obtained; (vii) ATC, the Escrow Agent and the
Representative shall have executed and delivered the
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Escrow Agreement; and (viii) Thayer, ITC Service Company, Edward Blank, The
Edward Blank 1995 Grantor Retained Annuity Trust, Codinvest Limited, Michael G.
Santry and Darryl D. Pounds shall have entered into the Shareholders' Agreement.
In addition to the foregoing conditions, the obligations of ATC and Sub to
consummate the Merger are subject to satisfaction or waiver of the following
conditions: (i) the representations and warranties of IQI in the Merger
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and IQI shall
have complied with all covenants and agreements and satisfied all conditions on
IQI's part, as applicable, to be performed or satisfied on or prior to the
Closing Date; (ii) ATC shall have received from Paul, Hastings, Janofsky &
Walker LLP, counsel for IQI, a written opinion dated the Closing Date and
addressed to ATC and Sub, regarding certain required legal matters; (iii) ATC
shall have received a certificate of Secretary of IQI dated the Closing Date
regarding certain corporate matters; (iv) ATC shall have received a certificate
of the President of IQI regarding the accuracy of IQI's representations and
warranties and the fulfillment and compliance with certain covenants and
conditions; (v) the fairness opinion of CIBC Oppenheimer Corp., financial
advisor to ATC, addressed to the ATC Board to the effect that the Exchange Ratio
was fair to the stockholders of ATC from a financial point of view shall not
have been withdrawn prior to the Closing Date; (vi) ATC shall have received the
resignations, effective as of the Effective Time, of each of the directors of
IQI; (vii) no act, event or condition shall have occurred after the date hereof
which ATC determines has had or could reasonably be expected to have a Material
Adverse Effect on IQI; (viii) ATC shall have received from Hughes & Luce,
L.L.P., counsel for ATC, a written opinion, in form and substance reasonably
satisfactory to ATC, dated as of the Effective Time, substantially to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and that, accordingly, no gain or loss will be recognized by
IQI, ATC or Sub as a result of the Merger; (ix) IQI and TC Management L.L.C.
shall have terminated that certain Management and Consulting Agreement between
them; and (x) up to $2.0 million in financial accommodations contemplated by the
Thayer Commitment Letter shall have been rendered.
In addition to the foregoing conditions, the obligations of IQI to
consummate the Merger are subject to satisfaction or waiver of the following
conditions: (i) the representations and warranties of ATC in the Merger
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date, and ATC shall
have complied with all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied on or prior to the Closing Date; (ii) IQI
shall have received from Hughes & Luce, L.L.P., counsel for ATC and Sub, a
written opinion dated the Closing Date and addressed to IQI regarding certain
legal matters; (iii) IQI shall have received a certificate of the Secretary of
ATC dated the Closing Date regarding certain corporate matters; (iv) IQI shall
have received from Paul, Hastings, Janofsky & Walker LLP, counsel for IQI, a
written opinion, in form and substance reasonably satisfactory to IQI, dated as
of the Effective Time, substantially to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code and
that, accordingly, no gain or loss will be recognized by IQI or the IQI
stockholders as a result of the Merger; (v) IQI shall have received a
certificate of the President of ATC regarding the accuracy of ATC's
representations and warranties and the fulfillment and compliance with certain
covenants and conditions of ATC; (vi) IQI shall have received a certificate of
the Secretary of Sub dated the Closing Date regarding certain corporate matters;
(vii) IQI shall have received a certificate of the President of Sub regarding
the accuracy of Sub's representations and warranties and the fulfillment and
compliance with certain covenants and conditions of Sub; (viii) the ATC Charter
shall have been amended to increase the number of authorized shares of ATC
Common Stock in an amount sufficient to enable ATC to consummate the
transactions contemplated by the Merger Agreement, including without limitation
the issuance of the Merger Shares, the Exchanged Option Shares and the Exchanged
Warrant Shares; (ix) ATC shall have adopted a 1998 Stock Option Plan with the
number of shares of ATC Common Stock available thereunder in an amount
sufficient to provide for the issuance of the Exchanged Option Shares; (x) no
act, event or condition shall have occurred after the date hereof which IQI
determines has had or could reasonably be expected to have a Material Adverse
Effect on ATC; (xi) the Merger Shares shall have been authorized for
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listing on the NASDAQ National Market upon official notice of issuance; and
(xii) Michael G. Santry shall have made a payment of not less than one-half of
the principal, together with all accrued and unpaid interest, under the terms of
that certain promissory note dated September 16, 1997 made by Michael G. Santry
in favor of ATC, as amended by that certain Letter Agreement dated as of the
date of the Merger Agreement.
AMENDMENT TO ATC BYLAWS
Pursuant to the Merger Agreement, ATC has agreed to amend its bylaws,
effective upon the Closing, to require that seven of twelve directors shall
annually approve an operating plan and capital expenditure budget for the
ensuing fiscal year, and that any subsequent materially adverse changes in such
plan or budget must be approved by such number of directors. This operating plan
would include spending authorization and guidelines for management. Such bylaw
amendment would also require the approval of seven of twelve directors before
ATC may: (i) sell, abandon, transfer, lease or otherwise dispose of all or a
material portion of its properties or assets other than in the ordinary course
of business; (ii) make any payment on account of the purchase, redemption or
other retirement of any shares of ATC Common Stock or preferred stock, except as
required by agreements, charter or bylaw provisions in effect prior to the date
of the Merger Agreement; (iii) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation or other
entity (except as contemplated by the Merger Agreement); (iv) dissolve,
liquidate or wind-up or carry out any partial liquidation or distribution or
transaction in the nature of a partial liquidation or distribution; (v) purchase
or otherwise acquire or permit any Subsidiary to acquire (whether by purchase or
lease of assets or stock or by merger or consolidation) any tangible or
intangible assets having a value of $1.0 million or more, except as approved in
the annual operating plan and capital expenditure budget; (vi) in any manner
authorize, create, issue or sell any class of capital stock of ATC ranking,
whether as to payments of dividends, redemptions or distributions of assets,
prior to or on a parity with, ATC Common Stock, or having voting rights superior
to or inconsistent with or adverse to ATC Common Stock; (vii) in any manner
authorize, create, issue or sell any debt security or other debt instrument
convertible into or exchangeable for any capital stock of ATC; (viii) take any
action to cause any amendment, alteration or repeal of any of the provisions of
its certificate of incorporation or bylaws; (ix) enter into any transaction with
an Affiliate (other than subsidiaries) of ATC with a value in excess of
$50,000.00; (x) issue, sell or exchange, agree to issue, sell or exchange, or
reserve or set aside for issuance, sale or exchange, any equity security (or any
debt security or other obligation with an equity feature) of any Subsidiary; and
(xi) remove or elect a Chief Executive Officer, President or Chief Financial
Officer or approve compensation increases for such executive officers.
REGULATORY APPROVALS REQUIRED
Under the Merger Agreement, the obligations of both ATC and IQI to
consummate the Merger are conditioned upon (i) the expiration or termination of
any waiting period applicable to the consummation of the Merger under the HSR
Act and no action having been instituted by the Department of Justice or the FTC
challenging or seeking to enjoin the Merger, which action shall have not been
withdrawn or terminated, and (ii) other than the filing of a certificate of
merger in accordance with the NYBCL, all authorizations, consents, waivers,
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any governmental entity shall have been obtained,
been filed or having occurred. See "--Conditions to the Consummation of the
Merger." There can be no assurance that any applicable regulatory authority will
approve or take other required action with respect to the Merger or as to the
timing of such regulatory approval or other action. ATC and IQI are not aware of
any governmental approvals or actions that are required in order to consummate
the Merger except in connection with the Securities Act, the filing of the
Merger-related documents under the NYBCL or as described below. Should such
other approval or action be required, it is contemplated that ATC and IQI would
seek such approval or action. There can be no assurance as to whether or when
any such other approval or action, if required, could be obtained.
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Pursuant to the HSR Act, on May 20, 1998, ATC and IQI each furnished
notification of the Merger and provided certain information to the FTC and the
Department of Justice. ATC and IQI have requested early termination of the
waiting period under the HSR Act.
INDEMNIFICATION
Under the Merger Agreement, the Shareholders covenant and agree to defend,
indemnify and hold harmless ATC, each person who controls, is controlled by or
is under common control with ATC within the meaning of the Securities Act, and
each director, officer, employee or agent of ATC (collectively, "ATC INDEMNIFIED
PARTIES") from and against any Damages arising out of or resulting from: (i) any
inaccuracy in or breach of any representation, warranty, covenant or agreement
made by IQI in the Merger Agreement or in any certificate delivered pursuant to
the Merger Agreement at the Closing; or (ii) the failure of IQI to perform or
observe fully any covenant, agreement or provision to be performed or observed
by IQI pursuant to the Merger Agreement. The Shareholders' liability under the
Merger Agreement shall be allocated among them pro rata in accordance with the
number of shares of IQI Common Stock owned by each of them. In the event that
the Shareholders are required to satisfy a claim for indemnification by any ATC
Indemnified Party, such claim shall be satisfied by delivery of Escrow Shares
(valued, for such purpose, at $1.78125 per share) in accordance with the terms
of the Escrow Agreement. No Shareholder shall have any right of contribution or
equitable indemnification against IQI or the Surviving Corporation for the
Shareholders' obligations under Section 10.02(a) of the Merger Agreement.
In addition, ATC covenants and agrees to defend, indemnify and hold harmless
the Shareholders, and each person who controls, is controlled by or is under
common control with any Shareholder within the meaning of the Securities Act,
from and against any Damages arising out of or resulting from: (i) any
inaccuracy in or breach of any representation, warranty, covenant or agreement
made by ATC in the Merger Agreement or in any certificate delivered pursuant to
the Merger Agreement at the Closing; or (ii) the failure of ATC to perform or
observe fully any covenant, agreement or provision to be performed or observed
by ATC pursuant to the Merger Agreement.
The indemnification obligations of the Shareholders and ATC under the Merger
Agreement (i) shall apply only to the extent that the amount of Damages suffered
by the ATC Indemnified Parties or the Shareholders, respectively, exceeds an
accumulated total of $500,000 in the aggregate, at which point the obligations
of the Shareholders or ATC, as the case may be, shall be to indemnify only for
the Damages in excess of such accumulated total; (ii) shall be limited, in the
case of the Shareholders, to the Escrow Shares, and the ATC Indemnified Parties
shall have no recourse against the Shareholders pursuant to the Merger Agreement
beyond recovery of the Escrow Shares; and (iii) shall be limited, in the case of
ATC, to the Additional Shares, and the Shareholders shall have no recourse
against ATC pursuant to the Merger Agreement beyond recovery of the Additional
Shares.
Except as otherwise expressly provided in the Merger Agreement, all claims
by any ATC Indemnified Party for indemnification from the Shareholders shall be
satisfied in accordance with the terms of the Escrow Agreement.
In the event that ATC is required to satisfy a claim for indemnification by
the Shareholders, such claim shall be satisfied by shares of ATC Common Stock
not to exceed the Additional Shares. See "--Additional Shares."
The indemnification provided for in the Merger Agreement shall constitute
the exclusive remedies of the ATC Indemnified Parties, on the one hand, and the
Shareholders, on the other hand, for any post-Closing claims against the other
under the Merger Agreement.
The indemnification obligations of the Shareholders and ATC under the Merger
Agreement shall not apply to any consequential, incidental, exemplary or
punitive Damages, including, but not limited to, lost profits, suffered by any
ATC Indemnified Party, on the one hand, or by the Shareholders, on the other
hand.
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SHAREHOLDERS' REPRESENTATIVE
In order to efficiently administer the transactions contemplated by the
Merger Agreement, including (i) the defense and/or settlement of any claims for
which the Shareholders may be required to indemnify ATC pursuant to Article X of
the Merger Agreement and (ii) entering into the Escrow Agreement, the
Shareholders, by their adoption of the Merger Agreement and the approval of the
Merger, agree to the appointment of Thayer as their representative (the
"REPRESENTATIVE"). The Representative is authorized to take any and all action
as is contemplated to be taken by the Shareholders by the terms of the Merger
Agreement and the Escrow Agreement. All decisions and actions by the
Representative shall be binding upon all of the Shareholders, and no Shareholder
shall have the right to object, dissent, protest or otherwise contest the same.
By their adoption of the Merger Agreement and the approval of the Merger, the
Shareholders agree that: (i) ATC shall be able to rely exclusively on the
instructions and decisions of the Representative as to the settlement of claims
for indemnification by ATC pursuant to Article X of the Merger Agreement, or any
other actions taken by the Representative thereunder, and no party hereunder
shall have any cause of action against ATC in reliance upon the instructions or
decisions of the Representative; (ii) all actions, decisions and instructions of
the Representative shall be final, conclusive and binding upon the Shareholders;
(iii) the provisions outlined in this paragraph are independent and severable,
are irrevocable and coupled with an interest, and shall be enforceable
notwithstanding any rights or remedies that any Shareholder may have in
connection with the transactions contemplated by the Merger Agreement and the
Escrow Agreement; and (iv) the provisions outlined in this paragraph are binding
upon the executors, heirs, legal representatives and successors of each
Shareholder, and any references in the Merger Agreement to a Shareholder shall
mean and include the successors to the Shareholders' rights thereunder, whether
pursuant to testamentary disposition, the laws of descent and distribution or
otherwise.
ESCROW SHARES
At the Effective Time, the holders of IQI Common Stock shall be entitled to
receive, in the aggregate, such number of shares of ATC Common Stock as is equal
to the Merger Shares less the Escrow Shares. For the purposes hereof, the
"ESCROW SHARES" shall mean 1,506,092 shares of ATC Common Stock. The shares of
ATC Common Stock which the holders of IQI Common Stock shall be entitled to
receive at the Effective Time are hereinafter referred to as the "INITIAL
SHARES." The Escrow Shares shall be deposited into escrow and shall be held and
disposed of in accordance with the terms of the Escrow Agreement.
On the Closing Date, ATC shall deliver to the Escrow Agent a certificate
(issued in the name of the Escrow Agent or its nominee) representing the Escrow
Shares, for the purpose of securing the indemnification obligations of the
Shareholders set forth in Article X of the Merger Agreement. The Escrow Shares
shall be held by the Escrow Agent under the Escrow Agreement pursuant to the
terms thereof. The Escrow Shares shall be held as a trust fund and shall not be
subject to any lien, attachment, trustee process or other judicial process of
any creditor of any party, and shall be held and disbursed solely for the
purposes, and in accordance with the terms, of the Escrow Agreement. In the
event that the IQI stockholders are required to satisfy a claim for
indemnification by ATC, a number of Escrow Shares equal to the indemnification
amount divided by $1.78125 shall be deducted from the trust fund and returned to
ATC. The adoption of the Merger Agreement and the approval of the Merger by the
Shareholders shall constitute approval of the Escrow Agreement and all of the
arrangements relating thereto, including without limitation the placement of the
Escrow Shares in escrow and the appointment of the Representative.
ADDITIONAL SHARES
In the event that ATC is required to satisfy a claim for indemnification by
the Shareholders, such claim shall be satisfied by dividing the amount thereof
by $1.78125 (the same valuation per share set forth in the Escrow Agreement) and
issuing to the Shareholders, pro rata in accordance with the number of shares of
IQI Common Stock owned by each of them, a number of shares of ATC Common Stock
equal to such quotient; PROVIDED HOWEVER, that ATC shall not be obligated to
issue an aggregate number of shares of
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ATC Common Stock in excess of 1,506,092, a number equal to the number of Escrow
Shares (the "ADDITIONAL SHARES"), in satisfaction of all its indemnification
obligations under the Merger Agreement.
WAIVER AND AMENDMENT
Any term or provision of the Merger Agreement may be waived in writing at
any time by the party or parties entitled to the benefits thereof. Any waiver
effected pursuant to the Merger Agreement will be binding upon all parties
thereto. No failure to exercise and no delay in exercising any right, power or
privilege shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude the exercise of any other
right, power or privilege. No waiver of any breach of any covenant or agreement
under the Merger Agreement shall be deemed a waiver of any preceding or
subsequent breach of the same or any other covenant or agreement. The rights and
remedies of each party under the Merger Agreement are in addition to all other
rights and remedies, at law or in equity, that such party may have against the
other parties.
The Merger Agreement may not be amended, modified or supplemented except by
written agreement of ATC, Sub and IQI. After any approval and adoption of the
Merger by the stockholders of ATC and IQI, no such amendment, modification or
supplementation will be made which under applicable law requires the approval of
such stockholders, without the further approval of such stockholders.
TERMINATION; TERMINATION FEE
The Merger Agreement may be terminated at any time prior to the Closing: (i)
by mutual consent of ATC and IQI; (ii) by IQI or by ATC, if, upon a vote at a
duly held meeting of stockholders of ATC or IQI, or any adjournment thereof, any
approval of the holders of ATC Common Stock, or the Shareholders, necessary to
consummate the Merger and the transactions contemplated by the Merger Agreement
shall not have been obtained; (iii) by IQI, by written notice to ATC, if, prior
to the meeting of stockholders of ATC, the ATC Board, in the exercise of its
fiduciary duties under applicable law (a) withdraws or modifies in any manner
adverse to IQI its approval or recommendation of the Merger Agreement or the
Merger, (b) approves or recommends any Acquisition Proposal by a party other
than IQI or (c) resolves to take any of the actions specified in clauses
(iii)(a) or (iii)(b); (iv) by ATC, by written notice to IQI, if the ATC Board,
in its good faith exercise of its business judgment, determines (after
consultation with, and upon the advice of, its counsel) that continuing to
recommend to the stockholders of ATC the approval of the Merger Agreement or the
Merger would be reasonably likely to be a breach of the fiduciary duties of the
ATC Board to the stockholders of ATC; (v) by IQI if there has been a material
breach by ATC of its "no solicitation" covenant (see "--Limitation on
Negotiations"); (vi) by IQI, on the one hand, or by ATC, on the other hand, by
written notice to the other party or parties to the Merger Agreement, if the
Merger shall not have been consummated on or before July 31, 1998 (or such later
date as ATC and IQI may agree), provided that in the case of a termination under
this clause (vi), the party or parties terminating the Merger Agreement shall
not then be in material breach of any of its obligations under the Merger
Agreement; (vii) by ATC if (a) there has been a material misrepresentation,
breach of warranty or breach of covenant by IQI under the Merger Agreement or
(b) any of the conditions precedent to Closing applicable to ATC have not been
met on the Closing Date, and, in each case, ATC is not then in material default
of its obligations under the Merger Agreement; or (viii) by IQI if (a) there has
been a material misrepresentation, breach of warranty or breach of covenant by
ATC under the Merger Agreement or (ii) any of the conditions precedent to
Closing applicable to IQI have not been met on the Closing Date, and, in each
case, IQI is not then in material default of its obligations under the Merger
Agreement.
In the event of termination of the Merger Agreement as provided in clauses
(i), (ii) or (vi) above, the Merger Agreement shall forthwith become void and
there shall be no liability or obligation on the part of any party thereto or
their respective directors, officers, employees, agents or other
representatives. In the event of termination of the Merger Agreement as provided
in clauses (iii), (iv), (v), (vii) or (viii) above, subject to the following
paragraph, such termination shall be without prejudice to any rights that the
terminating party or parties may have against the breaching party or parties or
any other Person under the terms of the Merger Agreement or otherwise.
76
<PAGE>
In the event that the Merger Agreement is terminated pursuant to clauses
(iii), (iv) or (v) above, then ATC shall promptly pay to IQI in immediately
available funds a breakup fee equal to $1,000,000 plus IQI's reasonable
out-of-pocket expenses (including legal, accounting, consulting and investment
banking fees) incurred in connection with the Merger Agreement, the Merger and
the transactions contemplated thereby, up to a maximum of $500,000. The fee
payable in the event of a termination solely pursuant to clauses (iii), (iv) or
(v) above constitutes the sole and exclusive remedy of IQI for such termination,
and as such, represents the IQI's liquidated damages as compensation for such
termination of the Merger Agreement.
LIMITATION ON NEGOTIATIONS
Pursuant to the Merger Agreement, each of IQI and ATC has agreed that it
will not, and it shall use its best efforts to cause its Affiliates and each of
its officers, directors, employees, representatives and agents not to, directly
or indirectly, (a) encourage or solicit any inquiry concerning, or initiate any
discussions or negotiations with any Person (other than IQI or ATC, as the case
may be) concerning, any merger, consolidation, sale of material assets, tender
offer, recapitalization, purchase or accumulation of shares, proxy solicitation
or other business combination involving IQI or ATC, as the case may be, or any
of its divisions (any of the foregoing, an "ACQUISITION PROPOSAL"), or (b)
provide any non-public information concerning the business, properties or assets
of IQI or ATC, as the case may be, to any Person (other than IQI or ATC, as the
case may be) in connection with an Acquisition Proposal; PROVIDED HOWEVER, that
in the event ATC receives any unsolicited inquiry concerning an Acquisition
Proposal and, after consultation with counsel, is advised by its counsel that
its board of directors has a fiduciary obligation to respond to such Acquisition
Proposal in order for its directors to properly discharge their fiduciary
obligations to the ATC's stockholders, then ATC may respond to such Acquisition
Proposal. In any event, IQI or ATC, as the case may be, shall immediately notify
the other of, and shall disclose all details of, any Acquisition Proposal. Each
of IQI and ATC further agrees that it will not engage any broker, financial
advisor or other consultant (other than CIBC Oppenheimer Corp. in the case of
ATC) on a basis which might provide such broker, financial advisor or consultant
with an incentive to initiate or encourage any Acquisition Proposal.
EXPENSES
Each party to the Merger Agreement will bear its own direct and indirect
expenses incurred in connection with the negotiation and preparation of the
Merger Agreement and the consummation and performance of the transactions
contemplated thereby, including, without limitation, all legal fees and fees of
any brokers, finders or similar agents; PROVIDED, HOWEVER, that any fees payable
to any Governmental Entity in connection with the transactions contemplated by
the Merger Agreement (including, without limitation, any fee to be paid by an
"acquiring person" under the HSR Act and any filing fees paid to the Commission
in connection with the Proxy Statement/Prospectus or Registration Statement)
shall be paid one-half by IQI and one-half by ATC.
RESALE OF ATC COMMON STOCK
The shares of ATC Common Stock issuable to stockholders of IQI upon
consummation of the Merger will have been registered under the Securities Act.
Such shares will be freely tradable without restriction by those stockholders
who are not deemed to be "affiliates" of ATC or IQI, as that term is defined in
the rules under the Securities Act.
Shares of ATC Common Stock received by those stockholders of IQI who are
deemed to be "affiliates" of IQI may be resold without registration under the
Securities Act only as permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. This Joint Proxy
Statement/Prospectus does not cover any resales of ATC Common Stock received by
persons who are deemed to be "affiliates" of IQI. See "Affiliates' Restriction
on Sale of ATC Common Stock."
77
<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, the charter of Sub, as in effect immediately prior to
the Effective Time, shall be the charter of the Surviving Corporation, and the
bylaws of Sub, as in effect immediately prior to the Effective Time, shall be
the bylaws of the Surviving Corporation.
The directors and officers of ATC after the Merger will be as follows:
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR
NAME/AGE POSITION AFTER THE MERGER SINCE
- --------------------------------------- ------------------------------------------------ -----------
<S> <C> <C>
Stephen A. McNeely, 51................. President, Chief Executive Officer and #
Director***
Matthew S. Waller, 35.................. Chief Financial Officer, Director** 1998
Michael G. Santry, 50.................. Co-Chairman of the Board** 1986
Paul G. Stern, 59...................... Co-Chairman of the Board** #
Darryl D. Pounds, 48................... Director* 1996
William G. Moore, Jr., 59.............. Director* #
Daniel H. Chapman, 53.................. Director*** #
David L. Malcolm, 44................... Director*** #
Peter V. Ueberroth, 60................. Director* #
Drew Lewis, 66......................... Director* #
Frederic V. Malek, 61.................. Director** #
Edward Blank, 63....................... Director*** #
</TABLE>
<TABLE>
<S> <C>
# As of the Effective Time
* Class I Director
** Class II Director
*** Class III Director
</TABLE>
WILLIAM G. MOORE, JR. is Chairman of The Grayson Group, a marketing and high
technology consulting company he founded in January 1990. Prior to founding The
Grayson Group, Mr. Moore was chairman and chief executive officer of Recognition
Equipment Incorporation (REI), Vice President and General Manager of computer
operations for The Perkin-Elmer Corporation, and President of Infoton, a Boston-
based computer terminal company. He has also held management positions in sales,
marketing and technical systems with firms such as Inforex, Inc. and Bell Labs.
From 1995 to 1997, Mr. Moore served as President and Chief Executive Officer of
USDATA.
In January 1988, the Reagan administration appointed Mr. Moore to a two-year
term on the Advisory Committee for Trade Negotiations (ACTN). In 1985, Mr. Moore
served as chairman of the American Electronics Association (AEA).
DANIEL H. CHAPMAN is currently Chairman of Northern Trust Bank of Texas and
Director of National Expansion of Northern Trust Corporation and has served in
such capacities since October 1997. From August 1985 until October 1997, Mr.
Chapman was President and Chief Executive Officer of Northern Trust Bank of
Texas and its predecessor, Concorde Bank, N.A.
DAVID L. MALCOLM currently serves as Chairman of Suncoast Financial
Corporation, a HUD approved mortgage banking company. Mr. Malcolm is also the
founder and President of West Coast Restaurant Enterprises, an owner and
operator of 18 restaurants. Mr. Malcolm also serves as a consultant and Senior
Vice President of Artemis Capital, a large municipal investment banking firm.
Mr. Malcolm is also Chairman of the Board of San Diego United Port District,
which owns and operates San Diego's International Airport and all water rights
and real property on San Diego Bay. From 1994 to 1997,
78
<PAGE>
Mr. Malcolm served on the Commission for Judicial Performance, and from 1984 to
1995, on the California Coastal Commission.
For information with respect to Messrs. Waller, Santry and Pounds, see "ATC
Management-- Directors and Executive Officers of ATC."
For information with respect to Messrs. McNeely, Stern, Ueberroth, Lewis,
Malek and Blank, see "IQI Management--Directors and Executive Officers of IQI."
79
<PAGE>
SELECTED FINANCIAL INFORMATION
SELECTED ATC HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information of ATC for each of the five fiscal years in the period ended June
30, 1997, which have been derived from the audited consolidated financial
statements of ATC. The audited financial statements of ATC for each of the three
years in the period ended June 30, 1997 appear elsewhere in this Joint Proxy
Statement/Prospectus. The selected historical consolidated financial information
for the nine-month periods ended March 31, 1997 and 1998 have been derived from
the unaudited consolidated financial statements of ATC which, in the opinion of
management, include all material, normal and recurring adjustments, necessary
for a fair presentation of the results for the unaudited periods. The unaudited
consolidated financial statements of ATC for the nine-month periods ended March
31, 1997 and 1998 appear elsewhere in this Joint Proxy Statement/Prospectus. The
selected historical consolidated financial information set forth below should be
read in conjunction with, and are qualified by reference to, "ATC Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the accompanying notes thereto included elsewhere
in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31,
-----------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------- (UNAUDITED)
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues(1)........................................... $ 17,829 $ 37,447 $ 61,354 $ 94,314 $ 97,629 $ 76,140
Gross profit.......................................... 5,513 10,586 18,239 31,150 29,347 23,650
Operating expenses.................................... 5,959 8,134 13,246 18,035 22,847 15,602
Depreciation and amortization......................... 492 1,113 2,238 2,937 3,619 2,594
Income (loss) from continuing operations.............. (939) 1,339 2,755 10,177 2,882 5,455
Interest expense...................................... 379 903 946 853 617 396
Interest and other income............................. 80 84 87 94 119 74
Income (loss) from continuing operations before income
taxes............................................... (1,238) 520 1,897 9,418 2,384 5,133
Net income (loss) from continuing operations.......... (817 (2) 340 1,445 5,850 1,429 3,384
Net income (loss)(3).................................. 1,182(4) 2,996 1,335 5,850 1,429 3,384
Diluted earnings (loss) from continuing operations per
share(5)............................................ $ (0.07) $ 0.02 $ 0.06 $ 0.25 $ 0.06 $ 0.14
Diluted earnings (loss) per share(5).................. $ 0.08 $ 0.21 $ 0.05 $ 0.25 $ 0.06 $ 0.14
Weighted average number of common and common
equivalent shares outstanding....................... 13,294 13,685 18,441 21,177 22,150 22,230
<CAPTION>
1998
-----------
<S> <C>
STATEMENTS OF OPERATIONS DATA
Revenues(1)........................................... $ 64,766
Gross profit.......................................... 15,895
Operating expenses.................................... 17,817
Depreciation and amortization......................... 3,124
Income (loss) from continuing operations.............. (5,046)
Interest expense...................................... 739
Interest and other income............................. 178
Income (loss) from continuing operations before income
taxes............................................... (5,606)
Net income (loss) from continuing operations.......... (3,725)
Net income (loss)(3).................................. (3,725)
Diluted earnings (loss) from continuing operations per
share(5)............................................ $ (0.17)
Diluted earnings (loss) per share(5).................. $ (0.17)
Weighted average number of common and common
equivalent shares outstanding....................... 21,484
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE
30, 1997
----------- AS OF MARCH
31, 1998
-------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital......................................................................................... $ 15,080 $ 5,283
Total assets............................................................................................ 41,223 45,095
Long-term obligations (less current maturities)......................................................... 4,754 3,706
Total liabilities....................................................................................... 12,602 21,124
Shareholders' equity.................................................................................... 28,621 23,971
</TABLE>
- ------------------------------
(1) Includes revenues generated by ATC's teleservices subsidiary only. ATC sold
its non-teleservices subsidiaries in fiscal 1994 and 1995; therefore, sales
of discontinued operations are omitted.
(2) Includes an income tax benefit of $421, or $0.03 per diluted share,
resulting from a change in the accounting method used to record deferred
income taxes.
(3) Includes (i) in fiscal 1993, 1994 and 1995, income (loss) from operations of
discontinued business segments of $1,999, or $0.15 per diluted share, $109,
or $0.01 per diluted share, and $(109), or $(0.01) per diluted share,
respectively, net of applicable taxes, and (ii) in fiscal 1994, the gain on
the disposition of the assets of a discontinued business segment of $2,547,
or $0.18 per diluted share, net of applicable taxes.
(4) Includes an income tax benefit of $819, or $0.06 per diluted share,
resulting from a change in the accounting method used to record deferred
income taxes.
(5) Calculated pursuant to Statement of Financial Accounting Standards No. 128
("SFAS 128"), which was adopted by ATC effective December 31, 1997. All
prior periods have been restated pursuant to SFAS 128.
80
<PAGE>
ATC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Joint Proxy Statement/Prospectus may contain forward-looking statements
which involve risks and uncertainties. ATC's actual results may differ
significantly from the results discussed below. Factors that might cause such
differences include, but are not limited to, those discussed in the section
"Risk Factors" and "The Proposed Merger--ATC's Reasons for the Merger."
RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31,
1998 AND MARCH 31, 1997
ATC experienced a loss from operations of $1,182,737 on revenues of
$21,125,330 for the quarter and a loss from operations of $5,045,791 on revenues
of $64,765,553 for the nine months ended March 31, 1998. In the previous fiscal
year, ATC earned income from operations of $730,447 on revenues of $24,480,347
in the comparable three month period and income from operations of $5,454,976 on
revenues of $76,139,785 in the comparable nine month period.
For the quarter ended March 31, 1998, revenues decreased $3,355,017, or
13.7%, from revenues generated in the corresponding quarter of the previous
fiscal year and decreased $11,374,232, or 14.9%, for the nine month period ended
March 31, 1998 compared to the prior year nine month period. The decrease in
revenues in the three and nine month periods ended March 31, 1998 was due
primarily to a price reduction and decreases in service volumes from the
Company's historically largest client. Revenue from this client declined
$6,931,230, or 64.7%, and $23,309,728, or 64.5%, for the three and nine month
periods, respectively, versus comparable prior year periods.
Management remains focused on growing other segments of its business in
order to reduce dependence on any one client. Approximately 17.9% of ATC's
revenues during the quarter and 19.8% during the nine months ended March 31,
1998 were generated by ATC's historically largest client as compared to
approximately 43.7% in the quarter and 47.6% in the nine months ended March 31,
1997. Excluding this client, revenues increased approximately 26.0% in the
quarter and 30.5% in the nine months ended March 31, 1998 versus the prior year
periods. ATC's three largest clients accounted for 69.8% of ATC's revenues
during the quarter and 63.5% during the nine months ended March 31, 1998 as
compared to 72.4% and 74.0%, respectively, in the prior year periods.
Gross profit earned on revenues decreased $2,308,008, or 30.0%, for the
quarter and $7,755,014, or 32.8%, for the nine month period ended March 31, 1998
versus the prior year periods. As a percentage of revenues, gross margins for
the quarter and nine months ended March 31, 1998 were 25.5% and 24.5%,
respectively, versus 31.5% and 31.1% in the comparable three and nine month
periods of the prior year, respectively. Both the decrease in gross profit and
in gross margin as a percentage of revenues for the nine months ended March 31,
1998 as compared with the comparable prior year period were due to lower
capacity utilization resulting from additional decreases in service volumes
during the first fiscal quarter from ATC's historically largest client, a price
reduction from this client and increased labor rates in the markets in which ATC
has traditionally operated.
Selling, general and administrative expenses ("SG&A") decreased $564,108, or
9.3%, in the quarter ended March 31, 1998 versus the prior year quarter. The
decrease in SG&A in the current year quarter was primarily the result of a
decrease in compensation-related expenses associated with management's efforts
to improve operating efficiencies through a reduction in operations management
and administrative staff. SG&A expenses increased $2,214,946, or 14.2%, in the
nine months ended March 31, 1998 versus the comparable prior year period as a
result of the recording of severance expense and other non-recurring charges of
approximately $633,000 in ATC's first fiscal quarter, and significant increases
in recruiting, marketing and administrative costs compared to the prior year
period.
81
<PAGE>
Management is continuing to reduce operating costs, a key element of which
is ATC's previously-announced new site strategy which focuses on smaller call
centers outside of the Dallas labor market. During the quarter ended March 31,
1998, ATC opened a new 330-station call center in Joplin, Missouri, which is now
fully operational. ATC plans to open comparable new centers later in calendar
1998 and in 1999. Management believes these new centers should continue to lower
ATC's operating costs as demonstrated thus far by the ATC's experience in
Joplin.
The increase in depreciation and amortization expense of $169,284, or 18.4%,
in the quarter and $530,807, or 20.5%, in the nine months ended March 31, 1998
versus the comparable prior year periods is primarily the result of the
enhancement of internal systems during the fiscal year ended June 30, 1997 and
additional capital expenditures related to the opening of the new call center
facility in Joplin, Missouri. The decrease in revenues in the current year
periods versus the prior year magnified the impact of the increase in
depreciation and amortization expense on ATC's operating margin as a percentage
of revenues. As a percentage of revenues, depreciation and amortization expense
for the three and nine months ended March 31, 1998 was 5.2% and 4.8%,
respectively, versus 3.8% and 3.4% in the comparable prior year periods.
Net interest expense increased for the three and nine month periods ended
March 31, 1998 $96,137, or 84.0%, and $238,416, or 74.1%, respectively, versus
the same periods in the previous fiscal year due to increased utilization of
ATC's working capital line of credit.
ATC's effective state and federal income tax rates for the three and nine
month periods ended March 31, 1998 were approximately 32.8% and 33.6%,
respectively, versus 33.0% and 34.1%, respectively, for the three and nine month
periods ended March 31, 1997. The effective tax rates were lower in the current
year periods due to a decrease in state income tax liabilities resulting from
the losses incurred by ATC for the three and nine month periods ended March 31,
1998.
Management knows of no trends or uncertainties other than those mentioned
above that are expected to have a material favorable or unfavorable impact on
operating results.
FISCAL 1997 VS. FISCAL 1996
ATC 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.
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 was the result of the addition of new clients and was offset
by decreases in the volume of services provided to certain of ATC's existing
clients. Approximately 44% of the revenues earned by ATC during fiscal 1997 and
fiscal 1996 originated from one of ATC's existing clients. During the fourth
quarter of fiscal 1997, the percentage of ATC'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.
ATC continued 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. ATC also continued to perform project-based
business for certain of its clients.
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
was 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 ATC's largest client and a change in
business mix which resulted in decreased operating efficiencies. Management
continued its efforts to improve operating efficiencies while maintaining ATC's
high quality standards. For fiscal 1997, gross margin as a percentage of
revenues was 30.1% versus 33.0% for fiscal 1996.
82
<PAGE>
SG&A expenses increased $4,812,033, or 26.7%, in fiscal 1997 as compared to
fiscal 1996. This increase in expenses was primarily the result of the addition
of personnel and infrastructure in anticipation of expected revenue growth. In
response to slower than expected revenue growth, ATC 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 was
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 was primarily the result of expansion in ATC'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 ATC's previous
banking relationship and lower utilization of ATC's working line of credit.
For the 1997 fiscal year, ATC's effective tax rate was approximately 40.0%.
In fiscal 1996, ATC's effective tax rate was 37.9%. The increase in ATC's
effective tax rate was primarily due to additional income-based state taxes
paid.
FISCAL 1996 VS. FISCAL 1995
ATC 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 ATC's existing clients. Approximately 44% of
the revenues earned by ATC during fiscal 1996 emanated from one of ATC's
existing clients; however, with the addition of new clients and increased
business volumes with other clients, the percentage of ATC'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 ATC'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 ATC'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 ATC'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 ATC's operating capacity in fiscal 1995 and fiscal
1996. Despite the increase in whole dollars, the impact of the expansion on
83
<PAGE>
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 ATC'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 ATC.
(b) During fiscal 1996, ATC secured a $15.0 million working capital line
of credit with a new commercial bank which replaced the working capital
borrowing arrangement with ATC's previous bank. The terms of this new
arrangement provide for a lower borrowing rate than the previous
relationship.
(c) During fiscal 1996, ATC 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, ATC recognized approximately $61,000 in
interest expense reduction due to the pay-off of the note payable in a
timely fashion.
For fiscal 1996, ATC's effective tax rate was approximately 37.9%. In fiscal
1995, ATC 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
Historically, ATC's primary sources of liquidity have been cash flow from
operating activities and available borrowing capacity under credit facilities.
Despite experiencing negative cash flow from operating activities in the nine
month period ended March 31, 1998, management believes ATC currently has the
liquidity and access to working capital to meet its near-term cash flow demands
through: (i) its receivables-based working capital line of credit, to the extent
permitted by the credit facility, up to $12.0 million; (ii) $2.0 million of
additional financing made available pursuant to the Thayer Commitment Letter;
and (iii) its ability to raise additional funds through debt or equity
financings. If ATC is unable to reduce its operating costs or resume revenue
growth in accordance with management expectations and continues to use cash in
operating activities, however, ATC may experience difficulty in meeting its
liquidity requirements. In such an event, ATC may need to explore other means of
financing its operations, including without limitation, negotiating a new and
expanded loan facility, raising funds through additional debt or equity
financings, or entering into other arrangements.
ATC operates in a fast-growing, highly competitive industry. As such, ATC
began implementation of its new site strategy, which focuses on smaller call
centers in what management believes are more economically attractive markets
than those in which ATC has traditionally operated, by opening a new 330-station
teleservicing center in Joplin, Missouri in February 1998. Company growth and
continued implementation of the new site strategy will necessitate additional
call center facilities and such facilities will have furniture, equipment and
technological requirements consistent with ATC's existing facilities. Management
anticipates opening new centers comparable to the Joplin facility later in
calendar 1998 and in 1999.
In addition to traditional growth strategies, management is currently
pursuing opportunities for growth through the acquisition of other call center
companies. From time to time, ATC engages in discussions with acquisition
candidates. Although there can be no assurances that any proposed acquisition
will be successfully completed, management requires that any acquisition
candidates fit ATC's corporate and operating strategies.
In April 1997, the ATC Board authorized the implementation of a stock
repurchase program of up to five million shares of ATC Common Stock on the open
market and through privately negotiated transactions. To date, ATC has used
available cash flow to repurchase 355,000 shares at an average cost of
84
<PAGE>
$3.98 per share. Based on ATC's current liquidity position and the pending
merger with IQI, Inc., ATC does not anticipate making any further repurchases in
the near-term.
At March 31, 1998 the Chairman of ATC had outstanding borrowings and accrued
interest due to ATC of approximately $3.8 million. The Note bears interest at 6%
and is secured by collateral pledged by Codinvest Ltd., ATC's largest
shareholder of record. The Merger Agreement contains a provision extending the
maturity date and principal repayment terms of the note. Pursuant to that
provision, one half of the principal balance plus accrued interest is due by
June 30, 1998 with the remainder of the principal plus accrued interest due on
March 31, 1999.
The $12.0 million accounts receivable credit facility, the $2.0 million
credit facility, and $1.0 million equipment term loan with the same major bank
contain various covenants which limit, among other things, the operating
subsidiary's indebtedness, capital expenditures, investments, payments and
dividends to ATC and requires the operating subsidiary to meet certain financial
covenants. Similarly, under the terms of ATC's guaranty of its operating
subsidiary's obligations, ATC is subject to certain covenants limiting, among
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 receivables, furniture and equipment, and are
guaranteed by ATC.
Although no assurances can be made in this regard, management anticipates
that, based on its ability to secure such financing to date, ATC should be able
to secure debt or equity funding for the capital equipment requirements of
future call center facilities or acquisition opportunities.
85
<PAGE>
SELECTED IQI HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information of IQI for the years ended December 31, 1996 and 1997, the five
months ended December 31, 1996, and for each of the four fiscal years in the
period ended July 31, 1996, which have been derived from the audited
consolidated financial statements of IQI. The unaudited selected historical
consolidated financial information for the five months ended December 31, 1995
and for the three-month periods ended March 31, 1997 and 1998 has been derived
from the unaudited consolidated financial statements of IQI which, in the
opinion of IQI's management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited periods. The audited consolidated financial statements of IQI for each
of the two fiscal years in the period ended July 31, 1996, the five months ended
December 31, 1996, and the year ended December 31, 1997 and the unaudited
consolidated financial statements for the three months ended March 31, 1998
appear elsewhere in this Joint Proxy Statement/ Prospectus. The unaudited
selected historical consolidated financial information has been included for
comparison purposes only. The selected historical financial information set
forth below should be read in conjunction with, and are qualified by reference
to, "IQI Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and the accompanying notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER
YEAR ENDED JULY 31,(1) ----------------------- 31,
------------------------------------------ (UNAUDITED) --------------------
1993 1994 1995 1996 1995 1996(2) 1996 1997(3)
--------- --------- --------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices....................... $ 20,069 $ 31,033 $ 56,179 $ 57,543 $ 22,966 $ 26,756 $ 62,799 $ 115,609
Marketing research services........ -- -- -- -- -- -- -- 18,223
--------- --------- --------- --------- ------------ --------- --------- ---------
Total revenues....................... 20,069 31,033 56,179 57,543 22,966 26,756 62,799 133,832
Gross profit......................... 6,670 11,457 18,207 16,834 6,848 6,092 17,586 45,642
Operating expenses................... 5,120 7,057 16,444 13,588 4,734 8,760 17,925 36,312
Depreciation and amortization........ 888 907 856 1,314 415 1,024 1,815 6,093
--------- --------- --------- --------- ------------ --------- --------- ---------
Operating income (loss).............. 662 3,493 907 1,932 1,699 (3,692) (2,154) 3,237
Other income, net.................... 107 142 437 877 -- 648 320 --
Interest expense, net................ 236 112 72 190 57 450 584 3,626
--------- --------- --------- --------- ------------ --------- --------- ---------
Income (loss) before income taxes.... 533 3,523 1,272 2,619 1,642 (3,494) (2,418) (389)
Income tax expense(1)................ 45 109 314 17 657 1,794 2,201 595
--------- --------- --------- --------- ------------ --------- --------- ---------
Net income (loss).................... $ 488 $ 3,414 $ 958 $ 2,602 $ 985 $ (5,288) $ (4,619) $ (984)
--------- --------- --------- --------- ------------ --------- --------- ---------
--------- --------- --------- --------- ------------ --------- --------- ---------
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------------
(UNAUDITED)
1997 1998
--------- ------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices....................... $ 23,438 $ 34,194
Marketing research services........ -- 8,019
--------- ------------
Total revenues....................... 23,438 42,213
Gross profit......................... 7,733 15,384
Operating expenses................... 6,440 11,991
Depreciation and amortization........ 1,058 2,377
--------- ------------
Operating income (loss).............. 235 1,016
Other income, net.................... -- --
Interest expense, net................ 543 1,216
--------- ------------
Income (loss) before income taxes.... (308) (200)
Income tax expense(1)................ (36) 260
--------- ------------
Net income (loss).................... $ (272) $ (460)
--------- ------------
--------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-------------
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................................................................ $ 5,288
Total assets............................................................................................. 101,736
Total debt (less current
maturities)............................................................................................ 51,257
Stockholders' equity..................................................................................... 30,573
<CAPTION>
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................................................................ $ 3,957
Total assets............................................................................................. 104,899
Total debt (less current
maturities)............................................................................................ 51,071
Stockholders' equity..................................................................................... 30,113
</TABLE>
- ------------------------------
(1) Through July 31, 1996, IQI had a fiscal year end of July 31. IQI operated as
a subchapter S-corporation through November 17, 1996, at which time it
became a C-corporation for tax purposes. In November 1996, IQI's fiscal year
was changed to December 31.
(2) Represents operations of IQI for the period from August 1, 1996 to December
31, 1996. Accounts include the acquisition of Lexi on November 22, 1996.
(3) Includes the acquisition of InterServ as of July 12, 1997.
86
<PAGE>
IQI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
HISTORICAL THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO HISTORICAL THREE MONTHS
ENDED
MARCH 31, 1997
IQI's revenues increased $18,775, or 80.1%, from $23,438 in 1997 to $42,213
in 1998. The increase was primarily due to the acquisition of InterServ (the
"InterServ Acquisition") in July 1997. Without InterServ's revenue contribution
of $17,070, revenues would have increased from $23,438 in 1997 to $25,143 in
1998, an increase of $1,705, or 7.3%. This increase was due to additional
revenue from existing and new clients in cellular telephone services, insurance
and financial services.
Gross profit earned on revenues increased $7,651, or 98.9%, from $7,733 in
1997 to $15,384 in 1998. As a percentage of revenues, gross profit in 1997 was
33.0% as compared to 36.4% in 1998. Without InterServ's gross margin
contribution of $6,284, gross margin would have increased from $7,733 in 1997 to
$9,100 in 1998, an increase of $1,367, or 17.7%. The increase in gross profit
was due to increased revenues and (i) a lower rate for telecommunications costs,
(ii) a shift to higher margin clients, and (iii) an increase in operating
efficiencies.
Operating expenses increased $5,551, or 86.2%, from $6,440 in 1997 to
$11,991 in 1998. The InterServ Acquisition contributed to this increase. As an
independent company in the first quarter of 1997, InterServ's operating expenses
were $3,506. Had InterServ's operating expenses been included with IQI's
operating expenses in the first quarter of 1997, operating expenses would have
increased from $9,946 in 1997 to $11,991 in 1998, an increase of $2,045, or
20.6%. This increase was due to the opening of two additional call center
facilities in 1997 and increases in information technology, finance, executive
and administrative staffing in order to accommodate actual and anticipated
revenue growth.
Depreciation and amortization increased $1,319, or 124.7%, from $1,058 in
1997 to $2,377 in 1998. Acquisition-related amortization increased $353 due to
the InterServ Acquisition. The $966 increase in depreciation and amortization
relates to the two new call center facilities opened in September and October
1997 and to increased capacity in existing call centers.
Interest expense increased $673, or 123.9%, from $543 in 1997 to $1,216 in
1998, primarily as a result of the InterServ Acquisition and the opening of two
new call center facilities in September and October 1997.
Income tax expense increased $296, from a benefit of $36 in 1997 to a
provision of $260 in 1998 due to a decrease in the pre-tax loss and state taxes
for InterServ.
Due to the factors described above, the net loss increased by $188 from $272
in 1997 to $460 in 1998.
HISTORICAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1996
IQI's revenues increased $71,033, or 113.1%, from $62,799 in 1996 to
$133,832 in 1997. The increase was primarily due to the acquisition of Lexi in
November 1996 (the "Lexi Acquisition") and the InterServ Acquisition in July
1997. In the period from November 22 to December 31, 1996, Lexi contributed
revenues of $2,803, as compared to Lexi's 1997 revenue contribution of $40,249.
In 1997, the five and one-half month revenue contribution from InterServ was
$26,434. Without Lexi's revenue contribution in 1996 and 1997, and without
InterServ's contribution in 1997, revenues would have increased from $59,996 in
1996 to $67,149 in 1997, an increase of $7,153, or 11.9%. This telemarketing
revenue growth was principally caused by increased volume generated by existing
clients including bank credit card issuers, regional and long distance telephone
service providers and cable television service providers.
87
<PAGE>
Gross profit earned on revenues increased $28,056, or 159.5%, from 1996. As
a percentage of revenues, gross profit in 1997 was 34.1% versus 28.0% in 1996.
The increase in gross profit was due in part to increased revenues as well as:
(i) operating efficiency improvements in the pay-for-performance programs,
especially certain programs for a large telecommunications client, and (ii) the
addition of higher margin inbound telemarketing business as a result of the
InterServ Acquisition. Partially offsetting the margin improvements were: (i)
price reductions granted to a major telecommunications client, (ii) higher
teleservices personnel costs in competitive labor markets, and (iii) new
facility start-up expenses in Port St. Lucie, Florida, and Fairmont, West
Virginia.
Operating expenses increased $18,387, or 102.6%, from $17,925 in 1996 to
$36,312 in 1997. The Lexi Acquisition and the InterServ Acquisition contributed
to this increase. In 1996, Lexi contributed operating expenses of $1,296, and in
1997, Lexi contributed operating expenses of approximately $13,055. In 1997,
InterServ contributed operating expenses of approximately $5,581. Without the
addition of Lexi in 1996 and 1997, and InterServ in 1997, operating expenses
would have increased from $16,629 in 1996 to $17,676, an increase of $1,047, or
6.3%. In addition to the acquisitions of Lexi and InterServ, the Company opened
two new call centers in 1997 in Port St. Lucie, Florida and Fairmont, West
Virginia, added to capacity in existing call centers, and added key corporate
personnel to assist with the management of the expanded business.
Depreciation and amortization increased from $1,815 in 1996 to $6,093 in
1997, an increase of $4,278, or 235.7%. The increase was principally due to the
addition of depreciation and amortization of tangible and intangible assets
acquired from Lexi and InterServ and to added depreciation associated with
$10,018 of capital expenditures. Goodwill amortization was $55 in 1996 and
increased to $1,592 in 1997.
Other income, net, decreased from $320 in 1996 to $0 in 1997. The 1996
amount was primarily interest income of $273 and management fee income of $61.
Interest expense increased by $3,042, from $584 in 1996 to $3,626 in 1997,
primarily due to increased borrowings. Long-term debt rose from $22,634 on
December 31, 1996 to $51,257 on December 31, 1997 primarily as a result of debt
associated with the InterServ Acquisition and the opening of two new call center
facilities in September and October 1997.
Income taxes decreased by $1,606, from $2,201 in 1996 to $595 in 1997. In
1996, IQI's change from an S-corporation to a C-corporation resulted in tax
charges of approximately $3,000.
Due to the factors described above, the net loss decreased from $4,619 in
1996 to $984 in 1997.
HISTORICAL FIVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO HISTORICAL FIVE
MONTHS ENDED DECEMBER 31, 1995
IQI's revenues increased $3,790, or 16.5%, from $22,966 in 1995 to $26,756
in 1996. These increased revenues relate primarily to the Lexi Acquisition.
Without the revenues of Lexi of $2,803 for the period from November 22 to
December 31, 1996, revenues would have increased by $987, or 4.3%, from $22,966
in 1996 to $23,953 in 1997. The increase in telemarketing revenue reflects
volume increases from major regional and long distance telecommunications
companies.
Gross profit earned on revenues decreased $756, or 11.0%, from the
comparable period in 1995. As a percentage of revenues, gross profit in 1996 was
22.8% versus 29.8% in 1995. The decrease in gross profit was principally due to:
(i) operations and quality problems associated with the start-up of IQI's
largest pay-for-performance program; (ii) start-up expenses for a new call
center facility in Mesquite, Texas; and (iii) price reductions granted to a
large bank credit card client.
Operating expenses increased by $4,026, or 85.0%, from $4,734 in 1995 to
$8,760 in 1996. Without the increase in operating costs and expenses of Lexi,
totaling $1,296 for the period from November 22 to December 31, 1996, this
increase would have been $2,730, or 57.7%, from $4,734 in 1995 to $7,464 in
1996.
88
<PAGE>
In 1996, the Company incurred additional expenses associated with its
recapitalization and the purchase of IQI shares by Thayer.
Depreciation and amortization increased $609, or 146.7%, from $415 in 1995
to $1,024 in 1996. Without the Lexi depreciation of $197 for the period from
November 22 to December 31, 1996, the increase would have been from $415 in 1995
to $827 in 1996, or 99.3%, primarily due to the addition of a new call center
facility in Mesquite, Texas. Goodwill amortization was $0 in 1995 and increased
to $55 in 1996 as a result of the Lexi Acquisition.
Other income, net, increased from $0 to $648 from 1995 to 1996. The 1996
amount was comprised primarily of interest income and management fee income.
Interest expense increased from $57 in 1995 to $450 in 1996, or $393.
Without the Lexi interest of $35 for the period from November 22 to December 31,
1996, the increase would have been from $57 in 1995 to $415 in 1996, or $358.
This increase includes interest on additional borrowings resulting from the
recapitalization of IQI and the purchase of IQI shares by Thayer.
Income taxes increased from $657 in 1995 to $1,794 in 1996 due to the change
in the Company's tax status from a subchapter S-corporation to a C-corporation
in November 1996.
Due to the factors described above, net income decreased from $985 in 1995
to a loss of $5,288 in 1996.
HISTORICAL FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO HISTORICAL FISCAL YEAR
ENDED JULY 31, 1995
IQI's revenues increased by $1,364, or 2.4%, from $56,179 in 1995 to $57,543
in 1996. The increase in telemarketing revenue reflects volume increases from
major regional and long distance telecommunications companies.
Gross profit earned on revenues decreased $1,373, or 7.5%, from $18,207 in
1995 to $16,834 in 1996. As a percentage of revenues, gross profit in 1996 was
29.3% versus 32.4% in 1995. The decrease in gross profit was primarily due to
price reductions granted to a large telecommunications client and a large bank
credit card issuer client.
Operating expenses decreased by $2,856, or 17.3%, from $16,444 in 1995 to
$13,588 in 1996. Included in operating costs and expenses were officer's
salaries of $7,063 in 1995 as compared to $2,417 in 1996. Offsetting this $4,646
decrease in officer's salaries was an increase in operating expenses of $933.
Most of this increase was the result of the 1996 opening of three new call
center facilities located in Pennsylvania, Minnesota and Ontario, Canada.
Depreciation and amortization increased by $458, or 53.5%, from $856 in 1995
to $1,314 in 1996. This increase was the result of capital spending related to
the opening of three new call centers facilities in 1996 and the full-year
impact of two new call center facilities opened in 1995.
Other income, net, increased from $437 to $877 from 1995 to 1996. These
amounts include primarily interest income and management fee income.
Interest expense increased by $118, from $72 in 1995 to $190 in 1996 as a
result of increased debt associated with the opening of the new call center
facilities in 1996.
Due to the factors described above, income taxes decreased by $297, from
$314 in 1995 to $17 in 1996 and net income increased by $1,644, or 171.6%, from
$958 in 1995 to $2,602 in 1996.
AS ADJUSTED RESULTS OF OPERATIONS
The historical results of IQI include the Lexi Acquisition and the InterServ
Acquisition. These acquisitions significantly affected IQI's operating results.
Accordingly, IQI believes it is more meaningful to compare the results of
operations on an "as adjusted" basis (i) for the three months ended March 31,
1998 to the results of operations for the three months ended March 31, 1997,
assuming the InterServ Acquisition occurred on January 1, 1997 and (ii) for the
year ended December 31, 1997 to the results of
89
<PAGE>
operations for the year ended December 31, 1996, assuming that the InterServ
Acquisition and the Lexi Acquisition had both occurred on January 1, 1996.
ACTUAL THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO AS ADJUSTED THREE MONTHS
ENDED MARCH 31, 1997
For purposes of additional analysis, set forth in the table below are
adjusted results of operations for the three months ended March 31, 1997
prepared on an "as adjusted" basis, and the actual results of operations for the
three months ended March 31, 1998. The "as adjusted" results are not necessarily
indicative of the results of operations that would have occurred had the
InterServ Acquisition occurred on January 1, 1997 or of results of operations
which may occur in any future period.
<TABLE>
<CAPTION>
AS ADJUSTED
THREE MONTHS ACTUAL THREE
ENDED MARCH MONTHS ENDED
31, 1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Teleservices................................................................................... $ 26,461 $ 34,194
Marketing research services.................................................................... 8,216 8,019
------- -------
Total revenues................................................................................... 34,677 42,213
Gross profit..................................................................................... 11,536 15,384
Operating expenses............................................................................... 9,946 11,991
Depreciation and amortization.................................................................... 1,752 2,377
------- -------
Operating income (loss).......................................................................... (162) 1,016
Interest expense, net............................................................................ 968 1,216
------- -------
Loss before provision for income taxes........................................................... (1,130) (200)
Income tax expense............................................................................... 161 260
------- -------
Net loss......................................................................................... $ (1,291) $ (460)
------- -------
------- -------
</TABLE>
IQI's revenues, as adjusted, increased $7,536, or 21.7%, from $34,677 in
1997 to $42,213 in 1998. This increase includes $2,707 attributable to
additional telemarketing revenues from both existing and new clients in the
communications, cable television and energy industries. Market research revenue
declined $197 due to spending cutbacks by some large clients. Outbound revenue
increased $5,026 from existing and new clients in regional telephone services,
insurance and financial services.
Gross profit, as adjusted, increased $3,848, or 33.4%, from $11,536 in 1997
to $15,384 in 1998. As a percentage of revenues, gross profit in 1998 was 36.4%
as compared to 33.3% in 1997. The increase in gross profit was due to increased
revenues and (i) a lower rate for telecommunications costs, (ii) a shift to
higher margin clients, and (iii) an increase in operating efficiencies.
Operating expenses, as adjusted, increased $2,046, or 20.6%, from $9,946 in
1997 to $11,991, in 1998. IQI opened two additional call center facilities in
September and October 1997, and increased its staffing in its information
technology, finance, executive, and administrative departments in order to
accommodate the actual and anticipated revenue growth.
Depreciation and amortization, as adjusted, increased $625, or 35.7%, from
$1,752 in 1997 to $2,377 in 1998. The increase in depreciation and amortization
relates to the two new call center facilities opened in 1997 and increased
capacity in existing call centers.
Interest expense, as adjusted, increased $248, or 25.6%, from $968 in 1997
to $1,216 in 1998, relating to the opening of the two new call center facilities
in September and October, 1997.
Income tax expense, as adjusted, increased $99 from $161 in 1997 to $260 in
1998.
Due to the factors described above, the net loss decreased by $831, from
$1,291 in 1997 to $460 in 1998.
90
<PAGE>
AS ADJUSTED YEAR ENDED DECEMBER 31, 1997 COMPARED TO AS ADJUSTED YEAR ENDED
DECEMBER 31, 1996
For purposes of additional analysis, set forth in the table below are
adjusted results of operations for the years ended December 31, 1996 and 1997
prepared on an "as adjusted" basis. The "as adjusted" results are not
necessarily indicative of the results of operations that would have occurred had
the acquisitions been made on such date or of results of operations which may
occur in any future period.
<TABLE>
<CAPTION>
UNAUDITED "AS
ADJUSTED"
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Teleservices............................................................................ $ 110,444 $ 122,010
Marketing research services............................................................. 38,854 37,143
---------- ----------
Total revenues............................................................................ 149,298 159,153
Gross profit.............................................................................. 42,019 54,178
Operating expenses........................................................................ 39,527 43,486
Depreciation and amortization............................................................. 6,312 7,533
---------- ----------
Operating income.......................................................................... (3,820) 3,159
Other income, net......................................................................... 717 --
Interest expense.......................................................................... 2,578 4,512
---------- ----------
Loss before provision for income taxes.................................................... (5,681) (1,353)
Income tax expense........................................................................ 2,405 780
---------- ----------
Net loss.................................................................................. $ (8,086) $ (2,133)
---------- ----------
---------- ----------
</TABLE>
IQI's total revenues, as adjusted, increased by $9,855, or 6.6%, from
$149,298 in 1996 to $159,153 in 1997. The increase was due to growth in
telemarketing revenues of $11,566, partially offset by a $1,711 decrease in
marketing research revenues. Telemarketing revenue growth was principally caused
by increased volume generated by existing clients, including bank credit card
issuers, regional and long distance telephone service providers and cable
television service providers. The decrease in marketing research revenues was
principally due to a budget reduction implemented by a major telecommunications
client, partially offset by the addition of a major new client.
Gross profit, as adjusted, increased $12,159, or 28.9%, from $42,019 in 1996
to $54,178 in 1997. As a percentage of revenues, gross profit in 1997 was 34.0%
versus 28.1% in 1996. The increase in gross profit was due in part to increased
revenues, as well as due to: (i) operating efficiency improvements in the pay-
for-performance programs, particularly certain programs for a large
telecommunications client; and (ii) improved pricing on new inbound
telemarketing programs. Partially offsetting the margin improvement was: (i)
price reductions granted to a major telecommunications client, (ii) higher TSR
costs in competitive labor markets; and (iii) new facility start-up expenses in
Port St. Lucie, Florida and Fairmont, West Virginia.
Operating expenses, as adjusted, increased by $3,959, or 10%, from 1996 to
1997. As a percentage of revenue, operating expenses increased from 26.5% in
1996 to 27.3% in 1997. In 1996, operating expenses included approximately $3,300
of non-recurring charges, including acquisition-related stay-on bonuses and
compensation of approximately $2,150, legal and audit fees of $650 and software
licensing expenses of $500. In 1997, operating expenses included $443 of legal
and accounting fees for Lexi and pre-acquisition costs of $1,166 incurred by
InterServ. Without these non-recurring expenses in 1996 and 1997, operating
expenses would have increased from $36,227 in 1996 to $41,877 in 1997, an
increase of $5,650, or 15.6%. Operating expenses in 1997 include costs
associated with the opening of two new call center facilities in
91
<PAGE>
Port St. Lucie, Florida and Fairmont, West Virginia, the addition of capacity in
existing call center facilities, and the addition of key personnel and systems
to assist with the management of the expanded business.
Depreciation and amortization, as adjusted, increased by $1,221, or 19.3%,
from $6,312 in 1996 to $7,533 in 1997. This increase was primarily due to
additional depreciation related to the increase in capital spending for two new
call centers, expanding call center capacity and information systems.
Interest expense, as adjusted, increased by $1,934 or 75.0%, from $2,578 in
1996 to $4,512 in 1997. This increase was primarily due to the increase in
borrowings for call center and capacity expansion.
Other income, net, as adjusted, decreased by $717 in 1997. The 1996 amount
was comprised of various items, including a non-recurring gain from the sale of
an InterServ business of $439, management fee income of $61, and interest income
of $273, and was partially offset by other expenses of $56.
Income taxes, as adjusted, decreased by $1,625, from $2,405 in 1996 to $780
in 1997.
Due to the factors described above, net loss, as adjusted, decreased by
$5,953, or 73.6%, from $8,086 in 1996 to $2,133 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, IQI's primary sources of liquidity have been cash flow from
operating activities, bank borrowings to fund acquisitions and working capital,
and investments by Thayer. In the three months ended March 31, 1998, cash
provided by operations was $1,115. Such cash funded investment activities of
$2,158 for infrastructure development and capacity expansion in existing call
center facilities. In the year ended December 31, 1997, IQI's cash provided by
operations was $2,016. Investment activities of $10,018 for purchases of fixed
assets and $15,776 for the InterServ Acquisition (net of cash acquired) were
funded by bank borrowings and capital contributions by Thayer. Management
believes that IQI will generate operating cash and have sufficient borrowing
capacity under its existing credit facility to finance its 1998 operating plan
and capital expenditures.
IQI's existing credit facility of $53.0 million, which consists of a $35.0
million term loan and revolving loans of up to $18.0 million, contains various
covenants which limit, among other things, IQI's indebtedness, capital
expenditures, payments of dividends, and requires IQI to meet certain financial
covenants. As of December 31, 1997, IQI was in default of certain of its debt
covenants. The credit facility was amended on March 30, 1998 to, among other
things, adjust certain of the financial covenants. As a condition to granting
the amendment, IQI's Lenders requested that Thayer provide IQI with a
subordinated loan in the amount of $2.0 million. This loan was funded on April
16, 1998. At March 31, 1998, IQI was in compliance with its debt covenants.
IQI operates in a fast-growing, highly competitive industry. As such, IQI
opened two new call centers in 1997, in Fairmont, West Virginia and Port St.
Lucie, Florida. In 1998, IQI anticipates adding inbound telemarketing capability
in both facilities. In addition, IQI is upgrading its inbound telemarketing
systems in Atlanta, and intends to add outbound telemarketing capacity in other
existing facilities during 1998. If revenue grows at the rate anticipated by
management, IQI will need to open additional call center facilities in 1999.
Additional facilities will have furniture, equipment and technological
requirements consistent with IQI's existing facilities.
Management continues to pursue growth opportunities through acquisitions,
although there can be no assurances that any proposed acquisition will be
successfully completed. In this regard, IQI entered into the Merger Agreement
with ATC. Upon consummation of the Merger, the Lenders will increase IQI's
existing credit facility to approximately $65.0 million and Thayer will fund
approximately $4.0 million in additional subordinated indebtedness. See "Other
Transactions Related to the Merger--New Senior Loan."
As part of IQI's management of financial risk, IQI enters into transactions
that involve contracts and financial instruments with off-balance sheet risk
involving interest rate collar agreements. The current hedging agreement had a
notional principal amount of $18,850 at December 31, 1997 and terminates on
92
<PAGE>
March 31, 2000. The effect on interest rates in 1997 was immaterial. The cost to
terminate the contract on December 31, 1997 would have been approximately $109.
YEAR 2000 COMPLIANCE
IQI could be adversely affected if its computer systems and those of its
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. IQI is taking steps that it believes
are reasonably designed to address these issues and to obtain reasonable
assurances that comparable steps are being taken by each of IQI's service
providers. Management believes such efforts and any remedies will be completed
by 1999 and all expenses incurred in assessing and remedying this issue will be
expensed as incurred and are not expected to be material to the consolidated
financial statements.
HISTORICAL CASH FLOW INFORMATION
The following sets forth a discussion of certain cash flow data for the
three months ended March 31, 1998 as compared to the three months ended March
31, 1997, the year ended December 31, 1997 as compared to the year ended
December 31, 1996 and the fiscal year ended July 31, 1996 as compared to the
fiscal year ended July 31, 1995.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Cash provided by operating activities increased by $2,204, from a use of
$1,089 in 1997 to $1,115 in 1998, resulting from an increase in accounts
payable, offset by increases in accounts receivable and other working capital
accounts. Cash used in investing activities increased by $1,098, from $1,060 in
1997 to $2,158 in 1998. The increase was used in capital expenditures for
infrastructure development and capacity expansion in existing call center
facilities. Cash from financing activities declined $1,537, from a source of
$1,249 in 1997 to a use of $288 in 1998. In 1998, IQI paid down capital leases
and notes payable. For the reasons described above, cash and cash equivalents
increased by $2,600, from $1,357 at March 31, 1997 to $3,957 at March 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Operating activities resulted in a use of cash of $2,472 in 1996 and a
source of cash of $2,016 in 1997. The increase of $4,488 was primarily due to a
reduction in IQI's net loss from $4,619 in 1996 to $984 in 1997, partially
offset by increases in other costs and working capital items. Cash used in
investing activities increased by $19,824 from $5,970 in 1996 to $25,794 in
1997. This increase includes the purchase of InterServ, net of cash acquired, of
$15,776, and an increase in capital expenditures of $4,048. Cash provided by
financing activities increased by $22,649 from $4,156 in 1996 to $26,805 in
1997, due primarily to increases in net borrowings to finance the InterServ
Acquisition. For the reasons described above, cash and cash equivalents
increased from $2,250 at December 31, 1996 to $5,288 at December 31, 1997.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Cash provided by operating activities increased by $2,547 from $368 in 1995
to $2,915 in 1996, resulting primarily from a reduction in officer's
compensation of $4,614 from 1995 to 1996, partially offset by increases in other
costs and working capital items. Cash used in investing activities increased by
$4,012 from $1,846 in 1995 to $5,858 in 1996. This increase is the result of a
loan to the sole shareholder of $2,370 to purchase a call center facility in Ft.
Worth, Texas, and capital expenditures of $1,642. Cash from financing activities
decreased by $462 from $2,114 in 1995 to $1,652 in 1996, due to an increase of
principal payments of debt of $2,447, partially offset by proceeds totaling
$1,687 from a sale-leaseback of a call center facility. For the reasons
described above, cash and cash equivalents decreased from $1,415 at December 31,
1995 to $127 at December 31, 1996.
93
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited Pro Forma
Financial Data") of New ATC have been derived by the application of pro forma
adjustments to the historical financial statements of IQI and ATC for the
periods indicated. The pro forma adjustments are described in the accompanying
notes. The historical IQI data for the year ended December 31, 1997 and the
historical InterServ data for the six months and eleven days ended July 11, 1997
have been derived from the audited financial statements of such companies which
have been included elsewhere in this Joint Proxy Statement/Prospectus. The
historical ATC data for the twelve months ended December 31, 1997 have been
derived from the audited financial statements for the fiscal year ended June 30,
1997, adjusted to a calendar year basis using the unaudited financial data for
the six-month periods ended December 31, 1997 and 1996, all of which are
included elsewhere in this Joint Proxy Statement/Prospectus. The historical IQI
data and historical ATC data for the three months ended March 31, 1998 have been
derived from the unaudited financial statements of such companies, which have
been included elsewhere in this Joint Proxy Statement/Prospectus and, in the
opinion of management of such companies, include all adjustments, consisting
only of normal recurring adjustments, necesary for a fair presentation of the
results for the unaudited periods.
The unaudited pro forma statement of operations data for the three months
ended March 31, 1998 and the year ended December 31, 1997 give effect to the
Merger and the related transactions described under the heading "Other
Transactions Related to the Merger" as if they had occurred at the beginning of
the periods presented. The unaudited pro forma statement of operations data for
the year ended December 31, 1997 also gives effect to the InterServ Acquisition
as if it had occurred on January 1, 1997. The unaudited pro forma balance sheet
data as of March 31, 1998 give effect to the Merger and its related transactions
as if such transactions had occurred on such date. The Unaudited Pro Forma
Financial Data are provided for informational purposes only and do not purport
to represent the results of operations or financial position of New ATC had such
transactions in fact occurred on such dates, nor do they purport to be
indicative of the financial position or results of operations as of any future
date or for any future period.
The Unaudited Pro Forma Financial Data and accompanying notes should be read
in conjunction with the financial statements and accompanying notes thereto and
the other financial information included elsewhere in this Joint Proxy
Statement/Prospectus.
94
<PAGE>
NEW ATC
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
IQI
-----------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------- ATC
HISTORICAL INTERSERV(1) OTHER AS ADJUSTED HISTORICAL
----------- ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Teleservices......................................... $ 115,609 $ 6,401 $ -- $ 122,010 $ 89,610
Marketing research services.......................... 18,223 18,920 -- 37,143 --
----------- ------------ ------ ------------ -----------
Total revenues....................................... 133,832 25,321 -- 159,153 89,610
Gross profit........................................... 45,642 8,536 -- 54,178 23,900
Operating expenses..................................... 36,312 8,340 (588)(2) 43,486 25,625
(578)(2)
Depreciation and amortization.......................... 6,093 936 504(3) 7,533 3,981
----------- ------------ ------ ------------ -----------
Operating income (loss)................................ 3,237 (740) 662 3,159 (5,706)
Interest expense, net.................................. 3,626 221 665(4) 4,512 640
----------- ------------ ------ ------------ -----------
Loss before provision for income taxes................. (389) (961) (3) (1,353) (6,346)
Income tax provision (benefit)......................... 595 220 (35)(5) 780 (2,015)
----------- ------------ ------ ------------ -----------
Net income (loss)...................................... $ (984) $ (1,181) $ 32 $ (2,133) $ (4,331)
----------- ------------ ------ ------------ -----------
----------- ------------ ------ ------------ -----------
Net loss per share..................................... $ (0.04) $ (0.07) $ (0.21)
----------- ------------ -----------
----------- ------------ -----------
Weighted average shares
outstanding(9)....................................... 27,233 29,259 20,905
----------- ------------ -----------
----------- ------------ -----------
<CAPTION>
MERGER NEW ATC
ADJUSTMENTS PRO FORMA
------------- -----------
<S> <C> <C>
Revenues:
Teleservices......................................... $ -- $ 211,620
Marketing research services.......................... -- 37,143
------------- -----------
Total revenues....................................... -- 248,763
Gross profit........................................... -- 78,078
Operating expenses..................................... -- 69,111
Depreciation and amortization.......................... 1,157(6) 12,671
------------- -----------
Operating income (loss)................................ (1,157) (3,704)
Interest expense, net.................................. 397(7) 5,549
------------- -----------
Loss before provision for income taxes................. (1,554) (9,253)
Income tax provision (benefit)......................... (159)(8) (1,394)
------------- -----------
Net income (loss)...................................... $ (1,395) $ (7,859)
------------- -----------
------------- -----------
Net loss per share..................................... $ (0.16)
-----------
-----------
Weighted average shares
outstanding(9)....................................... 50,164
-----------
-----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Statements of Operations.
95
<PAGE>
NEW ATC
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
---------------------- MERGER NEW ATC PRO
IQI ATC ADJUSTMENTS FORMA
---------- ---------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Teleservices............................................................... $ 34,194 $ 21,125 $ -- $ 55,319
Marketing research services................................................ 8,019 -- -- 8,019
---------- ---------- ----- -----------
Total revenues........................................................... 42,213 21,125 -- 63,338
Gross profit................................................................. 15,384 5,391 -- 20,775
Operating expenses........................................................... 11,991 5,484 -- 17,475
Depreciation and amortization................................................ 2,377 1,090 253(6) 3,720
---------- ---------- ----- -----------
Operating income (loss)...................................................... 1,016 (1,183) (253) (420)
Interest expenses, net....................................................... 1,216 210 99(7) 1,525
---------- ---------- ----- -----------
Loss before provision for income taxes....................................... (200) (1,393) (352) (1,945)
Income tax provision (benefit)............................................... 260 (457) (40)(8) (237)
---------- ---------- ----- -----------
Net loss..................................................................... $ (460) $ (936) $ (312) $ (1,708)
---------- ---------- ----- -----------
---------- ---------- ----- -----------
Net loss per share........................................................... $ (0.02) $ (0.04) $ (0.03)
---------- ---------- -----------
---------- ---------- -----------
Weighted average shares outstanding (9)...................................... 29,869 21,478 51,347
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Statements of Operations.
96
<PAGE>
NEW ATC
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) The InterServ Acquisition occurred on July 12, 1997. This data represents
the historical results of operations of InterServ for the period from
January 1, 1997 through July 11, 1997.
(2) In connection with the InterServ Acquisition, during the year ended December
31, 1997, InterServ incurred certain non-recurring expenses. These expenses
have been deducted for purposes of the Unaudited Pro Forma Financial Data.
These expenses include:
(a) Transaction expenses incurred by InterServ in connection with the
InterServ Acquisition totaling approximately $0.6 million.
(b) Expenses relating to the vesting of stock options to purchase shares of
InterServ totaling approximately $0.6 million.
(3) Had the InterServ Acquisition occurred on January 1, 1997, amortization of
goodwill would have increased by approximately $0.5 million for the year
ended December 31, 1997.
(4) In connection with the InterServ Acquisition, IQI incurred approximately
$22.0 million of debt. Had such debt been incurred as of January 1, 1997,
interest would have increased by approximately $0.7 million for the year
ended December 31, 1997.
(5) Reflects adjustment to income tax provision as a result of the pro forma
adjustments described in items (2) and (4) above.
(6) Had the Merger occurred at the beginning of the periods presented,
amortization of goodwill would have increased as follows:
<TABLE>
<S> <C> <C> <C>
Additional goodwill resulting from Merger............ $ 21,349
Additional goodwill related to adjustment to deferred
tax assets......................................... 1,500
Additional goodwill related to anticipated exit costs
resulting from the Merger restructuring
liabilities........................................ 3,908
Additional goodwill related to stock options of
ATC................................................ 2,090
Additional goodwill related to transaction costs..... 2,500
-----------
Total increase to goodwill........................... 31,347
Estimated life....................................... 25 years
-----------
Annual amortization of additional goodwill........... $ 1,254
-----------
-----------
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER ENDED MARCH 31,
31, 1997 1998
----------- ---------------
<S> <C> <C> <C>
Amortization of additional goodwill.................. $ 1,254 $ 314
Actual amortization of goodwill recorded by ATC...... (97) (61)
----------- -----
Net increase in amortization of goodwill............. $ 1,157 $ 253
----------- -----
----------- -----
</TABLE>
(7) Concurrent with the Merger, IQI will enter into a new loan agreement with
its lenders and will borrow an additional $3.3 million. Thayer will provide
subordinated financing of $3.3 million to New ATC. Proceeds from these
financing transactions will be used to refinance $5.2 million of existing
indebtedness of Advanced and repay ATC's term loan of $0.4 million. As a
result, pro forma cash and long-term indebtedness will each increase by $1.0
million. Had such debt transactions occurred at the beginning of the periods
presented, interest expense would have increased and deferred financing
97
<PAGE>
NEW ATC
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
costs associated with the issuance of the debt would have been amortized
during the period. Additionally, had the Chairman of ATC repaid borrowings
of $2.0 million at the beginning of the periods presented, interest income
would have decreased. Total interest expense, net, would have increased as
follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
AMOUNT --------------------------------
OUTSTANDING YEAR ENDED THREE MONTHS
AVERAGE AT MARCH DECEMBER 31, ENDED MARCH 31,
INTEREST RATE 31, 1998 1997 1998
--------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Additional bank loan.................. 8.25% $ 3,252 $ 268 $ 67
Additional subordinated indebtedness.. 12.00 3,299 396 99
Refinance indebtedness of Advanced.... 8.75 (5,162) (452) (113)
Repay ATC term loan................... 9.00 (389) (35) (9)
Additional amortization of deferred
financing costs..................... 121 30
----- -----
Increase in interest expense.......... $ 298 $ 74
Decrease in interest income related to
repayment of borrowings by Chairman
of ATC.............................. 99 25
----- -----
Increase in interest expense, net..... $ 397 $ 99
----- -----
----- -----
</TABLE>
(8) As a result of the pro forma adjustments described in items (6) and (7)
above, New ATC would record an income tax benefit of $0.2 million for the
year ended December 31, 1997 and $40,000 for the three months ended March
31, 1998.
(9) The weighted average shares outstanding for IQI have been adjusted to
reflect the effects of the Merger by multiplying the historical weighted
average shares by the Exchange Ratio of 9.7513. The weighted average shares
do not include common stock equivalents because their effect would be anti-
dilutive.
98
<PAGE>
NEW ATC
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------- MERGER
IQI ATC ADJUSTMENTS
------------------- ------------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 3,957 $ 55 $ (2,500)(1)
2,000(5)
1,000(3)
(500)(4)
Accounts receivable, net............................... 30,308 17,052 --
Other current assets................................... 3,928 5,593 (2,000)(5)
-------- ------- --------------
Total current assets............................... 38,193 22,700 (2,000)
Equipment, furniture and leaseholds, net............... 22,149 14,311 --
Goodwill and other intangibles, net.................... 43,100 1,662 21,349(1)
2,500(1)
2,090(1)
1,500(2)
3,908(6)
Deferred financing costs, net.......................... 1,177 -- 500(4)
188(7)
Other assets........................................... 280 6,422 (1,500)(2)
-------- ------- --------------
Total assets........................................... $ 104,899 $ 45,095 $ 28,535
-------- ------- --------------
-------- ------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses................ $ 14,355 $ 7,125 $ 3,908(6)
Current portion of long-term debt.................... 350 1,456 (389)(3)
Short term debt...................................... -- 5,162 (5,162)(3)
Other current liabilities............................ 6,479 3,675 --
-------- ------- --------------
Total current liabilities.......................... 21,184 17,418 (1,643)
Long-term obligations (less current maturities)...... 51,071 3,706 3,252(3)
3,299(3)
Other liabilities.................................... 2,531 -- --
-------- ------- --------------
Total liabilities...................................... 74,786 21,124 4,908
Shareholders' Equity:
Preferred stock...................................... -- -- --
Common stock......................................... 3 218 299(1)
(3)(8)
Treasury stock....................................... -- (1,421) --
Additional paid-in-capital........................... 28,321 18,279 23,140(1)
6,898(8)
188(7)
Cumulative translation adjustment.................... 13 -- --
Retained earnings.................................... 1,776 6,895 (6,895)(8)
-------- ------- --------------
Total shareholders' equity............................. 30,113 23,971 23,627
-------- ------- --------------
Total liabilities and shareholders' equity............. $ 104,899 $ 45,095 $ 28,535
-------- ------- --------------
-------- ------- --------------
<CAPTION>
NEW ATC
PRO FORMA COMBINED
-------------------
<S> <C>
ASSETS
Cash and cash equivalents.............................. $ 4,012
Accounts receivable, net............................... 47,360
Other current assets................................... 7,521
--------
Total current assets............................... 58,893
Equipment, furniture and leaseholds, net............... 36,460
Goodwill and other intangibles, net.................... 76,109
Deferred financing costs, net.......................... 1,865
Other assets........................................... 5,202
--------
Total assets........................................... $ 178,529
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses................ $ 25,388
Current portion of long-term debt.................... 1,417
Short term debt...................................... --
Other current liabilities............................ 10,154
--------
Total current liabilities.......................... 36,959
Long-term obligations (less current maturities)...... 61,328
Other liabilities.................................... 2,531
--------
Total liabilities...................................... 100,818
Shareholders' Equity:
Preferred stock...................................... --
Common stock......................................... 517
Treasury stock....................................... (1,421)
Additional paid-in-capital........................... 76,826
Cumulative translation adjustment.................... 13
Retained earnings.................................... 1,776
--------
Total shareholders' equity............................. 77,711
--------
Total liabilities and shareholders' equity............. $ 178,529
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheets.
99
<PAGE>
NEW ATC
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(1) In connection with the Merger, each share of IQI Common Stock issued and
outstanding immediately prior to the Merger will be converted into the right
to receive 9.7513 shares of ATC Common Stock. Had the Merger occurred on
March 31, 1998, ATC would have issued 29,870,338 shares of common stock,
$.01 par value.
The Merger Price is assumed to be $45.3 million (assuming a per share value
of $2.11 and 21,478,624 shares outstanding as of April 7, 1998, the date of
the Merger Agreement). The book value of net assets acquired was $24.0
million at March 31, 1998, resulting in an excess of purchase price over the
tangible book value of the assets acquired and liabilities assumed of $21.3
million. Goodwill also includes the intrinsic value of ATC's stock options
of $2.1 million.
In addition, costs associated with the Merger are estimated to be
approximately $2.5 million.
As a result of the above transactions, the following entries would have been
made at March 31, 1998:
<TABLE>
<S> <C>
Goodwill associated with purchase price............................ $ 21,349
Goodwill associated with transaction costs......................... 2,500
Goodwill associated with ATC stock options......................... 2,090
Cash............................................................... (2,500)
Common Stock ($.01 par value)...................................... 299
Additional Paid-in Capital......................................... 23,140
</TABLE>
(2) Other assets of ATC include $6.0 million of deferred tax assets. The fair
value of these deferred tax assets are estimated to be $4.5 million. The
reduction of $1.5 million in the book value to arrive at estimated fair
value has been included as goodwill.
(3) Concurrent with the Merger, IQI will enter into a new loan agreement with
its lenders and borrow an additional $3.3 million. In addition, Thayer has
agreed to provide subordinated financing of up to $6.0 million at the
closing of the Merger (for a cumulative commitment of $8.0 million). At
March 31, 1998, financing required from Thayer would be $3.3 million.
Proceeds from these financing transactions will be used to refinance $5.2
million of existing indebtedness of Advanced and repay ATC's term loan of
$0.4 million. As a result, pro forma cash and long term indebtedness will
each increase by $1.0 million as follows:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from additional bank loan................................................. $ 3,252
Proceeds from additional subordinated indebtedness................................. 3,299
Refinance indebtedness of Advanced................................................. (5,162)
Repay ATC term loan................................................................ (389)
---------
Net increase in debt............................................................... $ 1,000
---------
---------
</TABLE>
(4) In connection with the additional bank loan, IQI incurred approximately $0.5
million of additional financing costs. These costs have been included as
deferred financing costs and will be amortized over the term of the
additional bank loan (six years).
(5) The Chairman of ATC had outstanding borrowings from ATC of approximately
$3.7 million at March 31, 1998, including accrued interest. Pursuant to the
Merger Agreement, approximately
100
<PAGE>
NEW ATC
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
$2.0 million will be repaid on June 30, 1998 and the remaining principal
balance and accrued interest is due on March 31, 1999.
(6) In connection with the Merger, New ATC anticipates that it will incur
certain exit costs totaling $3.9 million. These exit costs include estimates
for costs to consolidate, costs to relocate offices and employees, costs to
close certain locations, severance and other costs. An accrual for these
expenses has been included in Accrued Expenses and Goodwill. However, the
unaudited pro forma condensed combined statements of operations do not
reflect any anticipated benefits from these exit costs because such benefits
will be realized over a period of several quarters beyond the date the exit
costs are incurred.
(7) In connection with the financing provided by Thayer, Thayer received
warrants to purchase up to 1.1 million shares of common stock of New ATC at
an exercise price of $1.96 per share. The fair market value of the warrants
is approximately $0.2 million at March 31, 1998. Such fair market value has
been included as deferred financing costs and will be amortized over five
years.
(8) As a result of the Merger, the equity of IQI and ATC will be combined. As a
result, the following entries will be made:
<TABLE>
<S> <C>
Eliminate IQI's common stock...................................... $ (3)
Eliminate ATC's retained earnings................................. (6,895)
Additional paid-in capital........................................ 6,898
</TABLE>
101
<PAGE>
INFORMATION CONCERNING ATC
OVERVIEW
ATC is a leading provider of outsourced telecommunications-based marketing,
customer service and call center management services in the United States. ATC
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. ATC 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. ATC's management believes these advantages have
contributed to ATC's record of client retention and its ability to attract new
business.
SERVICES AND STRATEGY
ATC 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, ATC 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 six fully-automated call center
facilities comprising approximately 3,185 workstations located around Dallas,
Chicago and Joplin, Missouri. Seven Rockwell Galaxy GVS 3000 Automatic Call
Distributors interfaced with multiple Data General System 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 ATC 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".
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<PAGE>
ATC 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, ATC
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. ATC'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 ATC to perform an assortment of duties when handling quantitatively and
qualitatively through multiple processes with different reporting lines in ATC.
ATC and its clients monitor the client's standards 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. ATC 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. ATC 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.
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. ATC 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 a integral, ongoing element in their core marketing and/or
customer service strategy. ATC 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. ATC 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
ATC's services to meet those needs.
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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 technology.
The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 194
(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 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.
ATC believes that it is in compliance with the TCPA and the FCC rules
thereunder and with the FTC's rules under the TCFAPA. ATC 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. ATC cannot predict whether this
legislation will be enacted and what effect, if any, it would have on ATC or its
industry.
The industries served by ATC are also subject to varying degrees of
government regulation. ATC works closely with its clients and their advisors to
develop the scripts to be used by its agents in connection with making consumer
contacts. ATC generally requires its clients to indemnify it against claims and
expenses arising with respect to ATC's services performed on its clients'
behalf. To date, ATC has not been held liable for a client's regulatory
noncompliance.
REVENUES AND SEASONAL NATURE OF BUSINESS
ATC'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, ATC
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. ATC'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 ATC in fiscal 1997: AT&T and American Express. In fiscal
1996, ten percent or more of ATC's gross revenues were generated by each of the
following clients: AT&T, American Express, Pacific Bell and U S West.
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PERSONNEL AND TRAINING
ATC believes a key component of its success is the quality of its employees.
Therefore, ATC is continually refining its systematic approach to hiring,
training and managing qualified personnel. ATC seeks to locate call centers in
communities with a relatively low cost of living and a large pool of qualified
and motivated workers in an effort to lower its operating costs and attract a
high quality work force. ATC believes that its relatively high proportion of
full-time employees provides a more stable work force and reduces ATC's
recruiting and training expenditures. At each call center, ATC utilizes a
management structure designed to ensure that its telephone service
representatives are properly supervised, managed and developed.
QUALITY ASSURANCE
Because ATC's services involve direct contact with its client's customers
and sale prospects, ATC's reputation for quality service is critical in
acquiring and retaining clients. Therefore, ATC and its clients monitor ATC's
telephone service representatives for strict compliance with the client's script
and to maintain quality and efficiency. ATC also regularly measures the quality
of its services by benchmarking such factors as sales per hour and level of
customer complaints. ATC's information systems enable ATC to provide clients
with reports on a real-time basis as to the status of an ongoing campaign and
can transmit summary data and captured information electronically to clients.
Access to this data enables ATC's clients to modify or enhance an ongoing
campaign to improve its effectiveness.
Since ATC's telephone service representatives deal directly with its
clients' customers and sales prospects, ATC places a heavy emphasis on its
training and quality control process. ATC has a training staff at each facility
dedicated to conducting both primary and recurrent training for all telephone
service representatives. ATC employs a quality control staff at each facility
that measures quality on both a quantitative and qualitative basis. This
attentiveness to training and customer service enables ATC's telephone service
representatives to perform a variety of highly complex and proprietary functions
for its clients.
EMPLOYEES
As of March 31, 1998, ATC employed 3,723 persons, including 3,407
teleservices agents. To date ATC has not experienced any material difficulty in
attracting and retaining qualified personnel in the geographic regions where it
currently conducts business. ATC believes its relationship with its employees is
good.
HISTORICAL DEVELOPMENTS
ATC 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 ATC was formally changed to ATC Communications Group, Inc. on April 24,
1996. ATC'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 ATC'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, ATC divested of its
direct mail publishing subsidiary, and in the year ended June 30, 1995, divested
of its mailing list services business, thereby enabling ATC 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 ATC's consolidated revenues from both
continuing and discontinued operations for the nine months ended March 31, 1998
and each of the years ended June 30, 1997, 1996 and 1995. Management believes
this shift in strategy has enabled ATC to grow revenues and improve
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<PAGE>
operating results, while positioning ATC to compete effectively as a provider of
telecommunications-based marketing and information services.
FACILITIES
ATC's principal executive offices in Dallas, Texas are occupied pursuant to
a lease expiring November 30, 2001 and contain approximately 4,170 square feet.
ATC's operational and administrative headquarters are located in a 23,333 square
foot building in Irving, Texas which is leased by ATC. This lease expires on
December 31, 2003.
ATC currently performs its services in the six call center facilities listed
below. All of ATC's call center facilities are occupied pursuant to various
lease arrangements, except the Chicago facility, which is owned by a client and
is occupied and managed by ATC at the client's expense. The leases at the
Dallas, Texas, and Garland, Texas locations expire on June 30, 1999 and June 30,
1998, respectively and at the Irving, Texas facilities on December 31, 2003. ATC
believes it can extend the leases at these locations or relocate the facilities
at terms comparable with its current lease obligations. As of March 31, 1998,
ATC operated the following call center facilities:
CALL CENTER FACILITIES
<TABLE>
<CAPTION>
CURRENT EQUIPMENT
LOCATION SQUARE FOOTAGE WORKSTATIONS
- ----------------------------------------------------------- -------------- -------------------
<S> <C> <C>
Chicago, Illinois N/A 69
Addison (Dallas), Texas 90,000 1,214
Garland, Texas 12,963 227
Irving, Texas (2 facilities) 83,825 1,345
Joplin, Missouri 33,055 336
------- -----
219,843 3,191
------- -----
------- -----
</TABLE>
ATC began implementation of its new site strategy, which focuses on smaller
call centers in what management believes are more economically attractive
markets than those in which ATC has traditionally operated, by opening a new
teleservicing facility in Joplin, Missouri in February 1998. While ATC's current
capacity is sufficient to handle its current production demands, Company growth
and continued implementation of the new site strategy will necessitate
additional call center facilities. Management anticipates opening new centers
comparable to the Joplin facility later in calendar 1998 and in fiscal 1999.
LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its businesses, neither
ATC nor its subsidiary are parties to, nor are their properties the subject of,
any material pending legal proceedings. From time to time, ATC is involved in
litigation incidental to its business. ATC believes that such litigation,
individually or in the aggregate, is not likely to have a material adverse
effect on ATC's results of operations or financial condition.
On April 14, 1998, a complaint was filed in the Court of Chancery in
Delaware by Dore Kreisler against ATC, the directors of ATC and IQI seeking
"injunctive and other appropriate relief" in connection with the proposed
Merger. The plaintiff alleges that ATC's directors breached their fiduciary
duties to plaintiff and the class of ATC shareholders by, among other things,
not conducting "an auction process or active market check" and that
consequently, the Exchange Ratio is unfair to ATC's shareholders. IQI is
included as a defendant for allegedly aiding and abetting the ATC board's
alleged breach of fiduciary duties. ATC, its board and IQI have all determined
that the case is without merit, and each intends to defend itself against the
claims.
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<PAGE>
ATC MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF ATC
The following table sets forth certain information about the current
directors, nominees for director, and executive officers of ATC.
DIRECTORS AND EXECUTIVE OFFICERS OF ATC
The following table sets forth the names and ages of all directors and
executive officers as of May 27, 1998, as well as all positions held by each
such person and his term in each such position or office.
<TABLE>
<CAPTION>
SERVED
NAME / AGE PRESENT POSITION SINCE
- ------------------------------------ ------------------------------------------------ -----------
<S> <C> <C>
Michael G. Santry, 50 President and Chief Executive Officer 1997
Chairman of the Board 1986
Robert B. Allen, 44 Chief Operating Officer 1997
Matthew S. Waller, 35 Chief Financial Officer 1997
Director 1998
Jerry L. Sims, Jr., 36 Secretary 1994
Director 1993
Senior Vice President--Controller 1991
William F. Bergeron, Jr., 36 Chief Technology Officer 1996
Patrick V. Stark, 43 Director 1991
J. Michael Allred, 52 Director 1993
J. Frank Mermoud, 41 Director 1994
Darryl D. Pounds, 48 Director 1996
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to each of the directors
and executive officers.
MICHAEL G. SANTRY has been a director of ATC since February 1986, Chairman
of ATC since September 1996 and President and Chief Executive Officer since
October 1997. Mr. Santry previously held the positions of President, Chief
Executive Officer and Chief Financial Officer of ATC from February 1986 through
September 1996. Mr. Santry founded Chartwell Group, Inc., a Dallas based
investment firm, in 1996 and has served as its Chairman of the Board since that
time. Since 1980, Mr. Santry has been President and a director of Lakewood
Financial Consultants, Inc., a privately held corporation providing financial
consulting services. Mr. Santry is also a director of Computer Integration Corp.
and is a Certified Public Accountant.
ROBERT B. ALLEN has been Chief Operating Officer since January 1997. From
1980 through 1996, Mr. Allen held various management positions with PepsiCo,
Inc., most recently serving as Vice President of Sales and Marketing for the
$1.3 billion annual revenue single-serve business unit of PepsiCo's Frito-Lay
subsidiary. Mr. Allen's tenure with Frito-Lay also included two International
Managing Director positions.
MATTHEW S. WALLER joined ATC in March 1997 as Chief Financial Officer. From
1993 to March 1997, Mr. Waller served in various positions with Principal
Financial Securities, Inc., most recently as Senior Vice President and Head of
Technology Investment Banking. Mr. Waller is also a director of Computer
Integration Corp.
JERRY L. SIMS, JR. has been a director of ATC since November 1993, Secretary
of ATC since February 1994, and Senior Vice President--Controller of ATC since
September 1991.
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<PAGE>
WILLIAM F. BERGERON, JR. joined Advanced in February 1993 and has been Chief
Technology Officer since December 1996. From 1992 to 1993, Mr. Bergeron served
in a variety of management positions with Tandem Telecommunications Systems
Inc., most recently as Senior Member of the Technical Staff.
PATRICK V. STARK has been a director of ATC since December 1991 and has been
a shareholder and director of the law firm Kane, Russell, Coleman and Logan
since 1993. Prior to joining the law firm, Mr. Stark was Executive Vice
President and General Counsel for Lifetime Automotive Products since May 1991.
J. MICHAEL ALLRED has been a director of ATC since February 1993 and has
been a director of Spencer Stuart since April 1994. Prior to joining Spencer
Stuart, Mr. Allred was a Vice President of E-Systems from May 1992 to March
1994.
J. FRANK MERMOUD has been a director of ATC since March 1994 and has acted
as a consultant to ATC since May 1993. Mr. Mermoud was a Legislative Director of
Congressional Affairs with the U.S. Department of State from 1992 to 1993. Prior
to that, Mr. Mermoud served in both the Reagan and Bush Administrations in
several capacities at the U.S. Dept. of State, USIA, the U.S. Dept. of Commerce
and the U.S. Dept. of Transportation.
DARRYL D. POUNDS has been a director of ATC since March 1996 and has been
President of Chartwell Group, Inc., a Dallas based investment firm, since 1996.
From 1993 until 1995, Mr. Pounds served as Chairman and CEO of the Trust Company
of Texas and, from 1972 through 1993, Mr. Pounds held a variety of positions
within First City Bancorporation, including Chairman and CEO of First City Bank
of Dallas.
Each director serves until the next annual meeting of ATC's shareholders and
until the director's successor is duly elected. Officers serve at the discretion
of the Board of Directors. There is no family relationship among any of the
above named officers and directors of ATC.
NOMINEES FOR ELECTION AS DIRECTOR
The ATC Board's nominees for the ATC Board are William G. Moore, Jr. (Class
I), Darryl D. Pounds (Class I), Michael G. Santry (Class II), Matthew S. Waller
(Class II), Daniel H. Chapman (Class III), and David L. Malcolm (Class III). The
IQI Board's nominees for the ATC Board are Peter V. Ueberroth (Class I), Drew
Lewis (Class I), Frederic V. Malek (Class II), Paul G. Stern (Class II), Edward
Blank (Class III), and Stephen A. McNeely (Class III), all of whom are current
members of the IQI Board. For more information regarding the nominees for
directors to the ATC Board, see "ATC Management-- Directors and Executive
Officers of ATC" and "Management and Operations after the Merger."
In the event Proposal No. 1 is not approved, the ATC Board's nominees for
director are Michael G. Santry, Matthew S. Waller, Patrick V. Stark, Jerry L.
Sims, Jr., Darryl D. Pounds, J. Michael Allred and J. Frank Mermoud. Each of the
foregoing seven nominees are currently members of the ATC Board. For a
description of the business experience of each of the seven nominees for
director to the ATC Board, see "--Directors and Executive Officers of ATC."
COMMITTEES AND MEETINGS OF THE ATC BOARD
The business of ATC is managed under the direction of the ATC Board. The ATC
Board meets during ATC's fiscal year to review significant developments
affecting ATC and to act on matters requiring ATC Board approval. The ATC Board
held three formal meetings and acted by unanimous written consent four times
during the fiscal year ended June 30, 1997. During the fiscal year, each member
of the ATC Board participated in at least 75% of all ATC Board and committee
meetings held during the period that he served as a director and/or committee
member.
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<PAGE>
The ATC Board has established an Audit Committee and Compensation Committee
to devote attention to specific subjects and to assist the ATC Board in the
discharge of its responsibilities. The functions of these committees is
described below.
AUDIT COMMITTEE. During the 1997 fiscal year, the Audit Committee was
comprised of J. Michael Allred and Patrick V. Stark. The Audit Committee is
empowered to recommend to the ATC Board a firm of certified public accountants
to conduct audits of the accounts and affairs of ATC, review accounting
objectives and procedures of ATC and the findings and reports of the independent
certified public accountants, and make such reports and recommendations to the
ATC Board as it deems appropriate. The Audit Committee held meetings at each
formal meeting of the ATC Board during the 1997 fiscal year.
COMPENSATION COMMITTEE. During the 1997 fiscal year, the Compensation
Committee was comprised of J. Michael Allred and Darryl D. Pounds. The
Compensation Committee is empowered to establish and revise the compensation
paid to all executive officers of ATC and has complete authority to (a)
construe, interpret and administer the provisions of the ATC stock option plans
and the provisions of option agreements granted thereunder, (b) select the key
employees, consultants and directors to whom awards are granted, the number of
options, the number of shares of ATC Common Stock with respect to each option,
the exercise price of each option, the vesting and exercise period of each
option, and such other terms and conditions of each option, if any, that are not
inconsistent with the provisions of ATC's stock option plans, (c) prescribe,
amend and rescind rules and regulations pertaining to the ATC stock option
plans, and (d) make all other determinations necessary or advisable for their
implementation and administration. The Compensation Committee acted by unanimous
written consent seven times during the 1997 fiscal year.
The ATC Board does not have a standing nominating committee or any other
committee performing a similar function. The function customarily attributable
to a nominating committee is performed by the ATC Board as a whole.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To ATC's knowledge, all statements of beneficial ownership required to be
filed with the Commission for the fiscal year ended June 30, 1997 have been
timely filed.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ATC
The following table sets forth, certain information with respect to the
shares of ATC Common Stock as of May 27, 1998 beneficially owned by (i) each of
the "Named Executive Officers (as defined in Regulation S-K to the Securities
Act), (ii) each director of ATC, (iii) each beneficial owner of more than 5% of
the outstanding shares of ATC Common Stock and (iv) all executive officers and
directors of ATC as a group.
Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to the shares of ATC Common stock
beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2)
- ----------------------------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Codinvest Limited ............................................... 4,200,000 19.55%
Road Town
Tortola, British Virgin Islands
Michael G. Santry ............................................... 609,840(3) 2.77%(3)
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
Jerry L. Sims, Jr. .............................................. 300,000(4) 1.38%(4)
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
Patrick V. Stark ................................................ 123,000(5) 0.57%(5)
1601 Elm Street, Suite 3700
Dallas, Texas 75201
J. Michael Allred ............................................... 101,000(6) 0.47%(6)
1201 W. Peachtree Street, Suite 3230
Atlanta, Georgia 30309
Matthew S. Waller ............................................... 170,990(7) 0.79%(7)
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
Robert B. Allen ................................................. 139,600(8) 0.65%(8)
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
Darryl D. Pounds ................................................ 66,000(9) 0.31%(9)
5950 Berkshire Lane, Suite 1650
Dallas, Texas 75225
J. Frank Mermoud ................................................ 56,000(10) 0.26%(10)
5220 Partridge Ln.
Washington, D.C. 20016
William F. Bergeron, Jr. ........................................ 12,700 0.06%
8001 Bent Branch Drive
Irving, Texas 75063
All directors and officers as a group (9 persons) ............... 1,579,130(11) 6.90%(11)
</TABLE>
- ------------------------
(1) Reported in accordance with the beneficial ownership rules of the
Commission. Unless otherwise noted, the shareholders listed in the table
have both sole voting power and sole dispositive power with respect to such
shares, subject to community property laws where applicable and the
information contained in the other footnotes to the table.
(2) Based on 21,478,624 shares of ATC Common Stock outstanding at March 31,
1998. This number excludes 361,000 unretired treasury shares held by ATC.
Each owner's percentage is calculated by dividing the
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<PAGE>
number of shares beneficially held by the sum of 21,478,624 and the number
of shares such owner has the right to acquire within 60 days.
(3) 79,000 of Mr. Santry's shares are owned of record by Lakewood Financial
Consultants, Inc. which is 99% owned by Mr. Santry. 30,840 of Mr. Santry's
shares are held by a company in which Mr. Santry is a 1% general partner.
Mr. Santry has investment control over such shares. Includes beneficial
ownership of 500,000 shares of ATC Common Stock issuable upon exercise of
stock options granted pursuant to the 1992 Plan.
(4) Includes beneficial ownership of 300,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1992 Plan.
(5) Includes beneficial ownership of 110,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1992 Plan.
(6) Includes beneficial ownership of 101,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1992 Plan.
(7) Includes beneficial ownership of 166,666 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1996 Plan.
(8) Includes beneficial ownership of 100,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1996 Plan.
(9) Includes beneficial ownership of 66,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1992 Plan.
(10) Includes beneficial ownership of 56,000 shares of ATC Common Stock issuable
upon exercise of stock options granted pursuant to the 1992 Plan.
(11) Includes certain beneficial ownership as set forth in footnotes (3), (4),
(5), (6), (7), (8), (9), and (10) above.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid for all services rendered to ATC in all capacities during fiscal years
1997, 1996 and 1995 by the ATC chief executive officer and the four other most
highly compensated executive officers of ATC whose total annual salary and bonus
earned during fiscal years 1997, 1996 and 1995 exceeded $100,000 (collectively,
the "NAMED EXECUTIVE OFFICERS").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL RESTRICTED STOCK OPTIONS/
NAME AND PRINCIPAL OCCUPATION FISCAL YEAR SALARY($) BONUS($) COMPENSATION AWARDS SARS(1)
- ----------------------------- ----------- ----------- ----------- ------------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
MICHAEL G. SANTRY 1997 -- (2) -- -- -- --
Chairman, Chief Executive 1996 293,750 -- -- -- 1,000,000
Officer and President 1995 275,000 -- -- -- --
ARTHUR CHAVOYA 1997 292,564(3) -- -- -- 600,000
Former Chief Executive 1996 -- -- -- -- --
Officer and President 1995 -- -- -- -- --
ROBERT B. ALLEN 1997 100,833(4) -- -- -- 300,000
Chief Operating Officer 1996 -- -- -- -- --
1995 -- -- -- -- --
MATTHEW S. WALLER 1997 52,067(5) -- -- -- 300,000
Chief Financial Officer 1996 -- -- -- -- --
1995 -- -- -- -- --
JERRY L. SIMS, JR. 1997 114,792 -- -- -- --
Senior Vice President 1996 90,000 -- -- -- --
Controller 1995 90,000 -- -- -- --
WILLIAM F. BERGERON, JR., 1997 112,007 25,000 -- -- 100,000
Chief Technology Officer 1996 85,926 20,000 -- -- --
1995 87,889 -- -- -- --
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL OCCUPATION LTIP PAYOUTS COMPENSATION
- ----------------------------- ------------- -------------------
<S> <C> <C>
MICHAEL G. SANTRY -- --
Chairman, Chief Executive -- --
Officer and President -- --
ARTHUR CHAVOYA -- --
Former Chief Executive -- --
Officer and President -- --
ROBERT B. ALLEN -- --
Chief Operating Officer -- --
-- --
MATTHEW S. WALLER -- --
Chief Financial Officer -- --
-- --
JERRY L. SIMS, JR. -- --
Senior Vice President -- --
Controller -- --
WILLIAM F. BERGERON, JR., -- --
Chief Technology Officer -- --
-- --
</TABLE>
- --------------------------
(1) In February 1993, ATC's shareholders approved ATC's 1992 Stock Option Plan
(the "1992 PLAN") to grant options to purchase up to 3,000,000 shares of ATC
Common Stock to key employees, officers and directors of ATC and its
subsidiaries. Options may be granted at any time prior to December 11, 2002.
In fiscal 1996, Mr. Santry was granted options to purchase 1,000,000 shares
at the market price on the date of grant pursuant to the 1992 Plan. In
September 1996, ATC's Board of Directors approved ATC's 1996 Stock Option
and Restricted Stock Plan (the "1996 PLAN") to grant restricted stock or
options to purchase up to 2,000,000 shares of ATC Common Stock to key
employees, officers and directors of ATC and its subsidiaries. In fiscal
1997, Mr. Chavoya, Mr. Allen, Mr. Waller and Mr. Bergeron were granted
options to purchase 600,000, 300,000, 300,000 and 100,000 shares,
respectively, at the market price on the respective dates of grant pursuant
to the 1996 Plan.
(2) Mr. Santry elected not to receive any salary or bonus compensation during
the fiscal year ended June 30, 1997. Effective April 1, 1996, the
Compensation Committee of the ATC Board set Mr. Santry's annual base salary
at $350,000. Mr. Santry is also entitled to receive bonus compensation up to
$125,000 annually.
(3) The amount indicated is the salary paid to Mr. Chavoya from the commencement
of his employment with ATC, on September 5, 1996, through June 30, 1997. Mr.
Chavoya's employment agreement with ATC specified an annual base salary of
$400,000. Mr. Chavoya relinquished the offices of Chief Executive Officer
and President effective October 1, 1997. See "Employment Contracts and
Termination of Employment Contracts."
(4) Mr. Allen joined ATC as Chief Operating Officer on January 6, 1997. The
amount indicated is the salary paid to Mr. Allen from the commencement of
his employment with ATC through June 30, 1997. Mr. Allen's employment
agreement with ATC specifies an annual base salary of $220,000. See
"Employment Contracts and Termination of Employment Contracts."
(5) Mr. Waller joined ATC as Chief Financial Officer on March 24, 1997. The
amount indicated is the salary paid to Mr. Waller from the commencement of
his employment with ATC though June 30, 1997. Mr. Waller's employment
agreement with ATC specifies an annual base salary of $225,000. See
"Employment Agreements and Termination of Employment Agreements."
OPTION GRANTS
The following table sets forth certain information relating to stock option
grants made by ATC to the Named Executive Officers during fiscal 1997. ATC has
no plans that provide for the granting of stock appreciation rights.
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STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS STOCK APPRECIATION FOR
SECURITIES GRANTED TO OPTION
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ------------------------------ --------------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur Chavoya................ 600,000 36.3% $ 16.19 9/5/06 $ 6,109,082 $ 15,481,614
Robert B. Allen............... 300,000 18.1% $ 11.81 1/6/07 $ 2,228,174 $ 5,646,630
Matthew S. Waller............. 300,000 18.1% $ 6.94 3/24/07 $ 1,309,359 $ 3,318,172
William F. Bergeron, Jr....... 100,000 6.0% $ 6.25 2/28/07 $ 393,059 $ 996,089
</TABLE>
OPTION REPRICING TABLE
The following table sets forth information relating to options held by the
Named Executive Officers that were repriced during October 1997 and December
1997.
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF EXERCISE ORIGINAL
SECURITIES MARKET PRICE PRICE OF TERM
UNDERLYING OF STOCK AT OPTIONS AT NEW REMAINING
DATE OF REPRICED TIME OF TIME OF EXERCISE AT DATE OF
NAME REPRICING OPTIONS REPRICING REPRICING PRICE REPRICING
- ---------------------------------------------- --------- ---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Santry............................. 10/17/97 1,000,000 $ 3.63 $ 9.00 $ 3.80 8 years
Arthur Chavoya(1)............................. 10/01/97 200,000 $ 4.00 $ 16.19 $ 4.00 9 years
Robert B. Allen............................... 10/17/97 300,000 $ 3.63 $ 11.81 $ 3.80 9 years
Matthew S. Waller............................. 10/17/97 300,000 $ 3.63 $ 6.94 $ 3.80 9 years
William F. Bergeron, Jr....................... 10/17/97 100,000 $ 3.63 $ 6.25 $ 3.80 9 years
</TABLE>
(1) Concurrent with his relinquishing the positions of Chief Executive Officer
and President of ATC effective October 1, 1997, Mr. Chavoya's option grant
was reduced from options to purchase 600,000 shares to options to purchase
the 200,000 shares which had vested as of October 1, 1997. See "Employment
Contracts and Termination of Employment Contracts."
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF EXERCISE ORIGINAL
SECURITIES MARKET PRICE PRICE OF TERM
UNDERLYING OF STOCK AT OPTIONS AT NEW REMAINING
DATE OF REPRICED TIME OF TIME OF EXERCISE AT DATE OF
NAME REPRICING OPTIONS REPRICING REPRICING PRICE REPRICING
- ---------------------------------------------- --------- ---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Santry............................. 12/31/97 1,000,000 $ 1.28 $ 3.80 $ 1.50 8 years
Robert B. Allen............................... 12/31/97 300,000 $ 1.28 $ 3.80 $ 1.50 9 years
Matthew S. Waller............................. 12/31/97 300,000 $ 1.28 $ 3.80 $ 1.50 9 years
William F. Bergeron, Jr....................... 12/31/97 100,000 $ 1.28 $ 3.80 $ 1.50 9 years
</TABLE>
During October and December 1997, the Compensation Committee determined that
certain stock options issued to all employees of ATC and its operating
subsidiary had an exercise price in most cases substantially higher than the
market price of ATC Common Stock. The Compensation Committee noted the decline
in the value of ATC Common Stock attributable to certain business setbacks,
including reduced volumes and delays in certain programs of ATC's largest client
and such client's negotiated price reductions with ATC in certain of its
programs. Therefore, the Compensation Committee concluded that the
aforementioned stock options were not providing the desired incentives.
Accordingly, after discussing the various alternatives available, the
Compensation Committee approved the repricing of all outstanding options under
then existing option plans in order to
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preserve the important motivating effect that stock options have had on ATC's
employees. Mr. Chavoya's replacement options were priced at the market closing
price of ATC Common Stock on October 1, 1997. All other replacement options were
priced at the average closing price of ATC Common Stock for the five-day trading
period prior to the repricing.
COMPENSATION OF DIRECTORS
Directors of ATC receive no fees for serving on the ATC Board. Upon election
to the ATC Board, non-employee directors are automatically granted non-qualified
stock options to purchase 135,000 shares of ATC Common Stock at the market price
of ATC Common Stock on the date of grant. All directors are entitled to
reimbursement for expenses incurred for attendance at each meeting.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT CONTRACTS
ARTHUR CHAVOYA entered into an employment agreement effective September 5,
1996, pursuant to which he served as Chief Executive Officer and President of
ATC. Under the employment agreement, Mr. Chavoya was entitled to receive an
annual base salary and an incentive bonus based upon certain financial
performance targets of ATC. The employment agreement also provided for the
payment to Mr. Chavoya of up to two times his annual salary plus an amount equal
to bonus compensation paid for the previous fiscal year should ATC terminate Mr.
Chavoya's employment without cause (as defined in the employment agreement) or
in the event of his termination after a change in control (as defined in the
employment agreement) of ATC. The employment agreement also stipulated that Mr.
Chavoya's stock options were to vest immediately in the event of a change in
control (as defined in the employment agreement) of ATC.
Subsequent to the fiscal year ended June 30, 1997, Mr. Chavoya relinquished
the offices of Chief Executive Officer and President of ATC effective October 1,
1997. In connection with this change, Mr. Chavoya entered into negotiations with
ATC for a release and separation from his employment agreement. The general
terms of the separation agreement call for Mr. Chavoya to receive one times his
annual salary and for Mr. Chavoya's option grant to be reduced from options to
purchase 600,000 shares to options to purchase the 200,000 shares which had
vested as of October 1, 1997.
ROBERT B. ALLEN entered into an employment agreement effective January 6,
1997, pursuant to which he serves as Chief Operating Officer of ATC. Under the
employment agreement, Mr. Allen is entitled to receive an annual base salary and
an incentive bonus based upon certain financial performance targets of ATC. The
employment agreement provides for the payment to Mr. Allen of nine (9) months of
compensation if ATC terminates Mr. Allen's employment without cause (as defined
in the employment agreement) or in the event that he is terminated after a
change in control (as defined in the employment agreement) of ATC. Mr. Allen's
options vest immediately in the event of a change in control (as defined in the
employment agreement) of ATC.
MATTHEW S. WALLER entered into an employment agreement effective March 24,
1997, pursuant to which he serves as Chief Financial Officer of ATC. Under the
employment agreement, Mr. Waller is entitled to receive an annual base salary
and an incentive bonus based upon certain financial performance targets of ATC.
The employment agreement provides for the payment to Mr. Waller of one times his
annual compensation if ATC terminates Mr. Waller's employment without cause (as
defined in the employment agreement) or in the event that he is terminated after
a change in control (as defined in the employment agreement) of ATC. Mr.
Waller's options vest immediately in the event of a change in control (as
defined in the employment agreement) of ATC.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
J. Michael Allred and Darryl D. Pounds served on ATC's compensation
committee during fiscal 1997. Neither Mr. Allred nor Mr. Pounds are current
officers or employees of ATC.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the Company is
responsible for overseeing the Company's compensation policy, approving salaries
and annual bonuses for executive officers and administering the Company's stock
option plans. The Compensation Committee is comprised of two non-employee
directors.
COMPENSATION POLICY. The Compensation Committee's philosophy for executive
compensation is designed to enable the Company to recruit, motivate, and retain
qualified individuals to manage the Company in order to enhance shareholders'
value. The objective of this philosophy is to recognize individual contributions
and achievements while enabling individuals to share the risks and rewards of
the Company's overall performance. The Compensation Committee fulfills its
responsibilities with input from the Company's executive officers and by
evaluating compensation relative to a broad range of companies both in the
Company's peer group and in comparable lines of business. The key components of
the Company's current compensation policy are competitive base salaries,
quarterly cash performance bonuses and long-term equity incentives.
BASE SALARIES. Base salaries of executive officers are targeted to be
competitive with companies with similar growth and operations. The Compensation
Committee also considers the executive's contribution to operating performance
and profitability, the executive's role in developing and maintaining client
relationships, and the executive's level and complexity of responsibility in
determining annual base salaries and salary increases.
PERFORMANCE BONUSES. Cash performance bonuses are determined annually by
the Compensation Committee based on an executive's performance relative to
predetermined individual performance goals. Additionally, the Compensation
Committee considers the Company's overall financial performance in determining
the extent to which performance bonuses will be paid.
LONG-TERM EQUITY INCENTIVES. The Compensation Committee believes that the
use of equity based long-term compensation directly links executive interests to
enhancing shareholder value. Stock options are generally offered to induce
executives to accept employment with the Company. Such offerings generally vest
over time and are subject to forfeiture. The Compensation Committee establishes
the number of shares granted and the exercise price and vesting period of each
grant. The stock options granted generally have an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant thus
rewarding the executive only if the Company's common share price appreciates
above the price on the date of grant.
CHIEF EXECUTIVE OFFICER COMPENSATION. The Compensation Committee set the
annual base compensation of Mr. Santry, the Company's chief executive officer,
at $350,000 per year and believes such base salary is comparable to that paid
the chief executive officers of companies of similar size and growth potential.
Additionally, Mr. Santry is entitled to receive annual bonus compensation up to
$125,000 per year based on the overall financial performance of the Company.
Because Mr. Santry has a substantial equity position in the Company and the
level of his borrowings from the Company, Mr. Santry elected not to receive
salary or bonus compensation during the fiscal year ended June 30, 1997.
Compensation Committee
J. Michael Allred
Darryl D. Pounds
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PERFORMANCE GRAPH
The following graph sets forth a comparison of the cumulative total
shareholder return on ATC Common Stock over the five year period ended June 30,
1997 as compared with the cumulative total return of a broad equity market
index, the Nasdaq Market Index, and a Peer Group Index. The Peer Group consists
of ACIT Telecentrics, Inc., APAC TeleServices, Inc., ICT Group, Inc., National
TechTeam, Inc., Precision Response Corp., RMH Teleservices, Inc., Sitel Corp.,
Sykes Enterprises, Inc., TeleTech Holdings, Inc., TeleSpectrum Worldwide, Inc.
and West TeleServices Corp. The total shareholder return for each company in the
Peer Group has been weighted according to the company's stock market
capitalization. This graph assumes an investment of $100 on July 1, 1992 in each
of ATC Common Stock, the Nasdaq Market Index and the Peer Group Index, and
assumes reinvestment of dividends, if any. The stock price performance shown on
the graph below is not necessarily indicative of future stock price performance.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ATC COMMUNICATIONS GROUP,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ATC COMMUNICATATIONS GROUP PEER GROUP BROAD MARKET
<S> <C> <C> <C>
1992 $100.00 $100.00 $100.00
1993 $145.01 $316.67 $122.76
1994 $360.00 $522.23 $134.61
1995 $380.00 $483.34 $157.88
1996 $2,100.00 $2,021.32 $198.73
1997 $770.00 $1,469.01 $240.10
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At March 31, 1998 and June 30, 1997, the Chairman of ATC had outstanding
borrowings and accrued interest of approximately $3,789,106 and $3,539,779,
respectively. The borrowing bears 6% annual interest, is due in full on June 30,
1998 and is secured by collateral pledged by Codinvest Limited, ATC's largest
shareholder of record. Interest income from the receivable amounted to
approximately $111,032 for the six months ended December 31, 1997 and $78,935
for the fiscal year ended June 30, 1997.
At June 30, 1997, FEM Inc., a company controlled by a shareholder of ATC,
had outstanding borrowings and accrued interest of $198,212 pursuant to a note
receivable to ATC. The note bears 6% annual interest and was due in full on
March 31, 1998. To date the Company has not collected the total due from FEM,
Inc. The Company is currently pursuing collection of the balance and believes
the borrowings will be collected in full.
During the fiscal years ended June 30, 1997, 1996 and 1995, ATC paid J.
Frank Mermoud, a director of ATC, $80,000 per year in monthly installments of
approximately $6,700, in consideration for consulting services performed.
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INFORMATION CONCERNING IQI
OVERVIEW
IQI (formerly known as Edward Blank Associates, Inc.) was founded in 1968 as
a provider of market research through nationwide telephone surveys conducted
from one central location. Under the direction of founder Edward Blank, IQI
evolved into a telemarketing organization by 1977. In November 1996, a
controlling interest in IQI was purchased by Thayer. On January 3, 1997,
effective as of December 31, 1996, IQI acquired Lexi International, Inc.
("LEXI"), a telemarketing company in which Thayer acquired a controlling
interest in November 1996. Lexi, founded in 1985 by Robin Richards, is
recognized as an innovator in the outbound telemarketing industry and has led
the industry in using a pay for performance value-added approach with its
customers. IQI acquired InterServ Services Corporation ("INTERSERV") in July
1997. Founded in 1993, InterServ offers full service marketing research through
its Elrick & Lavidge division ("E&L"), which was founded in 1951 and acquired by
InterServ in 1995, and inbound teleservicing, outbound telemarketing and
database management services through its Teleservices division. Unless otherwise
indicated, "IQI" refers to IQI and its subsidiaries, including Lexi and
InterServ.
SERVICES AND STRATEGY
SERVICES
IQI believes it is one of the largest independent outbound telemarketing
companies in the United States. IQI creates, manages and conducts large scale,
telephone-based direct sales programs on an outsourced basis for large
corporations with growing needs for cost-effective means of contacting current
and prospective customers. IQI specializes in providing telemarketing services
to telecommunications, financial services, insurance and publishing industries.
Through IQI, Lexi and the Teleservices division of InterServ, IQI's
principal services include direct telephone sales, generating customer leads,
managing customer retention programs, taking customer orders, updating customer
data and reporting program performance, and high-value inbound customer care and
direct response. IQI makes extensive use of call management technology,
including proprietary computer software and predictive dialers, to provide
telemarketing services to its clients. IQI operates approximately 2,462
telemarketing workstations in 20 telemarketing facilities (including six managed
facilities) in nine states and Canada, which provide IQI with over 590,000 hours
of monthly telemarketing call capacity. The telemarketing centers are centrally
managed through the application of extensive telecommunications and computer
technology to promote the consistent delivery of quality service. IQI believes
that its emphasis on, and reputation for, providing quality service
distinguishes it from competitors and has led to IQI's rapid growth rate and its
retention of key clients.
In addition, IQI believes that, through E&L, it is one of the largest custom
full-service marketing research firms in the United States offering a full range
of marketing capabilities for its clients through ten marketing research
facilities in nine states. These services include service evaluations, computer
assisted research, image studies, strategic research, pricing research, consumer
evaluations of promotional campaigns and similar types of information relating
to consumer attitudes, product usage and preferences. Such services are
typically provided to organizations which market and sell consumer products and
services, primarily in the telecommunications and packaged goods industries.
E&L's market research services focus on consultative/analytical, perceived
quality/value (brand equity) and industry specific segmentation studies.
STRATEGY
Key elements of IQI's business strategy include:
Industry Specialization. IQI's industry focus differentiates it from its
competitors and has allowed it to develop substantial expertise in industries
such as the telecommunications, financial services, insurance
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and publishing industries. IQI believes industry specialization offers marketing
advantages over competitors with a generalized service approach inasmuch as
IQI's sales personnel, telephone service representatives ("TSRS") and customer
service personnel concentrate their efforts on understanding and responding to
the competitive and regulatory issues affecting IQI's clients. IQI is also
currently servicing clients in diverse industries, including the rapidly
deregulating utility industry, the technology sector (including hardware
manufacturers and Internet access providers) and the healthcare industry, which
are expected to increase expenditures on direct sales and customer service
marketing applications. IQI believes that each of these targeted industries will
achieve growth in the near term. IQI is also increasingly targeting industries
which traditionally have not outsourced their telemarketing business.
Focus on Large Corporate Clients. IQI seeks clients with large customer
bases which can generate recurring revenues because of their ongoing direct
sales and customer service needs. Establishing long-term relationships with
these clients often leads to additional business opportunities as these
corporations continue to outsource more of their telemarketing activities and
also positions IQI as an integral part of its clients' sales and customer
service programs.
Sophisticated and Flexible Call and Data Management Technology. IQI makes
extensive use of call and data management technology, including proprietary
computer software, predictive dialers and automated call distributors to provide
superior client service and perform large scale telemarketing programs. In
addition, because the technological requirements of the client tend to vary
based on the client's industry, IQI adapts its call and data management systems
to develop customized, technical solutions to its clients' telemarketing issues.
Expansion of Inbound Telemarketing Capability. IQI currently performs
inbound telemarketing, and is expanding its inbound capability through the
addition of inbound call center operations. IQI believes the addition of such
service will attract new clients and provide increased revenues from existing
clients.
Investment in Technology and Rapid Development of Call Centers. IQI intends
to invest in new call center locations and systems integration. IQI plans to add
capacity in advance of actual new business in order to ensure available capacity
and the ability to timely respond to clients' needs. IQI believes that increased
capacity will also enable IQI to compete effectively for new business
opportunities.
OPERATIONS
TELEMARKETING SERVICES
Telemarketing services involve direct communication with clients' customers
by telephone. The contact is either outbound (IQI initiated) or inbound
(customer initiated). IQI is engaged primarily in outbound telemarketing.
Outbound telemarketing refers to direct sales activities that commence when
IQI places calls to parties targeted by the client to offer products or services
or to obtain information. In most instances, IQI receives computer records from
its clients containing each targeted customer's name, address, phone number and
other relevant data. IQI's data management system sorts the records and
electronically assigns them to one of its outbound call centers. Telephone calls
are controlled by computerized call management systems that utilize predictive
dialers to automatically dial the telephone numbers in the files, determine if a
live connection is made and present connected calls to a TSR who has been
trained for the client's program. When a call is presented, the customer's name,
other information about the customer and the program script simultaneously
appear on the TSR's computer screen. The TSR then uses the script to solicit an
order for the product or service or to request information that will be added to
the client's database.
Inbound telemarketing involves the receipt of a call from a client's
customer, the identification of the call and the routing of the call to the
appropriate IQI TSR. The customer typically calls a toll-free "800" or "888"
number to obtain assistance regarding a previous order or purchase. IQI intends
to expand its
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inbound telemarketing activities, and in that regard plans to utilize automated
call distributors to identify each inbound call by "800" or "888" number and
route the call to a TSR trained for the client's program. IQI reports
information and results captured during the call to its client for order
processing, customer service and database management.
As of April 1998, IQI was engaged in annual telemarketing programs for
approximately 60 clients, many of which are Fortune 100 companies. These
programs consist of approximately 70% business-to-consumer and 30%
business-to-business. IQI targets those companies with large customer bases and
the greatest potential to generate recurring revenues because of their ongoing
telephone-based direct sales and marketing needs. IQI currently specializes in
four industries:
Telecommunications--IQI has extensive experience in providing telemarketing
services to the telecommunications industry, primarily servicing long distance
and regional telephone companies. IQI's services include new account
acquisition, direct sales of custom calling features, personalized "800" and
long distance services and other customer retention services in both the
business and consumer market segments. IQI's most significant relationship in
this industry is with AT&T, a client since 1990.
Financial Services--IQI provides sales and marketing services to many of the
largest U.S. credit card issuers. IQI's services include customer account
acquisition, credit line expansion, balance consolidation, cardholder retention
and sales of other banking products and services.
Insurance--IQI is a major marketer of insurance products throughout the U.S.
IQI works with large consumer insurance companies and their agents, marketing
products such as life, accidental death and dismemberment, and hospital
insurance. IQI employs licensed TSRs to sell insurance products in 40 states and
eight Canadian provinces.
Publishing--IQI provides telemarketing services to magazine publishers and
book clubs to sell and renew subscriptions and memberships, cross-sell other
client publications and reinstate expired subscriptions or memberships.
IQI generally operates under annual contracts which may be terminated or
modified on short notice without penalty. Under these contracts, IQI is
generally paid either (a) a fixed fee for each hour that it provides a TSR or
(b) a fee for each sale that it provides its customers. AT&T accounted for
approximately 50% of IQI's consolidated revenues in fiscal 1997.
MARKETING RESEARCH SERVICES
IQI also offers full-service custom marketing research services through E&L,
which has almost 50 years of experience in providing qualitative, quantitative,
statistical/modeling capabilities and innovative customer satisfaction research
for its clients. E&L has offices in Albany (New York), Atlanta, Chicago, Dallas,
Cincinnati, Kansas City, San Francisco, Paramus (New Jersey) and Clarksville
(Tennessee) and serves many of the country's Fortune 100 companies with a focus
on the telecommunications and consumer packaged goods market segment. E&L's
services are typically provided to organizations which market and sell consumer
products and services, with a focus on consultative/analytical, perceived
quality/value (brand equity) and industry specific segmentation studies. E&L's
services include service evaluations, computer assisted research, image studies,
strategic research, pricing research, consumer evaluations of promotional
campaigns and similar types of information relating to consumer attitudes,
product usage and preferences.
INDUSTRY AND COMPETITION
The telephone-based marketing and customer service industry has experienced
substantial growth over the past ten years. Telephone-based direct marketing
expenditures increased from an estimated $34 billion in 1984 to an estimated $83
billion in 1995. Telephone contact with customers is increasing as more
companies realize its benefits, including high response rates, low cost per
transaction and direct interaction with customers, which allow on-line access to
detailed customer or product information and immediate
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response to customer inquiries. With the proliferation of toll-free "800" and
"888" numbers, the telephone is becoming a principal means of providing customer
service.
IQI believes that only a small percentage of the $83 billion in
teleservicing expenditures in 1995 was for outsourced services. IQI expects that
large companies increasingly will outsource these activities in order to focus
internal resources on their core competencies and to improve the quality and
cost-effectiveness of their customer service and marketing efforts by using the
experience and specialized capabilities of larger-scale teleservices providers.
IQI also believes that organizations with superior customer service and
sophisticated, advanced technology, such as IQI, will particularly benefit from
this outsourcing trend.
The teleservices industry has evolved over the last ten years from primarily
single-facility, low-technology environments to large, full-service
organizations with multi-location, high-volume call centers. This evolution has
resulted primarily from the development of sophisticated computer and
telecommunications equipment and software which enable teleservices providers to
implement large-scale, professional programs. However, the industry remains
highly fragmented and is comprised of a large number of in-house operations and
independent companies. Many of these organizations provide only a limited number
of services.
The industry in which IQI operates is very competitive and highly
fragmented. IQI's competitors range in size from very small firms offering
specialized applications or short term projects, to large independent firms and
the in-house operations of many clients and potential clients. Certain of IQI's
competitors have financial and other resources equal to, or greater than, IQI's.
The market includes non-captive telemarketing and customer service operations,
as well as in-house telemarketing and customer service operations throughout the
U.S. In-house telemarketing and customer service operations comprise by far the
largest segment of the industry. In addition, some of IQI's services also
compete with other forms of direct marketing such as mail, point-of-purchase
displays and on-line services as well as the Internet. IQI believes the
principal competitive factors in the telephone-based marketing and customer
service industry are reputation for quality, sales and marketing results, price,
technological expertise, and the ability to promptly provide clients with
customized solutions to their sales, marketing and customer service needs. IQI
believes that it competes favorably with other companies with respect to the
foregoing factors.
The marketing research industry is highly fragmented and is characterized by
a diverse group of marketing, advertising, public opinion and product
development and positioning research organizations that gather, process and
analyze information. These organizations obtain and measure respondents'
reactions and behavior concerning products and services, promotions, pricing and
distribution. Marketing research organizations vary greatly in size and scope,
ranging from local field interviewing groups to full-service organizations
offering extensive database and data collection capabilities providing a wide
array of reports and analyses to many industry groups. Many organizations
conduct custom studies, responding to the issues of a single client, and many
conduct multi-client studies, which typically provide information on issues for
a specific industry.
MARKETING OF SERVICES
IQI believes that its marketing, sales and customer support organizations
are important to its long-term growth and give IQI the ability to respond
rapidly to the needs of its customers. IQI has dedicated substantial resources
to develop and generate new business opportunities. Historically, IQI has
attracted new clients and marketed its services primarily by attending trade
shows, advertising in industry publications, responding to requests for
proposals, pursuing client referrals and cross-selling to existing clients.
Although IQI will continue to utilize these sources to identify potential
clients, IQI has developed a more targeted approach to identifying new clients
and the potential additional needs of existing clients. IQI seeks to
differentiate itself from other providers of telephone-based services by
offering customized value-
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added solutions that address the specialized needs of its clients. Often, IQI
initially develops a pilot program for a new client to demonstrate IQI's
abilities and the effectiveness of telephone-based marketing and customer
service. IQI's sales personnel also assist clients in identifying target
customers and developing programs to reach those customers, communicate results
of the program and assist clients in modifying programs for future use.
IQI's account management and client services teams, are responsible for
servicing IQI's existing customer base. The account executives maintain an
ongoing dialogue with existing clients, solicit client feedback, monitor active
programs and coordinate the dissemination of qualitative and quantitative
marketing information.
Members of E&L's senior managment are responsible for marketing services to
current and prospective clients. These efforts are organized by industry
expertise and region in order to provide timely response to major client needs.
E&L markets its services by advertising in industry publications, attending
trade shows and conferences, articles, mailing presentations and writing case
studies for trade publications and seeking follow-on engagements from current
clients.
GOVERNMENT REGULATIONS
Telephone sales practices are regulated at both Federal and state level. The
Federal Communications Commission's (the "FCC") rules under the Federal
Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit telemarketing
firms from initiating telephone solicitations to residential telephone
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 rules require telemarketing firms to maintain a list of
residential consumers who have stated that they do not want to receive telephone
solicitations and to avoid making calls to such consumers. The FCC also
prohibits the use of pre-recorded or artificial voice calls to consumers (with
limited exceptions) and advertising via telephone facsimile technology.
The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorized the Federal Trade Commission (the "FTC")
to issue regulations prohibiting misrepresentation in telephone sales. In August
1995, the FTC issued its telemarketing sales rules which became effective
December 31, 1995. Generally, these rules prohibit abusive telephone
solicitation practices and impose disclosure and record keeping requirements on
telemarketers.
IQI believes that it is in compliance with the TCPA and the FCC rules
thereunder and with the FTC's rules under the TCFAPA. IQI trains its TSRs 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
IQI's "do-not-call" list.
A number of states have enacted or are considering legislation to regulate
telephone solicitations. For example, 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. IQI believes it
is in substantial compliance with the applicable laws of the states in which it
operates. From time to time, bills are introduced in Congress which, if enacted,
would regulate the use of credit information. IQI cannot predict whether this
legislation will be enacted and what effect, if any, it would have on the
telemarketing industry.
The industries served by IQI are also subject to government regulation with
regard to selling practices and consumer disclosure requirements. IQI requires
its clients and their advisors to approve the scripts to be used by IQI in
making its solicitations. IQI generally requires its clients to indemnify IQI
against claims and expenses arising with respect to IQI's services performed on
its clients' behalf. IQI employees who
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complete the sale of insurance products are required to be licensed by various
state insurance commissions and participate in regular continuing education
programs.
REVENUES AND SEASONAL NATURE OF BUSINESS
IQI'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, IQI
experiences and expects to continue to experience quarterly variations in
revenues and operating results. Although the business is not typically seasonal
in nature, historically, IQI has generated a 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. Due to nature of market research, E&L's fourth quarter has historically
been its strongest revenue-producing quarter of the year. IQI'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. AT&T
accounted for more than 40% of IQI's gross revenues in fiscal 1997. In fiscal
1996, AT&T and First USA, Inc. generated approximately 40% and 18%,
respectively, of IQI's gross revenues.
TECHNOLOGY RESOURCES
IQI's management information and call and database management systems have
been designed to provide quality service to its clients and to manage and
control effectively all aspects of IQI's business. IQI's sophisticated use of
advanced technology enables it to develop and deliver solutions to its clients'
complex marketing needs. IQI's Information Management and Systems Management
Departments, which currently include over 60 systems specialists, have developed
IQI's management information and call and database management systems.
The computer network which IQI has implemented utilizes a "hub and spoke"
network configuration to electronically link each call center's systems to IQI's
data center. This open architecture system provides IQI with the flexibility to
integrate its client-server and mid-range systems with a variety of systems
maintained by its clients. In order to provide efficient and effective services,
IQI's calling systems also utilize sophisticated technology such as automated
and predictive dialers, automated call delivery systems and call management
systems which are integrated with minicomputer-based database management
systems, local area networks and wide area networks. IQI believes its computer
security system and off-site disaster back-up storage sufficiently protect the
integrity and confidentiality of its computer systems and data.
PERSONNEL AND TRAINING
IQI believes a key component of its success is the quality of its employees.
Therefore, IQI is continually refining its systematic approach to hiring,
training and managing qualified personnel. IQI seeks to locate call centers in
communities with a relatively low cost of living and a large pool of qualified
and motivated workers in an effort to lower its operating costs and attract a
high quality work force. IQI believes that its relatively high proportion of
full-time employees provides a more stable work force and reduces IQI's
recruiting and training expenditures. At each call center, IQI utilizes a
management structure designed to ensure that its TSRs are properly supervised,
managed and developed.
IQI offers extensive classroom and on-the-job training programs for its
personnel including instruction on the industries to which IQI provides
telephone-based sales, as well as customer service techniques. Once hired, each
new TSR receives on-site training that can last up to three weeks. The amount of
initial training each employee receives varies depending upon the nature of the
services being offered. In addition, IQI offers courses to its TSRs who are
preparing for the insurance agent license exam. IQI has
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also developed a management training program designed to provide an internal
source of well-trained managers.
QUALITY ASSURANCE
Because IQI's services involve direct contact with its client's customers
and sale prospects, IQI's reputation for quality service is critical in
acquiring and retaining clients. Therefore, IQI and its clients monitor IQI's
TSRs for strict compliance with the client's script and to maintain quality and
efficiency. IQI also regularly measures the quality of its services by
benchmarking such factors as sales per hour and level of customer complaints.
IQI's information systems enable IQI to provide clients with reports on a
real-time basis as to the status of an ongoing campaign and can transmit summary
data and captured information electronically to clients. Access to this data
enables IQI's clients to modify or enhance an ongoing campaign to improve its
effectiveness.
Since IQI's TSRs deal directly with its clients' customers and sales
prospects, IQI places a heavy emphasis on its training and quality control
process. IQI has a training staff at each facility dedicated to conducting both
primary and recurrent training for all TSRs. IQI employs a quality control staff
at each facility that measures quality on both a quantitative and qualitative
basis. This attentiveness to training and customer service enables IQI's TSRs to
perform a variety of highly complex and proprietary functions for its clients.
EMPLOYEES
As of March 31, 1998, IQI employed approximately 4,850 full-time equivalent
employees, comprised of approximately 4,081 persons in its telemarketing
operations (including 3,634 TSRs and 447 sales, administrative and operations
personnel) and approximately 1,319 persons in its E&L division (including 1,086
part-time telephone interviewers (which management believes constitute
approximately 540 full-time equivalent employees based on a 30-hour work week)
and 233 market research professionals). To date, IQI has not experienced any
material difficulty in attracting and retaining qualified personnel in the
geographic regions where it currently conducts business. None of IQI's employees
are subject to a collective bargaining agreement. IQI considers its relations
with its employees to be good.
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FACILITIES
IQI's corporate headquarters are located in Los Angeles, California in
leased facilities adjacent to its call center operations in Los Angeles. IQI
also has a number of administrative personnel in New York, New York who occupy
leased facilities consisting of approximately 13,000 square feet of office
space. The term of this lease expires in October 1998. IQI also leases the
facilities listed below:
Call Center Facilities
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
LOCATION DATE OPENED WORKSTATIONS
- -------------------------------------------- ------------------ -------------
<S> <C> <C>
Los Angeles, California October, 1985 687
Euless, Texas(a) July 1988 185
Virginia Beach, Virginia March 1989 120
Arlington, Texas April 1990 146
Fort Worth, Texas(a) December 1991 206
Tucker, Georgia March 1993 300
Dalton, Minnesota April 1995 56
Newport News, Virginia April 1995 120
Browns Valley, Minnesota January 1996 47
Hazelton, Pennsylvania April 1996 58
Barrie, Canada April 1996 56
Mesquite, Texas November 1996 168
Port St. Lucie, Florida September 1997 135
Fairmont, West Virginia October 1997 63
Managed Centers(b) 115
-----
Total Call Center Workstations 2,462
-----
-----
Marketing Research Facilities
<CAPTION>
APPROXIMATE
NUMBER OF
LOCATION YEAR OPENED WORKSTATIONS
- -------------------------------------------- ------------------ -------------
<S> <C> <C>
Chicago, Illinois 1951 58
Tucker, Georgia 1979 54
Paramus, New Jersey 1979 --
Cincinnati, Ohio 1985 64
Crookshank, Ohio 1985 --
San Francisco, California 1985 --
Clarksville, Tennessee 1985 84
Irving, Texas 1992 --
Kansas City, Missouri 1992 --
Albany, New York 1996 100
-----
Total Marketing Research Workstations 360
-----
-----
</TABLE>
- ------------------------
(a) Owned by Edward Blank and leased to IQI at market rates.
(b) Represents approximate number of workstations in six managed centers located
in Iowa and Minnesota.
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The leases of these facilities have an average length of three years, and
typically contain early termination buyouts and renewal options. IQI believes
that all of these leases are on market terms. IQI believes that its existing
facilities are adequate for its current operations, however, additional
facilities will be required to support anticipated growth. IQI believes that
suitable additional or alternative space will be available as needed to expand
its business on commercially reasonable terms.
In addition to its own telemarketing facilities, IQI has contracts with six
additional facilities operated by independent third parties ("MANAGED CENTERS")
which contain an aggregate of approximately 115 workstations. All Managed
Centers utilized by IQI are required to have state-of-the-art predictive dialing
capabilities, and IQI conducts site visits to assess the technological
capabilities of all Managed Centers. Managed Centers have been used historically
as a method of expanding capacity without increasing fixed costs. IQI believes
that the development of additional company-operated centers will reduce its
reliance on Managed Centers and enhance long-term profitability.
LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its business, neither
IQI nor any of its subsidiaries are parties to, nor are their properties the
subject of, any material pending legal proceedings.
From time to time, IQI is involved in litigation incidental to its business.
IQI believes that such litigation, individually or in the aggregate, is not
likely to have a material adverse effect on IQI's results of operations or
financial condition.
On April 14, 1998, a complaint was filed in the Court of Chancery in
Delaware by Dore Kreisler against ATC, the directors of ATC and IQI seeking
"injunctive and other appropriate relief" in connection with the proposed
Merger. The plaintiff alleges that ATC's directors breached their fiduciary
duties to plaintiff and the class of ATC shareholders by, among other things,
not conducting "an auction process or active market check" and that
consequently, the Exchange Ratio is unfair to ATC's shareholders. IQI is
included as a defendant for allegedly aiding and abetting the ATC board's
alleged breach of fiduciary duties. ATC, its board and IQI have all determined
that the case is without merit, and each intends to defend itself against the
claims.
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IQI MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF IQI
The following table sets forth the names, ages and positions of the current
directors and executive officers of IQI.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH IQI
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Stephen A. McNeely................. 51 Chief Executive Officer, President and Director
Paul G. Stern...................... 59 Chairman of the IQI Board, Director
Robin D. Richards.................. 41 Vice Chairman of the IQI Board, Director
Edward Blank....................... 63 Vice Chairman of the IQI Board, Director
Eric Croson........................ 49 Senior Vice President, Chief Financial Officer, Chief of Staff and
Secretary
Drew Lewis......................... 66 Director
Frederic V. Malek.................. 61 Director
James D. Robinson III.............. 62 Director
William H. Scott, III.............. 50 Director
Peter V. Ueberroth................. 60 Director
</TABLE>
STEPHEN A. MCNEELY. Mr. McNeely is the President and Chief Executive
Officer of IQI. Prior to joining IQI, between 1996 and July 1997 he was
President and CEO of the Keystone Communications Group, the leading U.S.
provider of worldwide broadcast services. From 1995 to 1996 Mr. McNeely held a
senior management position with PMG Equities, Inc. From 1991 to 1995, he was
President and CEO of Patrick Media Group, Inc. Mr. McNeely has held the position
of President and CEO in the automotive industry as well, with companies such as
GE Capital Resale Service (GECARS)(from 1989 to 1991) and Tenneco Automotive
Retail Services (a division of Tenneco Automotive, Inc.)(from 1987 to 1989). In
addition, Mr. McNeely has held a wide variety of senior management positions
with Exxon Corporation from 1968 to 1985. Mr. McNeely currently sits on the
Board of Directors of the Advertising Council and is the Campaign Director for
the Coalition of Organ and Tissue Donation. He has also held positions on the
Board of Directors and Executive Committee of the Outdoor Advertising
Association of America, Traffic Audit Bureau, The American Advertising
Federation, Chicago Advertising Federation and GNMMA.
PAUL G. STERN. Dr. Stern, Chairman of IQI, co-founded Thayer Equity
Investors III, L.P. in 1995. Prior to that, Dr. Stern was a Special Limited
Partner at Forstmann Little & Co. From 1989 until 1993, Dr. Stern served as the
Chairman and Chief Executive Officer of Northern Telecom Ltd. Prior to that
time, Dr. Stern served as President and Chief Operating Officer of Burroughs
(later Unisys) Corporation, Corporate Vice President and later President of
Commercial Electronics Operations at Rockwell International Corporation and
Chairman and Chief Executive Officer of Braun AG in Germany. Dr. Stern serves on
the Board of Dow Chemical Company, LTV Corporation, and Software A.G. Systems,
Inc. and Whirlpool Corporation.
ROBIN D. RICHARDS. Mr. Richards, Vice Chairman of IQI and the founder of
Lexi, is recognized as an innovative entrepreneur and is highly regarded in the
telemarketing industry. Prior to founding Lexi in 1985, Mr. Richards operated
the Southern California Sales Division of Wilcor, Inc., the Sales and Marketing
arm of Fawn Manufacturing.
EDWARD BLANK. Mr. Blank, Vice Chairman and founder and IQI, is one of the
pioneers of the telemarketing industry. He founded IQI in 1968, and, under his
direction, IQI has grown to be one of the largest telemarketers in the U.S.
Prior to establishing IQI, Mr. Blank was associated with Litton Industries,
Benton & Bowles Advertising and NBC in senior marketing research capacities.
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ERIC CROSON. Mr. Croson has held his present position with IQI since
November 1996. Prior to joining IQI, Mr. Croson was the President and Managing
Director of the European Business Unit of Thomas Group, Inc. Prior to being
appointed to that post he served as Chief Financial Officer from 1994 to 1995.
From 1992 to 1994, Mr. Croson was the Vice President Finance-Products at
Northern Telecom. Mr. Croson also served as Vice President and Controller at
Frito Lay, Inc. and Vice President and Corporate Controller of Unisys
Corporation where he worked from 1978 to 1991 as part of Memorex and Burroughs
Corporations.
DREW LEWIS. From 1987 to 1997, Mr. Lewis served as Chairman and Chief
Executive Officer of Union Pacific Corporation. Prior to that time, Mr. Lewis
served as President and Chief Operating Officer of Union Pacific from 1986 to
1987 and served as Chairman and Chief Executive Officer of Union Pacific
Railroad Company from April 1986 to October 1986. Prior to his career with Union
Pacific Corporation, Mr. Lewis served as Chairman and Chief Executive Officer of
Warner Amex Cable Communications and served as U.S. Secretary of Transportation
in President Reagan's cabinet from 1981 through 1983. Mr. Lewis is a director of
Union Pacific Corporation, American Express Company, Ford Motor Company, FPL
Group, Inc., Gannett Co., Inc., Gulfstream Aerospace Corporation and Lucent
Technologies. In addition, Mr. Lewis is Chairman of the Board of Union Pacific
Resources Group Inc. and past Chairman of The Business Roundtable.
FREDERIC V. MALEK. Mr. Malek founded Thayer Capital Partners in 1991 and
co-founded Thayer Equity Investors III, L.P. in 1995. From 1989 to 1991, Mr.
Malek was President and then Vice Chairman of Northwest Airlines. Prior to that
time, Mr. Malek served as President of Marriott Hotels and Resorts from 1980 to
1988. Mr. Malek currently serves as director of Automatic Data Processing Corp.,
American Management Systems, Manor Care Inc., FPL Group and Northwest Airlines.
JAMES D. ROBINSON III. Mr. Robinson is a co-founder, Chairman and CEO of
RRE Investors, LLC. In addition, Mr. Robinson is President of J.D. Robinson,
Inc., Chairman of Violy, Byorum & Partners and Senior Advisor to Trust Company
of the West. From 1977 to 1993, Mr. Robinson served as Chairman, Chief Executive
Officer and Director of American Express Company. Prior to 1977, Mr. Robinson
held several positions with American Express, was a general partner with White
Weld & Co. and served as Assistant to the Chairman and President of Morgan
Guaranty Trust Company. Mr. Robinson is a director of Coca-Cola Company,
Bristol-Myers Squibb Company, First Data Corporation, Union Pacific, Alexander &
Alexander Services, Inc., Cambridge Technology Partners and New World
Communications Group, Inc.
WILLIAM H. SCOTT, III. Mr. Scott has served as President of ITC Holding
Company since December 1991 and has been a director of ITC Holding Company since
March 1989. Mr. Scott is a director of InterCel, AvDat, CyberNet and MindSpring.
From 1989 to 1991, he served as Executive Vice President of ITC Holding Company.
From 1985 to 1989, Mr. Scott was an officer and director of Async Corporation (a
provider of voice messaging services). Between 1984 and 1988, Mr. Scott held
several offices with SouthernNet, Inc. (a long distance telecommunications
company which was the predecessor to Telecom*USA, Inc.), including Chief
Operating Officer, Chief Financial Officer and Vice President-Administration. He
served as a director of SouthernNet, Inc. from 1984 to 1987.
PETER V. UEBERROTH. Since 1990, Mr. Ueberroth has been a private investor,
and currently is Chairman of two publicly-traded companies, Ambassadors
International and Doubletree Corporation. From 1984 to 1989, Mr. Ueberroth
served as the sixth Commissioner of Major League Baseball, and from 1980 to
1984, Mr. Ueberroth served as President and CEO of the Los Angeles Olympic
Organizing Committee. Prior to 1980, Mr. Ueberroth headed First Travel
Corporation, a travel business he founded in 1962. Mr. Ueberroth is a director
of Ambassadors International, Inc., Coca-Cola Company, CB Commercial, Doubletree
Hotels Corporation and Transamerica Corporation.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF IQI
The following table sets forth certain information as of March 31, 1998,
with respect to the beneficial ownership of IQI's Common Stock by (i) each
person known by IQI to own beneficially more than 5% of the outstanding shares
of its common stock based upon information provided to IQI; (ii) each director
and executive officer named in the table above; and (iii) all directors and
executive officers of IQI as a group. The business address of each of IQI's
directors and executive officers is IQI's address.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1)(2) OUTSTANDING(1)(2)
- --------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Thayer Equity Investors III, L.P. ....................... 1,971,480 63.29%
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Edward Blank(3)(4) ...................................... 410,510 13.18%
Robin D. Richards(3)(5) ................................. 167,826 5.38%
Paul G. Stern(3)(6) ..................................... 1,987,207 63.80%
Frederic V. Malek(3)(6) ................................. 1,987,207 63.80%
William H. Scott, III(3)(7) ............................. 308,652 9.91%
Drew Lewis(3)(8) ........................................ 4,090 *
James D. Robinson III(3)(9) ............................. 3,108 *
Peter V. Ueberroth(3)(10) ............................... 1,636 *
Eric Croson(11) ......................................... 8,132 *
All Directors and Officers as a Group
(9 persons)(12) ....................................... 2,886,162 93.74%
</TABLE>
- ------------------------
* Less than 1% of outstanding shares of common stock.
(1) Information with respect to beneficial ownership is based upon IQI's stock
records and data supplied to IQI by the holders.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of common stock
subject to options, warrants or conversion privileges exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants or conversion privileges but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to joint ownership with spouses and
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
(3) Director.
(4) Includes (a) 31,416 shares subject to warrants exercisable within 60 days
and (b) 60,530 shares owned by the Edward Blank 1995 Grantor Retained
Annuity Trust, of which Mr. Blank is the trustee and therefore may be deemed
to beneficially own.
(5) Includes 152,932 shares owned jointly by Mr. Richards and his wife and 7,447
shares subject to options exercisable within 60 days.
(6) Includes 1,971,480 shares owned by Thayer Equity Investors III, L.P. Each of
Dr. Stern and Mr. Malek are members of the general partner of this fund, and
may be deemed to be the beneficial owner of its shares. Dr. Stern and Mr.
Malek disclaim such beneficial ownership. Also includes 15,727 shares
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owned by TC Co-Investors, LLC. Each of Dr. Stern and Mr. Malek are managers
of this fund, and may be deemed to be the beneficial owners of its shares.
Dr. Stern and Mr. Malek disclaim such beneficial ownership.
(7) Includes 290,743 shares owned by ITC Service Company, for which William H.
Scott, III serves as President. Also includes 17,909 shares owned by ITC
Holding Company, Inc., a company for which William H. Scott, III also serves
as President. Mr. Scott disclaims any and all beneficial ownership
associated with such shares owned by ITC Service Company and ITC Holding
Company, Inc.
(8) Includes 1,636 shares subject to options exercisable within 60 days.
(9) Includes 1,636 shares subject to options exercisable within 60 days.
(10) Includes 1,636 shares subject to options exercisable within 60 days.
(11) Includes 8,132 shares subject to options exercisable within 60 days.
(12) Includes 69,167 shares subject to options and warrants exercisable within
60 days.
COMPARATIVE RIGHTS OF STOCKHOLDERS OF ATC AND IQI
IQI is organized under the laws of the State of New York and ATC is
organized under the laws of the State of Delaware. The following discussion
summarizes certain differences between (a) the IQI Charter and IQI Bylaws and
the ATC Charter and ATC Bylaws and (b) certain provisions of the NYBCL and the
DGCL affecting stockholders' rights.
AUTHORIZED CAPITAL
The DGCL and the NYBCL require a corporation's certificate of incorporation
to set forth the total number of shares of all classes of stock that the
corporation has authority to issue, and, for each class, the designations,
powers, preferences, rights, qualifications, limitations and restrictions
thereof. The ATC Charter currently authorizes 27,500,000 shares of ATC Common
Stock, of which 21,478,624 shares were issued and outstanding as of the ATC
Record Date, and 1,000,000 shares of ATC Preferred Stock, of which 29,778 shares
were issued and outstanding as of the ATC Record Date. The ATC Preferred Stock
is convertible into 59,556 shares of ATC Common Stock. The IQI Charter currently
authorizes 4,000,000 shares of IQI Common Stock, of which 3,089,006 shares were
issued and outstanding as of the IQI Record Date, and 1,000,000 shares of IQI
preferred stock, $0.01 par value per share, of which no shares were issued and
outstanding as of the IQI Record Date.
The provisions of the ATC Charter setting forth the terms of ATC Common
Stock are generally the same as the comparable provisions of the IQI Charter.
Holders of ATC Common Stock and IQI Common Stock, respectively, are entitled to
one vote per share on all matters submitted to a vote of stockholders, have no
preemptive rights and no conversion rights, are not subject to redemption, have
no sinking fund and do not have cumulative voting rights.
The rights, preferences and privileges of holders of ATC Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of ATC Preferred Stock that ATC may designate and issue in the future. In
addition, the rights of holders of ATC Common Stock to receive ratably and
dividends that may be declared by the ATC Board is subject to preferential
dividend rights of any ATC Preferred Stock. The ATC Board has authority, without
any further vote or action by the stockholders of ATC, to issue ATC Preferred
Stock in one or more classes or series and to fix the number of shares,
designations, powers, preferences, rights, qualifications, limitations and
restrictions thereof. The ability of the ATC Board to so issue ATC Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire (or of discouraging a third party from acquiring) a
majority of the outstanding voting stock of ATC.
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DIRECTORS
The ATC Bylaws provides for a minimum of two and a maximum of eleven
directors, with the exact number to be fixed from time to time by the ATC Board.
There are currently seven directors serving on the ATC Board. The IQI Bylaws
provides for a minimum of three directors (except where all of the shares of IQI
capital stock are owned by less than three stockholders, in which case the
number of directors may be less than three but not less than the number of
stockholders). The exact number of directors may be fixed by the IQI Board.
There are currently nine directors serving on the IQI Board. Under the Bylaws of
both IQI and ATC, a plurality of stockholder votes cast is sufficient to elect
directors. Both Bylaws also provide that a majority of the entire board of
directors shall constitute a quorum for the transaction of business.
If Proposal No. 2 is approved, the ATC Board will be divided into three
classes of four directors each, with one class having an initial term of one
year, one class having an initial term of two years, and one class having an
initial term of three years. At each annual meeting of ATC stockholders,
commencing with the annual meeting of stockholders to be held in 1999, directors
will be elected to succeed those directors whose terms have expired, and each
newly elected director will serve for a three-year term.
REMOVAL OF DIRECTORS
The DGCL provides that directors may be removed, with or without cause, by
the holders of a majority of the shares then entitled to vote at an election of
directors. If holders of any class or series are entitled to elect one or more
directors under the certificate of incorporation, then the majority vote of the
holders of that class or series is required to remove such director without
cause.
Under the NYBCL, directors may be removed for cause by the vote of the
shareholders. The NYBCL further provides that a corporation may provide in its
certificate of incorporation or in its provisions of its bylaws adopted by the
corporation's stockholders for the removal for cause of a director by (i) the
board of directors, except in the case of any director elected by cumulative
voting, or (ii) the holders of shares of any class or series, or holders of
bonds, voting as a class, when so entitled by the provisions of the
corporation's certificate of incorporation. In addition, any or all of the
directors may be removed without cause by vote of the stockholders if the
certificate of incorporation or the bylaws so provide, PROVIDED, HOWEVER, that
in the case of cumulative voting, no director may be removed when the votes cast
against removal would be sufficient to elect him if voted cumulatively at an
election at which the same total number of votes were cast and the board were
then being elected.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the DGCL, vacancies and newly created directorships may be filled by a
majority of the directors then in office or a sole remaining director (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or bylaws. In addition, under the DGCL, unless otherwise provided
in the certificate of incorporation or bylaws, if a director resigns from the
board, a majority of the directors then in office have the right to fill such
vacancies. The DGCL also provides that if the directors then in office
constitute less than a majority of the corporation's board of directors, upon
application by stockholders representing at least 10% of outstanding shares
entitled to vote for such directors, the Delaware Court of Chancery may order an
election of directors to be held. Under the ATC Bylaws, vacancies created by
death, resignation, removal or otherwise may be filled by the affirmative vote
of the directors then in office, although less than a quorum, or by a sole
remaining director.
Under the NYBCL, newly created directorships resulting from an increase in
the number of directors and vacancies occurring in the board for any reason
other than removal without cause may be filled by a majority vote of the
directors then in office. Unless the certificate or bylaws otherwise provide (as
adopted by the shareholders), vacancies created by removal without cause may
only be filled by a vote of the shareholders. The IQI Bylaws provide that newly
created directorships resulting from an increase in the board of directors and
all vacancies occurring in the board of directors, including vacancies caused by
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<PAGE>
removal without cause, may be filled by the affirmative vote of a majority of
the board of directors then in office, although less than a quorum.
AMENDMENT TO CHARTER OR CERTIFICATE OF INCORPORATION
Under the DGCL and the NYBCL, the affirmative vote of a majority of the
outstanding shares entitled to vote is required to amend a corporation's
certificate of incorporation. Under the DGCL, amendments that make changes
relating to a class or series of capital stock by increasing or decreasing the
rights of such class, also must be approved by the majority vote of each class
or series of stock affected, even if such shares ordinarily would not have such
voting rights.
AMENDMENT OF BYLAWS
Under the DGCL, the bylaws may be amended by the action of the board of
directors or by the affirmative vote of a majority of the outstanding shares of
stock, voting as a single class. The ATC Bylaws provide that such bylaws may be
amended by the affirmative vote of directors at a meeting at which a quorum is
present, provided notice of the proposed alternative, amendment, or repeal is
contained in the notice of such meeting.
Under the NYBCL, a corporation's bylaws may be amended by a majority of the
votes of shares then entitled to vote in the election of directors or, when so
provided in the corporation's certificate of incorporation or bylaws duly
adopted by the shareholders, by the board of directors. The IQI Bylaws provide
that such bylaws may be amended by the affirmative vote of a majority of the
holders of shares entitled to vote in the election of any directors at a meeting
at which a quorum is present, provided notice of the proposed alteration,
amendment or repeal is contained in the notice of such meeting, or by the
affirmative vote of a majority of the board of directors.
STOCKHOLDER MEETINGS AND PROVISIONS FOR NOTICES; PROXIES
Under the NYBCL and the DGCL, stockholder meetings may be held at any place
within or without the state, as provided in the bylaws. Under both the NYBCL and
the DGCL, written notice of a stockholders meeting must state the place, date
and time of the meeting, and if a special meeting, the purpose or purposes for
which the meeting is to be held. The ATC Bylaws further provide that written
notice of every meeting of the stockholders, stating the place, date, and hour
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, will be given not less than 10 nor more than 50
calendar days before the date of the meeting to each stockholder of record
entitled to vote at such meeting. Under the IQI Bylaws, not less than 10 days
nor more than 50 days before the date of every stockholders' meeting, the IQI
Secretary shall give to each stockholder entitled to vote at the meeting,
written or printed notice stating the time and place of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called, either by mail or by presenting it to him personally or by leaving it at
his residence or usual place of business.
Under the DGCL stockholder proxies are valid for three years from their date
unless the proxy provides for a longer period. Under the NYBCL, proxies are
valid for eleven months from their date, unless the proxy otherwise provides.
VOTING BY STOCKHOLDERS
Under the ATC Bylaws, each holder of shares of Common Stock is entitled at
every meeting of the stockholders to one vote for each share of stock having
voting power standing in the name of such stockholder. Votes are counted by
inspectors appointed by the board of directors to act as judges of the voting
and to determine those entitled to vote at any meeting of the stockholders. When
a quorum is present, the affirmative vote of a majority of the votes cast by
stockholders present in person or by proxy generally is the act of the
stockholders.
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Under the IQI Bylaws, each holder of shares of Common Stock is entitled at
every meeting of the stockholders to one vote for each share of stock having
voting power standing in the name of such stockholder. The board of directors in
advance of any stockholders' meeting may appoint one or more inspectors to act
as judges of the voting and to determine those entitled to vote at any meeting
of the stockholders. If no inspector is so appointed, the person presiding at a
stockholders' meeting may, and on the request of any stockholder entitled to
vote thereat, shall appoint one or more inspectors. When a quorum is present,
the affirmative vote of a majority of the votes cast by stockholders present in
person or by proxy generally is the act of the stockholders.
STOCKHOLDER ACTION WITHOUT A MEETING
Under the DGCL, unless otherwise provided in the certificate of
incorporation, actions may be taken by the stockholders of a Delaware
corporation by written consent, provided that the written consent is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote on the matter were present and voted. The ATC
Charter includes no such provisions limiting the ability of stockholders to act
by written consent. The DGCL also requires that prompt notice of the taking of
corporate action without a meeting by less than a unanimous written consent be
given to those stockholders who have not consented in writing.
Under the NYBCL, actions may be taken without a meeting by the unanimous
written consent of the stockholders of the corporation or, if the certificate of
incorporation so permits, by the written consent of the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. The IQI Charter does permit such action.
Prompt notice of the taking of corporate action without a meeting by less than a
unanimous written consent must be given to those stockholders who have not
consented in writing.
BUSINESS COMBINATIONS
Under Section 203 of the DGCL ("SECTION 203"), certain "business
combinations" with "interested stockholders" (each as defined in Section 203) of
Delaware corporations are subject to a three-year moratorium unless specified
conditions are met.
Under Section 912 of the NYBCL, certain "business combinations" with
"interested shareholders" (each as defined in Section 912) of New York
corporations may not occur for a period of five years following such interested
shareholders stock acquisition date unless approved by the board of directors
prior to such shareholders stock acquisition date.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The DGCL and the NYBCL have similar laws with respect to indemnification by
a corporation of its officers and directors. The laws of both states provide
that a corporation may indemnify any person made or threatened to be made a
party to any threatened, pending or completed action or proceeding, whether
civil or criminal (other than an action by or in the right of the corporation),
by reason of the fact that such person is or was a director or officer of the
corporation or was serving at the request of the corporation as a director or
officer of another entity, against judgments, fines and amounts paid in
settlement and reasonable expenses, including attorneys' fees, if such person
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to criminal actions
or proceedings, had reasonable cause to believe that such person's conduct was
lawful. Under the DGCL, this standard of conduct is to be made by either (1) a
majority vote of the directors who are not parties to such action, (2) by a
committee of directors designated by a majority vote of directors, (3) if there
are no such directors, independent legal counsel, or (4) the stockholders. In
addition, the
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DGCL permits corporations to indemnify employees and agents of the corporation
if such persons meet the standards stated above.
The ATC Charter and ATC Bylaws provide that ATC shall indemnify directors,
officers, employees and agents of ATC to the fullest extent permitted by the
DGCL.
The IQI Bylaws provide that IQI shall indemnify any and all persons whom it
shall have power to indemnify under the NYBCL to the fullest extent permitted by
the NYBCL, and the personal liability of the directors of IQI to IQI and its
stockholders shall be eliminated to the fullest extent permitted by the NYBCL.
DISSENTERS' OR APPRAISAL RIGHTS
Under the DGCL, a stockholder of a corporation who does not consent to
certain major corporate transactions may, under varying circumstances, be
entitled to dissenter's or appraisal rights pursuant to which such stockholder
may receive cash in the amount of the fair market value of his or her shares in
lieu of the consideration he or she would otherwise receive in the transaction.
Unless the corporation's certificate of incorporation provides otherwise, such
appraisal rights are not available in certain circumstances, including without
limitation, (a) with respect to the sale, lease, or exchange of all or
substantially all of the assets of a corporation, (b) with respect to a merger
or consolidation by a corporation the shares of which are either listed on a
national securities exchange or are held of record by more than 2,000 holders if
such stockholders receive only shares of the surviving corporation or shares of
any other corporation which are either listed on a national securities exchange
or held of record by more than 2,000 holders, plus cash in lieu of fractional
shares, or (c) to stockholders of a corporation surviving a merger if no vote of
the stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met. The holders of ATC Common Stock are not
entitled to dissenter's rights of appraisal in connection with the proposed
Merger because of (b) above.
Under the NYBCL, a shareholder of a corporation who does not consent to
major transactions (including a merger of the corporation; the sale, lease,
exchange or other disposition of all or substantially all if the assets of the
corporation; or a share exchange) may, under varying circumstances, be entitled
to dissenter's or appraisal rights pursuant to which such shareholder may
receive cash in the amount of the fair market value of his or her shares in lieu
of the consideration he or she would otherwise receive in the transaction. The
IQI stockholders are entitled to dissenter's rights of appraisal in connection
with the proposed Merger. Under the NYBCL, shareholders who wish to enforce such
rights must comply with Section 623 of the NYBCL. See Appendix C--New York
Appraisal Rights and Procedures.
DISSOLUTION
Under the DGCL, unless the board of directors approves the proposal to
dissolve, dissolution of the corporation must be approved by all stockholders
entitled to vote thereon. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation's
stockholders.
Under the DGCL, the Court of Chancery, upon application by any stockholder,
may appoint a custodian or receiver (a) if the stockholders are so divided that
they have failed to elect successors to directors whose terms have expired, (b)
if the business of the corporation is suffering or is threatened with
irreparable injury because of a deadlock of directors, or (c) if the corporation
has abandoned its business but has not liquidated. Upon the order of the Court
of Chancery or in the event of clause (c) above, the corporation may be
liquidated and its assets distributed.
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Under the NYBCL, a corporation may be dissolved by a vote of two-thirds of
all the outstanding shares entitled to vote thereon, or if the certificate of
incorporation so provides, by a vote of a majority of the outstanding shares
entitled to vote. The NYBCL also provides that a corporation's certificate of
incorporation may permit any shareholder to require the dissolution of a
corporation at will or upon the occurrence of a specified event. The IQI Charter
does not contain such provisions. The NYBCL further provides that a petition for
judicial dissolution may be brought if a majority of the board of directors or
the shareholders adopts a resolution that finds that the assets of the
corporation are not sufficient to discharge its liabilities or that a
dissolution will be beneficial to its shareholders.
DIVIDENDS
The DGCL permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, the DGCL generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation or if it repurchases
shares having a preference upon the distribution of any of its assets that it
retires such shares upon acquisition (and provided, that after any reduction in
capital made in connection with such retirement of shares, the corporation's
remaining assets are sufficient to pay any debts not otherwise provided for).
Under the NYBCL, a corporation may declare and pay dividends on its
outstanding shares except when the corporation is insolvent or would thereby be
made insolvent or would otherwise be contrary to any restrictions contained in
the certificate of incorporation. Dividends may be declared or paid out of
surplus only, so that net assets of the corporation after such declaration or
payment shall at least equal the amount of its stated capital.
RIGHT TO EXAMINE STOCKHOLDER LIST
The DGCL provides that stockholders have a right for a period of 10 days
prior to any stockholder meeting and during such meeting, to examine a list of
stockholders of the corporation, arranged in alphabetical order and showing the
address and the number of shares held by such stockholder, for any purpose
germane to such meeting. Further, under the DGCL, any stockholder, following a
written request, has the right to inspect the corporation's books and records,
including the stockholder list, during usual business hours for a proper
purpose.
The NYBCL provides that shareholders have a right, upon request at or prior
to any stockholder meeting, to examine the list of shareholders of the
corporation. Further, under the NYBCL, any shareholder, following at least five
days' written demand, has the right to inspect the corporation's books and
records, including the shareholder list, during usual business hours for any
purpose reasonably related to such person's interest as a shareholder.
INTERESTED DIRECTOR TRANSACTIONS
Under both the DGCL and the NYBCL, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not valid or
voidable because of such interest provided that certain conditions are met.
Under the DGCL and the NYBCL, any such contract or transaction may be ratified
by the stockholders (as set forth below) or a majority of disinterested members
of the board of directors or a committee thereof if (a) the material facts are
disclosed or known thereto, or (b) the contract or transaction was fair (and
under the NYBCL, reasonable) to the corporation at the time it was approved.
Under the DGCL, any ratification of such a contract or transaction by the
stockholders must be made by a
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majority of all stockholders in good faith. Under the NYBCL, such ratification
must be made by a majority of the disinterested stockholders.
PREEMPTIVE RIGHTS
Under the DGCL, stockholders have no preemptive rights unless such rights
are provided for in the certificate of incorporation. The ATC Charter does not
provide for preemptive rights associated with the ATC Common Stock.
Under the NYBCL, with respect to corporations incorporated prior to February
22, 1998, except as otherwise provided in the certificate of incorporation, the
holders of equity shares of any class of stock, in case if the proposed issuance
by the corporation of or the proposed granting by the corporation of rights or
options to purchase its equity shares of any class, shall, if such proposed
issuance or grant adversely affect the unlimited dividend rights of such
holders, have the right during a reasonable time and on reasonable conditions to
purchase such shares or other securities in proportions as determined under the
NYBCL. The IQI Charter does not provide for such preemptive rights. For
corporations incorporated after February 22, 1998, the holders of equity shares
of any class of stock have no preemptive rights unless such rights are provided
for in the certificate of incorporation.
AFFILIATES' RESTRICTION ON SALE OF ATC COMMON STOCK
The shares of ATC Common Stock to be issued pursuant to the Merger will be
registered under the Securities Act by a Registration Statement on Form S-4,
thereby allowing such securities to be traded without restriction by any former
holder of IQI securities who is not deemed to be an "affiliate" of IQI prior to
the consummation of the Merger, as "affiliate" is defined for purposes of Rule
145 under the Securities Act, and who does not become an "affiliate" of ATC
after the consummation of the Merger.
Shares of ATC Common Stock received by persons who are deemed to be
affiliates of IQI prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act or as otherwise permitted under the Securities Act. In general, Rule 145, as
currently in effect, imposes restrictions on the manner in which such affiliates
may make resales of ATC Common Stock and also on the quantity of resales that
such stockholders, and others with whom they may act in concert, may make within
any three-month period for a period of two (2) years after consummation of the
Merger. Persons who may be deemed to be affiliates of IQI generally include
individuals or entities that control, are controlled by, or are under common
control with IQI and may include certain officers and directors as well as
principal stockholders of IQI. IQI stockholders who are identified as affiliates
will be so advised by IQI prior to the Effective Time. In addition, officers and
directors of ATC following the Merger will be subject to the resale restrictions
of Rule 144 as it applies to affiliates of an issuer.
LEGAL MATTERS
Certain legal matters with respect to the validity of the ATC Common Stock
to be issued in connection with the Merger and with respect to certain federal
income tax consequences of the Merger are being passed upon for ATC by Hughes &
Luce, L.L.P., Dallas, Texas. Certain legal matters with respect to certain
federal income tax consequences of the Merger are being passed upon for IQI by
Paul, Hastings, Janofsky & Walker LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of ATC Communications Group, Inc. as
of June 30, 1997 and 1996 and for each of the three years in the periods ended
June 30, 1997 included in this Joint Proxy Statement/Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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The consolidated financial statements of IQI, Inc. as of December 31, 1997
and 1996 and for the year ended December 31, 1997, the five-month period ended
December 31, 1996 and the years ended July 31, 1996 and 1995, included in this
Joint Proxy Statement/Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein
which, as to the five-month period ended December 31, 1996, is based in part on
the report of Arthur Andersen LLP, independent auditors. The consolidated
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The financial statements of InterServ Services Corporation for the six
months and 11 days ended July 11, 1997 included in this Joint Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of InterServ Services Corporation as of December
31, 1996 and 1995 and for each of the two years then ended and the consolidated
financial statements of Lexi International, Inc. as of September 30, 1996, 1995,
and 1994 and for each of the three years then ended included in this Joint Proxy
Statement/Prospectus and Registration Statement have been audited by Arthur
Andersen LLP, independent pubic accountants, as stated in their reports
appearing herein and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
ATC incorporates herein by reference all documents filed by ATC pursuant to
Section 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of
this Joint Proxy Statement/Prospectus and prior to the date of the ATC Annual
Meeting, and all such documents shall be deemed to be incorporated by reference
in this Joint Proxy Statement/Prospectus and to be a part hereof from the date
of filing of such documents. All information appearing in this Joint Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated by reference herein.
Any statement contained in a document incorporated or deemed incorporated by
reference herein shall be modified or superseded, for purposes of this Joint
Proxy Statement/Prospectus, to the extent that a statement contained herein or
in any subsequently filed document that is deemed to be incorporated herein
modifies or supersedes any such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Joint Proxy Statement/Prospectus.
AS A RESULT OF THE FOREGOING, THIS JOINT PROXY STATEMENT/PROSPECTUS MAY
INCORPORATE DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. ATC HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS JOINT PROXY STATEMENT/
PROSPECTUS HAS BEEN DELIVERED, ON WRITTEN OR ORAL REQUEST BY ANY SUCH PERSON, A
COPY OF ANY AND ALL OF THE DOCUMENTS REFERRED TO ABOVE THAT HAVE BEEN OR MAY BE
INCORPORATED BY REFERENCE, OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS).
DOCUMENTS RELATING TO ATC ARE AVAILABLE UPON REQUEST FROM ATC COMMUNICATIONS
GROUP, INC., 5950 BERKSHIRE LANE, SUITE 1650, DALLAS, TEXAS 75225, ATTENTION:
JERRY L. SIMS, JR., SECRETARY, (214) 361-9870.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ATC COMMUNICATIONS GROUP, INC. ............................................................................ F-3
Report of Independent Accountants.......................................................................... F-4
Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995......................... F-5
Consolidated Balance Sheets at June 30, 1997 and 1996...................................................... F-6
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995........... F-7
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995..................... F-8
Notes to Consolidated Financial Statements................................................................. F-9
Consolidated Balance Sheets at March 31, 1998 (unaudited) and June 30, 1997 (audited)...................... F-22
Unaudited Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997......... F-23
Unaudited Consolidated Statements of Operations for the nine months ended March 31, 1998 and 1997.......... F-24
Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 1998 and 1997.......... F-25
Notes to Unaudited Consolidated Financial Statements....................................................... F-26
IQI, INC. ................................................................................................. F-30
Report of Independent Auditors............................................................................. F-31
Report of Independent Public Accountants................................................................... F-32
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-33
Consolidated Statements of Operations for the year ended December 31, 1997, the five months ended December
31, 1996 and the years ended July 31, 1996 and 1995...................................................... F-34
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1997, the five months ended
December 31, 1996 and the years ended July 31, 1996 and 1995............................................. F-35
Consolidated Statements of Cash Flows for the year ended December 31, 1997, the five months ended December
31, 1996 and the years ended July 31, 1996 and 1995...................................................... F-36
Notes to Consolidated Financial Statements................................................................. F-38
Condensed Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31, 1997 (audited)........ F-53
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and
1997..................................................................................................... F-54
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and
1997..................................................................................................... F-55
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-56
INTERSERV SERVICES CORPORATION ............................................................................ F-58
Report of Independent Auditors............................................................................. F-59
Statement of Operations for the six months and 11 days ended July 11, 1997................................. F-60
Statement of Stockholders' Equity for the six months and 11 days ended July 11, 1997....................... F-61
Statement of Cash Flows for the six months and 11 days ended July 11, 1997................................. F-62
Notes to Financial Statements.............................................................................. F-63
Report of Independent Public Accountants................................................................... F-71
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Balance Sheets as of December 31, 1996 and 1995............................................................ F-72
Statements of Operations for the years ended December 31, 1996 and 1995.................................... F-73
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995.......................... F-74
Statements of Cash Flows for the years ended December 31, 1996 and 1995.................................... F-75
Notes to Financial Statements.............................................................................. F-76
LEXI INTERNATIONAL, INC.................................................................................... F-83
Report of Independent Public Accountants................................................................... F-84
Consolidated Balance Sheets--September 30, 1996, 1995 and 1994............................................. F-85
Consolidated Statements of Operations and Changes in Retained Deficit for the Fiscal Years Ended September
30, 1996, 1995 and 1994.................................................................................. F-87
Notes to the Consolidated Financial Statements............................................................. F-90
</TABLE>
F-2
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
ATC COMMUNICATIONS GROUP, INC.
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of ATC Communications Group, Inc.
In our opinion, the consolidated financial statements appearing on pages F-5
to F-21 and S-1 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, except as to
Notes 7, 12 and 15, which are
as of April 24, 1998
F-4
<PAGE>
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 profit........................................................ 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
------------- ------------- -------------
------------- ------------- -------------
Basic earnings per share (Note 7):
Income from continuing operations................................. $ 0.07 $ 0.40 $ 0.10
Income (loss) from discontinued operations........................ -- -- $ (0.01)
------------- ------------- -------------
Net income...................................................... $ 0.07 $ 0.40 $ 0.09
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings per 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 shares outstanding (Note 7):
Basic............................................................. 18,075,603 13,890,616 13,561,007
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... 22,149,692 21,177,186 18,441,214
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
--------- ---------
Current assets:
<S> <C> <C>
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
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
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-6
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------
SERIES B SERIES C COMMON STOCK ADDITIONAL
------------------------ -------------------- -------------------- TREASURY PAID-IN
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE STOCK CAPITAL
----------- ----- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994....... 29,778 $ 298 840,000 $ 8,400 13,563,361 $ 135,634 $ -- $8,657,058
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) 8,657,058
Cash dividend paid on preferred
stock........................ -- -- -- -- -- -- -- --
Net Income..................... -- -- -- -- -- -- -- --
Exercise of stock options...... -- -- -- -- 1,468,800 14,688 -- 482,591
Tax benefit of stock options
exercised.................... -- -- -- -- -- -- -- 960,755
----------- ----- --------- --------- --------- --------- --------- ----------
Balance at June 30, 1996....... 29,778 298 840,000 8,400 15,032,161 150,322 (7,448) 10,100,404
Conversion of preferred
stock........................ -- -- (840,000) (8,400) 4,200,000 42,000 -- (33,600)
Net Income..................... -- -- -- -- -- -- -- --
Purchase of subsidiary minority
interest..................... -- -- -- -- 526,032 5,260 -- 540,526
Exercise of stock options...... -- -- -- -- 2,034,929 20,349 -- 2,134,364
Treasury stock purchased....... -- -- -- -- -- -- (413,473) --
Tax benefit of stock options
exercised.................... -- -- -- -- -- -- -- 5,462,991
----------- ----- --------- --------- --------- --------- --------- ----------
Balance at June 30, 1997....... 29,778 $ 298 -- $ -- 21,793,122 $ 217,931 $(420,921) $18,204,685
----------- ----- --------- --------- --------- --------- --------- ----------
----------- ----- --------- --------- --------- --------- --------- ----------
<CAPTION>
RETAINED TOTAL
EARNINGS SHAREHOLDERS'
(DEFICIT) EQUITY
---------- -------------
<S> <C> <C>
Balance at June 30, 1994....... $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....... 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...... -- 497,279
Tax benefit of stock options
exercised.................... -- 960,755
---------- -------------
Balance at June 30, 1996....... 9,189,800 19,441,776
Conversion of preferred
stock........................ -- --
Net Income..................... 1,429,468 1,429,468
Purchase of subsidiary minority
interest..................... -- 545,786
Exercise of stock options...... -- 2,154,713
Treasury stock purchased....... -- (413,473)
Tax benefit of stock options
exercised.................... -- 5,462,991
---------- -------------
Balance at June 30, 1997....... $10,619,268 $28,621,261
---------- -------------
---------- -------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
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-8
<PAGE>
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
NAME DATE ACQUIRED OWNED BY OWNERSHIP PRINCIPAL BUSINESS ACTIVITY
- ---------------------------------- ------------- ----------- ----------- -----------------------------
<S> <C> <C> <C> <C>
Advanced Telemarketing
Corporation..................... April 1988 ATC 98.6% Call center management
(d/b/a ATC 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-9
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-10
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board issued FAS No. 128 ("SFAS 128"). The Company adopted SFAS 128, which
establishes standards for computing and presenting earnings per share ("EPS"),
in the second quarter of fiscal 1998 and has restated all prior period financial
statements pursuant to SFAS 128. 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.
COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130 ("SFAS 130") "Reporting Comprehensive Income." This
statement establishes standards for 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 beginning after December 15, 1997. The Company believes that 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>
F-11
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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. 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.
F-12
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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, 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.
F-13
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
7. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 ("SFAS 128") which establishes standards for computing and presenting
earnings per share ("EPS"). The Company adopted SFAS 128 in the second quarter
of fiscal 1998 and has restated all prior period financial statements pursuant
to SFAS 128. 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 and diluted EPS are computed by dividing net income applicable to common
stock by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Basic EPS excludes the effect of
potentially dilutive securities while diluted 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.
Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options and warrants, computed based on the treasury stock
method and the assumed conversion of the Company's issued and outstanding
preferred stock. Common stock equivalents are not included in diluted EPS
calculations to the extent their inclusion would have an anti-dilutive effect.
Net income applicable to common stock was adjusted to reflect the income
attributable to the minority ownership interest, including stock options issued
to certain key employees and officers in Advanced, the operating subsidiary of
the Company.
Basic and diluted shares outstanding were computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
BASIC
Weighted average common shares outstanding................ 18,075,603 13,890,616 13,561,007
------------- ------------- -------------
------------- ------------- -------------
DILUTED
Weighted average common 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
------------- ------------- -------------
Diluted shares............................................ 22,149,692 21,177,186 18,441,214
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-14
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
7. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Basic and diluted earnings per share were computed as follows:
1997 1996 1995
---------- ---------- ----------
BASIC
<S> <C> <C> <C>
Net income from continuing operations......... $1,429,468 $5,850,128 $1,444,612
Less: net income applicable to Advanced
minority interest........................... (130,507) (145,582) (21,219)
Less: preferred dividends..................... (103,120) (103,130)
---------- ---------- ----------
Net income from continuing operations used in
Basic EPS calculation....................... 1,298,961 5,601,426 1,320,273
Loss from discontinued operations............. -- -- (109,229)
---------- ---------- ----------
Net income used in Basic EPS calculation...... $1,298,961 $5,601,426 $1,211,044
---------- ---------- ----------
---------- ---------- ----------
Net income from continuing operations per
share....................................... $ 0.07 $ 0.40 $ 0.10
Loss from discontinued operations per share... -- -- (0.01)
---------- ---------- ----------
Net income per share.......................... $ 0.07 $ 0.40 $ 0.09
---------- ---------- ----------
---------- ---------- ----------
DILUTED
Net income from continuing operations......... $1,429,468 $5,850,128 $1,444,612
Less: net income applicable to Advanced
minority interest........................... (205,712) (600,939) (408,929)
---------- ---------- ----------
Net income from continuing operations used in
Diluted EPS calculation..................... 1,223,756 5,249,189 1,035,683
Loss from discontinued operations............. -- -- (109,229)
---------- ---------- ----------
Net income used in Diluted EPS calculation.... $1,223,756 $5,249,189 $ 926,454
---------- ---------- ----------
---------- ---------- ----------
Net income from continuing operations per
share....................................... $ 0.06 $ 0.25 $ 0.06
Loss from discontinued operations per share... -- -- (0.01)
---------- ---------- ----------
Net income per share.......................... $ 0.06 $ 0.25 $ 0.05
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Net income applicable to Advanced minority interest was computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
BASIC
Advanced net income after income tax
allocation................................................ $ 2,523,666 $ 6,678,068 $ 42,187,535
Minority interest........................................... 5.17% 2.18% 0.97%
------------ ------------ -------------
Net income applicable to Advanced minority interest......... $ 130,507 $ 145,582 $ 21,219
------------ ------------ -------------
------------ ------------ -------------
DILUTED
Advanced net income after income tax allocation............. $ 2,523,666 $ 6,678,068 $ 2,187,535
Minority interest........................................... 8.15% 9.00% 18.69%
------------ ------------ -------------
Net income applicable to Advanced minority interest......... $ 205,712 $ 600,939 $ 408,929
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-15
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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>
F-16
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
9. INCOME TAXES (CONTINUED)
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>
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.
F-17
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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>
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>
F-18
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following tables summarize information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- VESTED OPTIONS
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL NUMBER OF EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE RANGE 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>
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
------------- ------------ ------------
------------- ------------ ------------
Basic earnings per share from continuing operations.......... $ 0.07 $ 0.40 $ 0.10
------------- ------------ ------------
------------- ------------ ------------
Diluted earnings per share from continuing operations........ $ 0.06 $ 0.25 $ 0.05
------------- ------------ ------------
------------- ------------ ------------
PRO FORMA:
Net income (loss) from continuing operations................. $ (1,236,950) $ 5,435,738 $ 783,284
------------- ------------ ------------
------------- ------------ ------------
Basic earnings per share from continuing operations.......... $ (0.07) $ 0.37 $ 0.05
------------- ------------ ------------
------------- ------------ ------------
Diluted earnings per share from continuing operations........ $ (0.07) $ 0.23 $ 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
F-19
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 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.
F-20
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996 AND 1995
14. DISPOSITION OF ASSETS (CONTINUED)
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.
15. SUBSEQUENT EVENTS
On April 7, 1998 the Company entered into a merger agreement, which set
forth the terms and conditions of a merger, with IQI, Inc. Under the terms of
the merger agreement, the Company will issue shares of its Common Stock to
stockholders of IQI, Inc. utilizing an exchange ratio of 9.7513 shares of ATC's
Common Stock for each share of IQI, Inc. common stock, which will result in IQI,
Inc. stockholders owning approximately 57.5% of ATC Common Stock assuming
exercise and conversion of all common stock equivalents.
The merger agreement contains a provision extending the maturity date of
one-half of the note receivable due to the Company by Michael G. Santry, the
Company's Chairman, to March 31, 1999. In addition, the merger agreement
contains provisions whereby the majority shareholder of IQI, Inc. will provide a
$2.0 million financial accommodation to the Company to fund the Company's
working capital needs in exchange for warrants to purchase up to 1,000,000
shares of Common Stock at an exercise price of $2.00 per share, the number of
warrants being exercisable being dependent on the amount of the accommodation
ultimately funded by the shareholder. In connection with the financial
accommodation commitment and for additional consideration of $110,000 the
Company issued warrants to purchase an additional 1,100,000 shares of the
Company's Common Stock at an exercise price of $1.96 per share, 110% of the
average of the high and low prices of ATC Common Stock on April 7, 1998, the day
before the announcement of the proposed merger. The merger agreement is subject
to regulatory and shareholder approvals.
F-21
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
MARCH 31, JUNE 30,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents...................................... $ 55,491 $ 632,826
Accounts receivable--trade, less allowance for doubtful
accounts of $73,826.......................................... 17,052,447 14,527,440
Notes receivable--related parties.............................. 4,141,956 3,809,658
Notes receivable--other........................................ 158,219 157,693
Current deferred tax asset..................................... 918,066 3,037,066
Prepaid expenses and other current assets...................... 374,212 763,361
Total current assets......................................... 22,700,391 22,928,044
Property and equipment, net of accumulated depreciation of
$11,206,624 and $8,211,046 at March 31, 1998 and June 30, 1997,
respectively................................................... 14,310,911 14,447,962
Cost in excess of net assets acquired, net of accumulated
amortization of $1,107,867 and $1,046,475 at March 31, 1998 and
June 30, 1997, respectively.................................... 1,661,927 1,723,319
Deferred tax assets.............................................. 5,998,760 1,998,531
Other assets..................................................... 422,633 124,930
----------- -----------
4$5,094,622 $41,222,786
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit....................................... $5,162,302 $ --
Current portion of long-term debt.............................. 1,455,505 1,395,304
Accounts payable--trade........................................ 3,297,110 821,187
Unearned revenues and customer deposits........................ 120,630 573,922
Accrued compensation expense................................... 3,003,656 1,524,954
Accrued telephone expense...................................... 823,989 659,949
Other accrued liabilities...................................... 3,553,991 2,872,596
Total current liabilities.................................... 17,417,183 7,847,912
Long-term debt................................................... 3,706,267 4,753,613
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
29,778 convertible, $.36 cumulative Series B shares issued
and outstanding.............................................. 298 298
Common stock, $.01 par value, 27,500,000 shares authorized;
21,839,624 and 21,793,122 shares issued and outstanding at
March 31, 1998 and June 30, 1997, respectively............... 218,396 217,931
Treasury stock................................................. (1,420,921) (420,921)
Additional paid-in capital..................................... 18,278,878 18,204,685
Retained earnings.............................................. 6,894,521 10,619,268
Total shareholders' equity................................... 23,971,172 28,621,261
4$5,094,622 $41,222,786
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-22
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 21,125,330 $ 24,480,347
Cost of services, excluding depreciation and amortization shown below.............. 15,734,113 16,781,122
------------- -------------
Gross profit....................................................................... 5,391,217 7,699,225
Selling, general and administrative expenses....................................... 5,484,219 6,048,327
Depreciation and amortization...................................................... 1,089,735 920,451
------------- -------------
Total expenses................................................................... 6,573,954 6,968,778
------------- -------------
Income (loss) from operations...................................................... (1,182,737) 730,447
Interest expense................................................................... 272,241 139,418
Interest income.................................................................... 61,706 25,020
------------- -------------
Income (loss) from operations before income taxes.................................. (1,393,272) 616,049
Income tax expense (benefit)....................................................... (457,151) 203,349
------------- -------------
Net income (loss)................................................................ $ (936,121) $ 412,700
------------- -------------
Earnings (loss) per share:
Basic............................................................................ $ (0.04) $ 0.02
------------- -------------
------------- -------------
Diluted.......................................................................... $ (0.04) $ 0.02
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 21,478,294 19,225,323
Weighted average common and common equivalent shares outstanding................... 21,478,294 21,871,609
</TABLE>
See accompanying notes.
F-23
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 64,765,553 $ 76,139,785
Cost of services, excluding depreciation and amortization shown below.............. 48,870,434 52,489,652
------------- -------------
Gross profit....................................................................... 15,895,119 23,650,133
Selling, general and administrative expenses....................................... 17,816,602 15,601,656
Depreciation and amortization...................................................... 3,124,308 2,593,501
------------- -------------
Total expenses................................................................... 20,940,910 18,195,157
------------- -------------
Income (loss) from operations...................................................... (5,045,791) 5,454,976
Interest expense................................................................... 738,508 395,576
Interest income.................................................................... 178,318 73,802
------------- -------------
Income (loss) from operations before income taxes.................................. (5,605,981) 5,133,202
Income tax expense (benefit)....................................................... (1,881,229) 1,748,711
------------- -------------
Net income (loss)................................................................ $ (3,724,752) $ 3,384,491
------------- -------------
------------- -------------
Earnings (loss) per share:
Basic............................................................................ $ (0.17) $ 0.19
------------- -------------
------------- -------------
Diluted.......................................................................... $ (0.17) $ 0.14
------------- -------------
------------- -------------
Weighted average common shares outstanding: 21,484,012 16,964,022
Weighted average common and common equivalent shares outstanding: 21,484,012 22,230,419
</TABLE>
See accompanying notes.
F-24
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ (3,724,752) $ 3,384,491
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 3,124,308 2,593,501
Other........................................................................... 1,324 --
Changes in operating assets and liabilities:
Accounts and notes receivable--related parties................................ (332,298) (1,489,736)
Accounts and notes receivable--other.......................................... (2,525,533) 2,132,430
Prepaid expenses and other current assets..................................... 389,149 (610,890)
Deferred taxes................................................................ (1,881,229) --
Other assets.................................................................. (353,836) (39,287)
Accounts payable.............................................................. 2,475,923 (1,377,575)
Unearned revenue and customer deposits........................................ (453,292) (643,676)
Accrued liabilities........................................................... 2,385,913 (1,811,655)
------------- -------------
Net cash provided by (used in) operating activities............................. (894,323) 2,137,603
Cash flows from investing activities:
Capital expenditures (2,780,058) (3,155,304)
------------- -------------
Net cash used in investing activities........................................... (2,780,058) (3,155,304)
Cash flows from financing activities:
Proceeds from (payments on) line of credit, net................................. 5,162,302 (1,421,662)
Payments on long-term debt...................................................... (250,002) (250,002)
Payments on capital lease obligations........................................... (815,254) (672,612)
Proceeds from exercise of stock options......................................... -- 2,190,750
Purchases of treasury stock..................................................... (1,000,000) --
------------- -------------
Net cash provided by (used in) financing activities........................... 3,097,046 (153,526)
Net change in cash and cash equivalents............................................. (577,335) (1,171,227)
Cash and cash equivalents at beginning of period.................................... 632,826 1,723,702
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 55,491 $ 552,475
------------- -------------
------------- -------------
Supplemental information on non-cash transactions:
Tax benefit of stock options exercised............................................ -- 763,035
Capital lease obligations entered into............................................ 78,111 3,805,828
</TABLE>
See accompanying notes.
F-25
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial statements. These financial statements do not include all disclosures
associated with annual financial statements. Accordingly, these statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto contained in the Company's Form 10-K for the year
ended June 30, 1997.
In the opinion of management, all adjustments (which include all material,
normal and recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented have
been made. Interim results are not necessarily indicative of results expected
for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 ("SFAS 128"). The Company adopted 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 and diluted EPS are computed by dividing net income applicable to common
stock by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Basic EPS excludes the effect of
potentially dilutive securities while diluted 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.
Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options and warrants, computed based on the treasury stock
method, and the assumed conversion of the Company's issued and outstanding
preferred stock. Common stock equivalents are not included in diluted EPS
calculations to the extent their inclusion would have an anti-dilutive effect.
Net income applicable to common stock for the three and nine month periods
ended March 31, 1997 was adjusted to reflect the income attributable to the
minority ownership interest, including stock options issued to certain key
employees and officers, in Advanced Telemarketing Corporation d/b/a ATC
Communications, Inc. ("Advanced"), the operating subsidiary of the Company. Net
loss applicable to common stock for the three and nine month periods ended March
31, 1998 was not adjusted to reflect the net loss attributable to the minority
ownership interest, including stock options issued to certain key employees and
officers, in Advanced because minority interest holders in Advanced are under no
obligation to fund their proportionate share of losses incurred by Advanced.
F-26
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997
2. EARNINGS PER SHARE (CONTINUED)
Basic and diluted weighted average shares outstanding for the three and nine
month periods ending March 31, 1998 and 1997 were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- -----------------------------
1998 1997 1998 1997
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
BASIC
Weighted average common shares outstanding..... 21,839,294 19,231,323 21,826,896 16,970,022
Treasury shares................................ (361,000) (6,000) (342,884) (6,000)
--------------- ------------ --------------- ------------
Shares used in Basic EPS computation....... 21,478,294 19,225,323 21,484,012 16,964,022
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
DILUTED
Weighted average common shares outstanding..... 21,478,294 19,225,323 21,484,012 16,964,022
Common stock equivalents:
Dilutive stock options and warrants, net of
shares assumed repurchased with exercise
proceeds................................... -- (1) 588,952 -- (1) 1,740,915
Common Stock assumed issued on conversion of
dilutive preferred stock................... -- (1) 2,057,334 -- (1) 3,525,482
--------------- ------------ --------------- ------------
Shares used in Diluted EPS computation..... 21,478,294 21,871,609 21,484,012 22,230,419
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
</TABLE>
F-27
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997
2. EARNINGS PER SHARE (CONTINUED)
Basic and diluted earnings (loss) per share for the three and nine month
periods ended March 31, 1998 and 1997 was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ------------------------------
1998 1997 1998 1997
-------------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
BASIC
Net income (loss)................................ $ (936,121) $ 412,700 $ (3,724,752) $ 3,384,491
Less: net income applicable to Advanced minority
interest....................................... -- (2) (58,700) -- (2) (184,646)
Less: preferred stock dividends.................. (2,680) (2,680) (8,040) (8,040)
-------------- ---------- ---------------- ------------
Net income (loss) used in Basic EPS
calculation.................................... $ (938,801) $ 351,320 $ (3,732,792) $ 3,191,805
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
Net income (loss) per share...................... $ (0.04) $ 0.02 $ (0.17) $ 0.19
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
DILUTED
Net income (loss)................................ $ (936,121) $ 412,700 $ (3,724,752) $ 3,384,491
Less: net income applicable to Advanced minority
interest....................................... -- (2) (61,350) -- (2) (328,410)
-------------- ---------- ---------------- ------------
Net income (loss) used in Diluted EPS
calculation.................................... $ (936,121) $ 351,350 $ (3,724,752) $ 3,056,081
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
Net income (loss) per share...................... $ (0.04) $ 0.02 $ (0.17) $ 0.14
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
</TABLE>
F-28
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997
2. EARNINGS PER SHARE (CONTINUED)
Net income (loss) applicable to Advanced minority interest for the three and
nine month periods ended March 31, 1998 and 1997 was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ------------------------------
1998 1997 1998 1997
-------------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
BASIC
Advanced net income (loss) after income tax
allocation..................................... $ (665,049) $ 702,749 $ (2,352,921) $ 3,730,630
Minority interest................................ -- (2) 8.35% -- (2) 4.95%
-------------- ---------- ---------------- ------------
Net income applicable to Advanced minority
interest....................................... $ -- $ 58,700 $ -- $ 184,646
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
DILUTED
Advanced net income (loss) after income tax
allocation..................................... $ (665,049) $ 702,749 $ (2,352,921) $ 3,730,630
Minority interest................................ -- (2) 8.73% -- (2) 8.80%
-------------- ---------- ---------------- ------------
Net income applicable to Advanced minority
interest....................................... $ -- $ 61,350 $ -- $ 328,410
-------------- ---------- ---------------- ------------
-------------- ---------- ---------------- ------------
</TABLE>
- ------------------------
(1) For the three and nine month periods ended March 31, 1998, common stock
equivalents are not included in diluted EPS calculations because their
inclusion would have an anti-dilutive effect.
(2) Net losses applicable to common stock for the three and nine month periods
ended March 31, 1998 were not adjusted to reflect the income attributable to
the minority ownership interest in Advanced because minority interest
holders in Advanced are under no obligation to fund their proportionate
share of losses incurred by Advanced.
F-29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
IQI, INC.
YEAR ENDED DECEMBER 31, 1997, FIVE MONTHS ENDED DECEMBER 31, 1996,
AND YEARS ENDED JULY 31, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IQI, Inc.
We have audited the accompanying consolidated balance sheets of IQI, Inc.
and subsidiaries, formerly Edward Blank Associates, Inc., as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997, the
five months ended December 31, 1996, and the years ended July 31, 1996 and 1995.
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 did not audit the financial statements of Lexi International,
Inc., a wholly owned subsidiary which statements reflect total assets of
$24,028,000 as of December 31, 1996, and total revenues of $2,803,000 for the
six weeks ended December 31, 1996. Those statements were audited by other
auditors whose report has been furnished to us and, our opinion, insofar as it
relates to data included for Lexi International, Inc. at December 31, 1996, and
for the six weeks then ended, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of IQI, Inc. at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for the year
ended December 31, 1997, the five months ended December 31, 1996, and the years
ended July 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
April 17, 1998
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Lexi International, Inc.:
We have audited the accompanying consolidated balance sheet of Lexi
International, Inc. (a California corporation) and subsidiary as of December 31,
1996, and the related consolidated statement of operations and changes in
retained deficit and cash flows for the six week period then ended (not included
separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lexi International, Inc. and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the six week period then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 25, 1997
F-32
<PAGE>
IQI, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................................... $ 5,288 $ 2,250
Accounts receivable, less allowance for doubtful accounts of $550 in 1997 and $102 in 1996..... 21,209 14,842
Unbilled accounts receivable, net.............................................................. 4,367 1,965
Prepaid expenses and other current assets...................................................... 2,720 2,513
Deferred income taxes.......................................................................... 1,415 1,054
--------- -----------
Total current assets............................................................................. 34,999 22,624
Equipment, furniture and leasehold improvements, net............................................. 21,623 12,423
Goodwill, net of accumulated amortization of $1,647 in 1997 and $55 in 1996...................... 43,558 15,023
Deferred financing costs, net.................................................................... 1,242 783
Other assets..................................................................................... 314 1,161
--------- -----------
Total assets..................................................................................... $ 101,736 $ 52,014
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--bank, current portion........................................................... $ 350 $ 1,000
Bank overdrafts................................................................................ -- 313
Accounts payable and accrued expenses.......................................................... 5,535 8,779
Accrued payroll and related liabilities........................................................ 4,543 1,345
Due to related parties......................................................................... -- 249
Due to shareholders............................................................................ 1,908 250
Deferred income................................................................................ 3,262 425
Capital lease, current portion................................................................. 751 1,272
Income taxes payable........................................................................... 261 111
Deferred income taxes.......................................................................... 512 1,054
Other current liabilities...................................................................... 253 1,658
--------- -----------
Total current liabilities........................................................................ 17,375 16,456
Notes payable--bank, net of current portion...................................................... 49,475 18,600
Capital lease, net of current portion............................................................ 782 1,034
Deferred income taxes............................................................................ 2,331 2,374
Subordinated note payable--shareholder........................................................... 1,000 3,000
Other long-term liabilities...................................................................... 200 --
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.001 par value; 1,000,000 shares authorized; none issued or outstanding...... -- --
Common stock--$.001 par value; 4,000,000 shares authorized; 3,062,766 and 2,607,078 shares
issued and outstanding in 1997 and 1996, respectively........................................ 3 3
Additional paid-in capital..................................................................... 28,321 7,325
Cumulative translation adjustment.............................................................. 13 2
Retained earnings.............................................................................. 2,236 3,220
--------- -----------
Total stockholders' equity....................................................................... 30,573 10,550
--------- -----------
Total liabilities and stockholder's equity....................................................... $ 101,736 $ 52,014
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
F-33
<PAGE>
IQI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ----------------------
1997 1996 1996 1995
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Teleservices............................................. $ 115,609 $ 26,756 $ 57,543 $ 56,179
Marketing research services.............................. 18,223 -- -- --
------------ ------------ ---------- ----------
133,832 26,756 57,543 56,179
Operating expenses:
Cost of revenues--teleservices........................... 75,728 20,664 40,709 37,972
Cost of revenues--marketing research services............ 12,462 -- -- --
Selling, general and administrative expenses............. 40,813 9,613 12,485 10,237
Officer's salary......................................... -- 116 2,417 7,063
Amortization of goodwill................................. 1,592 55 -- --
------------ ------------ ---------- ----------
Operating income (loss).................................... 3,237 (3,692) 1,932 907
Other income (expense):
Other income, net........................................ -- 648 877 437
Interest expense, net.................................... (3,626) (450) (190) (72)
------------ ------------ ---------- ----------
Income (loss) before provision (benefit) for income
taxes.................................................... (389) (3,494) 2,619 1,272
Income tax provision (benefit):
Current.................................................. 1,391 12 17 53
Deferred................................................. (796) 1,782 -- 261
------------ ------------ ---------- ----------
595 1,794 17 314
------------ ------------ ---------- ----------
Net income (loss).......................................... $ (984) $ (5,288) $ 2,602 $ 958
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Net income (loss) per share:
Basic and diluted........................................ $ (.35) $ (2.11) $ 1.04 $ .38
Shares used in computation of net income (loss) per
share:................................................. 2,792,800 2,503,976 2,500,000 2,500,000
</TABLE>
See accompanying notes.
F-34
<PAGE>
IQI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
----------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Balance--August 1, 1994.................................. 2,500,000 $ 3 $ -- $ -- $ 8,214
Net income............................................. -- -- -- -- 958
----------- ----- ----------- ----- -----------
Balance--July 31, 1995................................... 2,500,000 3 -- -- 9,172
Foreign currency translation adjustment................ -- -- -- 1 --
Net income............................................. -- -- -- -- 2,602
----------- ----- ----------- ----- -----------
Balance--July 31, 1996................................... 2,500,000 3 -- 1 11,774
Cash contributions by shareholder...................... -- -- 4,675 -- --
Issuance of common stock in exchange for contribution
of affiliates........................................ 112,000 -- -- -- --
Repurchase of common stock in connection with IQI
Agreement............................................ (1,030,690) (1) (21,783) -- --
Issuance of common stock in connection with Lexi
acquisition.......................................... 1,025,768 1 21,167 -- --
Foreign currency translation adjustment................ -- -- -- 1 --
Net loss............................................... -- -- -- -- (5,288)
Re-classification of undistributed
S-corporation earnings................................. -- -- 3,266 -- (3,266)
----------- ----- ----------- ----- -----------
Balance--December 31, 1996............................... 2,607,078 3 7,325 2 3,220
Repurchase of common stock............................. (4,409) -- (90) -- --
Issuance of common stock in connection with InterServ
merger............................................... 393,073 -- 14,793 -- --
Exercise of stock options.............................. 4,190 -- 5 -- --
Capital contributions.................................. -- -- 4,475 -- --
Issuance of common stock pursuant to exercise of
warrants............................................. 62,834 -- 2,000 -- --
Return of capital to shareholder....................... -- -- (187) -- --
Foreign currency translation adjustment................ -- -- -- 11 --
Net loss............................................... -- -- -- -- (984)
----------- ----- ----------- ----- -----------
Balance--December 31, 1997............................... 3,062,766 $ 3 $ 28,321 $ 13 $ 2,236
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance--August 1, 1994.................................. $ 8,217
Net income............................................. 958
--------------
Balance--July 31, 1995................................... $ 9,175
Foreign currency translation adjustment................ 1
Net income............................................. 2,602
--------------
Balance--July 31, 1996................................... 11,778
Cash contributions by shareholder...................... 4,675
Issuance of common stock in exchange for contribution
of affiliates........................................ --
Repurchase of common stock in connection with IQI
Agreement............................................ (21,784)
Issuance of common stock in connection with Lexi
acquisition.......................................... 21,168
Foreign currency translation adjustment................ 1
Net loss............................................... (5,288)
Re-classification of undistributed
S-corporation earnings................................. --
--------------
Balance--December 31, 1996............................... 10,550
Repurchase of common stock............................. (90)
Issuance of common stock in connection with InterServ
merger............................................... 14,793
Exercise of stock options.............................. 5
Capital contributions.................................. 4,475
Issuance of common stock pursuant to exercise of
warrants............................................. 2,000
Return of capital to shareholder....................... (187)
Foreign currency translation adjustment................ 11
Net loss............................................... (984)
--------------
Balance--December 31, 1997............................... $ 30,573
--------------
--------------
</TABLE>
See accompanying notes.
F-35
<PAGE>
IQI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ (984) $ (5,288) $ 2,602 $ 958
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 6,093 1,024 1,314 857
Deferred income taxes...................................... (796) 1,782 -- 261
Amortization of deferred income............................ 217 (178) -- --
Changes in operating assets and liabilities:
Bank overdrafts.......................................... (313) (1,476) 1,236 --
Accounts receivable...................................... 1,527 2,383 (2,586) (3,558)
Unbilled accounts receivable............................. (709) (719) -- --
Prepaid expenses and other current assets................ 1,836 26 (258) (53)
Due to related parties................................... (249) 2,384 -- (35)
Other assets............................................. (138) 458 (450) (5)
Accounts payable and accrued expenses.................... (2,597) (877) 485 1,901
Income taxes payable..................................... 150 111 (33) 26
Other current liabilities................................ (1,774) 169 603 --
Other, net............................................... (247) 62 2 16
------------ ------------ --------- ---------
Net cash provided by (used in) operating activities............ 2,016 (139) 2,915 368
Investing activities
Purchases of fixed assets...................................... (10,018) (3,866) (3,488) (1,846)
Net cash aquired from the acquisition of Lexi.................. -- 5,462 -- --
Acquisition of InterServ, net of cash acquired................. (15,776) -- -- --
Loan and advances to affiliate................................. -- -- (2,370) --
------------ ------------ --------- ---------
Net cash provided by (used in) investing activities............ (25,794) 1,596 (5,858) (1,846)
Financing activities
Deferred financing costs....................................... (650) (800) -- --
Proceeds from notes payable.................................... 30,225 19,600 3,600 3,500
Principal payments of notes payable--bank...................... (6,200) (3,967) (3,657) (1,210)
Principal payments of capital leases payable................... (773) (59) -- --
Proceeds from sale leaseback................................... -- -- 1,688 --
Repurchase of common stock..................................... (90) (18,784) -- --
Return of capital to shareholder............................... (187) -- -- --
Proceeds from shareholder...................................... -- -- 63 --
Principal payments to shareholder.............................. -- -- (42) (176)
Proceeds from exercise of stock options........................ 5 -- -- --
Capital contributions.......................................... 4,475 4,675 -- --
------------ ------------ --------- ---------
Net cash provided by financing activities...................... 26,805 665 1,652 2,114
Effect of exchange rates on cash............................... 11 1 3 --
------------ ------------ --------- ---------
Increase (decrease) in cash and cash equivalents............... 3,038 2,123 (1,288) 636
Cash and cash equivalents--beginning of year................... 2,250 127 1,415 779
------------ ------------ --------- ---------
Cash and cash equivalents--end of year......................... $ 5,288 $ 2,250 $ 127 1,415
------------ ------------ --------- ---------
------------ ------------ --------- ---------
</TABLE>
See accompanying notes.
F-36
<PAGE>
IQI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
YEAR ENDED FIVE MONTHS
DECEMBER 31, ENDED DECEMBER ----------------------
1997 31, 1996 1996 1995
------------- --------------- --------- -----
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................ $ 3,046 $ 218 $ 177 $ 46
------ ----- --------- ---
------ ----- --------- ---
Income taxes........................................................ $ 1,206 $ 458 $ 88 $ 58
------ ----- --------- ---
------ ----- --------- ---
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1997 and 1996, the Company purchased equipment and furniture under
financing leases totaling $37 and $2,356, respectively.
During 1997, a shareholder forgave $2,000 of subordinated notes payable by
the Company, which was treated as a contribution of capital. On July 12, 1997,
the Company acquired the outstanding stock of InterServ Services Corporation in
exchange for cash of $15,415, common stock valued at $13,321 and options valued
at $1,472. In accordance with the InterServ purchase agreement, the Company has
accrued $1,908 as consideration for additional purchase price of InterServ,
which is payable in 1998.
On November 22, 1996, the Company acquired the common stock of Lexi
International, Inc. in exchange for common stock valued at $21,168.
See accompanying notes.
F-37
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
IQI, Inc., formerly Edward Blank Associates, Inc. (IQI), Lexi International,
Inc. (Lexi) which was acquired on November 22, 1996 (see Note 3), and InterServ
Services Corporation (InterServ) and its subsidiaries, which were acquired on
July 12, 1997 (collectively, IQI or the Company). All intercompany accounts have
been eliminated in consolidation. The accompanying consolidated financial
statements give effect to the acquisitions of Lexi and InterServ as of their
respective acquisition dates.
Effective November 18, 1996, IQI, certain of its affiliates, Edward Blank,
the sole shareholder of IQI and The Edward Blank 1995 Grantor Retained Annuity
Trust (collectively, Edward Blank) and Thayer Equity Investors III, L.P.
(Thayer) entered into a stock purchase agreement, (the IQI Agreement), whereby:
i) IQI redeemed 1,030,690 shares of its common stock held by Edward Blank for
cash, notes and a warrant, aggregating $21,168 and ii) Thayer acquired
additional common shares for cash from Edward Blank such that Thayer owned
approximately 80% of the outstanding shares of common stock of IQI, after giving
effect to i) above. The consideration paid for the redemption of the 1,030,690
shares was recorded as treasury stock, including related expenses of $783. Prior
to November 18, 1996, the Company was treated as an S-corporation for tax
purposes. On November 18, 1996, the Company became a C-corporation and became
subject to income taxes on that basis. As a result of the Company's change from
an S-corporation, undistributed retained earnings of $3,266 on November 17, 1996
have been reclassified to additional paid in capital.
The Company provides outsourced telecommunications-based marketing services
to large companies in various industries through strategically located calling
centers throughout the United States and Canada. The Company also provides,
through its InterServ subsidiary, customer service, call center management, and
market research services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Included in other assets is a
certificate of deposit, aggregating $155 at December 31, 1997 and 1996, which
has been pledged as collateral for a capital lease.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets, which range from three to ten years.
Leasehold improvements are amortized over the asset life or lease term,
whichever is shorter. Assets acquired under capitalized lease arrangements are
recorded at the present value of the minimum lease payments.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 1996, prepaid expenses and other current assets included an
escrow receivable of $2,400, an amount corresponding to the reserve established
by Lexi related to certain income tax matters as described in Note 10. In
accordance with the provisions of the Lexi purchase agreement, an escrow fund
F-38
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
was established to reimburse the Company for various pre-acquisition
contingencies. Such tax matters were resolved in 1997.
REVENUE RECOGNITION
Telemarketing services revenues earned under contracts based on hours worked
are recognized when the related services are performed at rates expected to be
realized under the contracts. Telemarketing services revenues earned under
contracts based on successful sales are recognized on the date such sale is
verified by the customer. Marketing research services revenue is recognized when
services are performed in accordance with contract terms.
GOODWILL
Goodwill is amortized using the straight-line method over a period of 20
years.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related debt
using the straight-line method.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Company's management of financial market risk, the Company
enters into transactions that involve contracts and financial instruments with
off-balance sheet risk, including interest rate collar agreements. The Company
enters into these agreements in order to manage the interest rate sensitivity
associated with its variable-rate indebtedness. The differential to be paid or
received in connection with interest rate hedging agreements is recognized as
interest rates change and is charged or credited to interest expense over the
life of the agreements. Gains or losses for early termination of such agreements
are recognized as an adjustment to interest expense over the remaining portion
of the original life of the terminated contract.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short maturity of
those instruments.
NOTES PAYABLE--BANK
The carrying amount approximates fair value due to its variable-rate nature.
F-39
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUBORDINATED NOTE PAYABLE--SHAREHOLDER
The fair value of the subordinated note to shareholder is based on the
Company's estimate of amount it would be required to pay in order to terminate
the indebtedness. Management believes that the amount it would be required to
pay is not materially different than the carrying amount.
INTEREST RATE HEDGING AGREEMENTS
The fair value of interest rate hedging agreements is estimated by obtaining
quotes from brokers as to the amount either party would be required to pay or
receive in order to terminate the agreement. Management believes that it would
have to pay approximately $109 to terminate its hedging agreement. This amount
is not reflected in the consolidated financial statements.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of IQI's Canadian
subsidiary ("EBA Direct") are measured using local currency as the functional
currency. Assets and liabilities are translated using the end of period exchange
rates while the statements of operations are translated at the average exchange
rate prevailing during the period. The translation adjustment arising from the
use of different exchange rates from period to period is a cumulative
translation adjustment in stockholders' equity.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" (Statement 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for the
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECOVERABILITY OF ASSETS
The Company periodically assesses the recoverability of tangible and
intangible assets (including goodwill) based on estimates of future undiscounted
cash flows compared to net book value. If future undiscounted cash flow
estimates were less than the net book value, net book value would then be
reduced to estimated fair value, which generally approximates discounted cash
flows. The Company also evaluates the depreciation and amortization periods of
assets to determine whether events or circumstances warrant revised estimates of
useful lives.
F-40
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. ACQUISITIONS
LEXI INTERNATIONAL, INC.
Effective November 22, 1996, Lexi entered into a purchase agreement with
Thayer whereby: i) Lexi issued common stock to Thayer for approximately $9
million and ii) certain former Lexi shareholders sold shares in Lexi to Thayer
for approximately $6.6 million. After giving effect to such transactions, Thayer
owned approximately 73% of Lexi.
On January 3, 1997, Lexi entered into a merger with a newly formed
subsidiary of IQI, whereby: i) the issued and outstanding shares of Lexi owned
by Thayer were acquired by the newly formed subsidiary for 748,194 shares of IQI
common stock, ii) the remaining 27% of Lexi not previously acquired by Thayer
was acquired by IQI in exchange for 277,574 shares of IQI common stock, and iii)
the newly formed subsidiary was merged into IQI and Lexi became a wholly owned
subsidiary of IQI (collectively, the Lexi Merger). The consolidated financial
statements give effect to the Lexi Merger on November 22, 1996, the date of
purchase by Thayer.
INTERSERV SERVICES CORPORATION
Effective July 12, 1997, IQI, certain of its affiliates and ITC Holding
Company (ITC) the former owner of InterServ, entered into a stock purchase
agreement, (the InterServ Agreement), whereby IQI purchased all of the
outstanding common shares of InterServ for a combination of stock and cash,
based on a formula, valued at $32,142, including the assumption of approximately
$6,200 of InterServ indebtedness. Included in the purchase price is additional
performance-based consideration of $1,908 to the former shareholders of
InterServ based on a formula contained in the InterServ Agreement. The
additional consideration is payable in cash and stock in the same proportion as
the initial transaction and is payable in 1998.
The acquisitions of Lexi and InterServ were accounted for by the purchase
method of accounting, whereby the purchase price of Lexi and InterServ was
allocated to the assets and liabilities assumed based
F-41
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS (CONTINUED)
on management's estimate of the relative fair values of the assets and
liabilities assumed at the date of acquisition, as follows:
<TABLE>
<CAPTION>
LEXI INTERSERV
--------- -----------
<S> <C> <C>
Purchase Price:
Issuance of common stock of IQI, Inc............................................ $ 21,168 $ 14,793
Additional common stock to be issued in 1998.................................... -- 874
Cash purchase price............................................................. -- 15,415
Additional cash consideration to be paid 1998................................... -- 1,034
Debt assumed.................................................................... -- 6,200
Other liabilities assumed....................................................... 5,318 4,754
Transaction costs............................................................... 1,140 1,342
--------- -----------
27,626 44,412
Fair Market Value of Assets Acquired and Liabilities Assumed:
Equipment, furniture, and leasehold improvements................................ 4,105 3,305
Other assets.................................................................... 8,035 11,388
--------- -----------
12,140 14,693
--------- -----------
Excess of Purchase Price over Fair Value of Assets Acquired and Liabilities
Assumed....................................................................... $ 15,486 $ 29,719
--------- -----------
--------- -----------
</TABLE>
In 1997, the Company recorded additional goodwill relating to the Lexi
acquisition of $283 pertaining to the resolution of certain pre-acquisition
contingencies.
The following unaudited condensed consolidated pro forma statements of
operations data present the consolidated results of operations of the Company as
if the acquisitions had occurred at the beginning of
F-42
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS (CONTINUED)
the periods presented and are not necessarily indicative of what would have
occurred had the acquisitions been made as of those dates or of the results
which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED JULY 31,
DECEMBER 31, 1997 1996
----------------- FIVE MONTHS ENDED ------------
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues..................................................... $ 159,153 $ 38,012 $ 95,850
Cost of revenues............................................. 104,975 29,588 70,090
----------------- ----------------- ------------
Gross profit................................................. 54,178 8,424 25,760
Other operating expenses..................................... 51,019 13,624 26,489
----------------- ----------------- ------------
Operating income (loss)...................................... 3,159 (5,200) (729)
Interest expense............................................. (4,512) (1,041) (641)
Other income................................................. -- 648 877
Income taxes................................................. (780) (1,614) (17)
----------------- ----------------- ------------
Net loss..................................................... $ (2,133) $ (7,207) $ (510)
----------------- ----------------- ------------
----------------- ----------------- ------------
Pro forma net loss per share:
Basic and diluted.......................................... $ (0.71) $ (2.22) $ (.14)
----------------- ----------------- ------------
----------------- ----------------- ------------
Weighted average shares...................................... 3,000,508 3,250,159 3,525,766
----------------- ----------------- ------------
----------------- ----------------- ------------
</TABLE>
4. EQUIPMENT, FURNITURE, AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Computer equipment................................................................ $ 21,528 $ 13,728
Leasehold improvements............................................................ 4,569 2,161
Furniture and equipment........................................................... 4,232 2,175
Telephone equipment............................................................... 2,901 723
Construction in progress--computer software....................................... 206 925
--------- ---------
33,436 19,712
Less accumulated depreciation and amortization.................................... 11,813 7,289
--------- ---------
$ 21,623 $ 12,423
--------- ---------
--------- ---------
</TABLE>
Construction in progress includes capitalized software costs of $206 and
$925 at December 31, 1997 and 1996, respectively. Upon completion of the
computer project, capitalized software costs are transferred to computer
equipment and amortized on a straight-line basis over three to five years.
F-43
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
5. NOTES PAYABLE--BANK
In connection with the original IQI Agreement, IQI obtained a $19,600 term
loan and a revolving loan commitment for a maximum principal amount of $10,000,
including a $2,000 letter of credit subfacility and a $2,000 swing line loan
subfacility (the Bank Loan). The Bank Loan originally matured in November 2002.
The swing line subfacility provided the Company with the ability to obtain
immediate borrowing. In connection with the IQI Agreement, the Company borrowed
$19,600 under the term loan commitment. The term loan requires quarterly
principal payments through December 2002. IQI incurred $800 of costs related to
the Bank Loan.
In May 1997, the Bank Loan was amended whereby, among other matters,
borrowings under the Bank Loan are available for Lexi and Lexi's results are
included in the determination of the aforementioned covenants, as amended.
In June 1997, the Bank Loan was amended again (the Amended Bank Loan) to
provide financing for the acquisition of InterServ. The Bank Loan was increased
to a $35,000 term loan and a revolving loan commitment for a maximum amount of
$18,000. The $2,000 letter of credit subfacility and $2,000 swing line loan
subfacility which are part of the revolving loan commitment were unchanged. The
Company paid additional loan costs of $650 for the amendments in 1997.
IQI may elect that the loans accrue interest at a fluctuating rate per
annum--Base Rate Loans, as defined, equal to the sum of the Alternate Base Rate,
as defined, plus the Applicable Margin for Base Rate loans, as defined (which is
dependent on IQI's Debt to EBITDA Ratio, as defined, and ranges from .25% to
1.5% for the Revolving Loan and 1.5% and 2% for the Term Loan). Alternatively,
IQI may elect that the loans accrue interest on a fixed rate basis, as defined.
Interest on swing line loans is at the aforementioned base rate and are not
entitled to be converted into LIBO rate loans. Interest is payable quarterly for
Base Rate Loans, and on the last day of each applicable Interest Period, as
defined, for LIBO Rate Loans. At December 31, 1997, amounts outstanding for
accrued interest based on the LIBO Rate was $482.
IQI is to pay commitment fees equal to .5% or .375% if the Debt to EBITDA
Ratio as defined, is greater than or equal to 3:1 or less than 3:1,
respectively, based on the average daily unused portion of the revolving loan
commitment amount.
IQI is subject to various covenants, as defined, including, among others,
Debt to EBITDA ratios, Interest Coverage Ratios, Cash Flow Coverage ratios and
restricted Capital Expenditure amounts. At December 31, 1997, IQI was in default
of certain covenants and, on March 30, 1998, obtained from its bank an amendment
to its Amended Bank Loan regarding these covenants. Under the amended terms,
management believes that it was in compliance with these covenants at December
31, 1997. Management also believes that it was in compliance with all other
covenants at December 31, 1997.
The Company has granted to the banks a security interest in all of the
assets of the Company including, without limitation, the pledge of all the
capital stock of Lexi and InterServ owned by the Company. In addition, Lexi and
InterServ have guaranteed the obligations of the Company under the Amended Bank
Loan.
F-44
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
5. NOTES PAYABLE--BANK (CONTINUED)
Future maturities of long term debt at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 350
1999............................................................... 350
2000............................................................... 350
2001............................................................... 8,575
2002............................................................... 16,800
Thereafter......................................................... 23,400
---------
$ 49,825
---------
---------
</TABLE>
At December 31, 1997, the Company had an interest rate collar agreement with
an original notional principal amount of $19,600 whereby the Company pays
interest at LIBO rates, subject to a floor of 5.6% and a cap of 8.0%. The
notional principal amount reduces by $250 each quarter through March 31, 1998,
by $375 for each of the four quarters ending March 31, 1999, and by $750 for
each of the three quarters ending December 31, 1999. The agreement terminates on
March 31, 2000. At December 31, 1997, the notional principal of this contract
was $18,850. The effects of this agreement on interest expense for the year
ended December 31, 1997, was immaterial.
6. SUBORDINATED NOTES PAYABLE--SHAREHOLDER
In connection with the redemption of shares of common stock in 1996, IQI
issued a subordinated note payable to a shareholder aggregating $3,000, due
November 2003. In December 1997, the Company and the shareholder consummated an
agreement to settle outstanding issues between the shareholder, the Company and
Thayer (the Company's principal shareholder). As part of such settlement, the
aggregate principal balance of the notes was reduced to $1,000, the interest
rate increased from 8% to 12% on the remaining note and the shareholder waived
the right to receive interest in the total amount of $30, but shall retain the
right to receive all other accrued but unpaid interest. The $2 million reduction
to the shareholder note was treated as a contribution of capital by the
shareholder.
7. STOCKHOLDERS' EQUITY
In connection with the IQI Agreement, all of the issued and outstanding
common shares of stock were automatically changed into $.001 par value common
shares at a rate of 100,000 shares for each share issued and outstanding. The
accompanying consolidated financial statements and footnotes show the
retroactive effect to such recapitalization. In connection with the IQI
Agreement, Ed Blank contributed all of the shares he owned of CEPC and Direct,
two affiliated entities, to IQI in exchange for 112,000 common shares of IQI.
In connection with the IQI Agreement, IQI issued warrants to a shareholder
to purchase an aggregate of 94,250 common shares for $3,000. The right to
exercise the warrants expires at the earlier of i) repayment of the subordinated
notes payable--shareholder, ii) the date the Company consummates an underwritten
public offering of common stock, iii) the consummation date of a sale of the
Company, as defined, or iv) November 2003. The warrants were valued at $186.
F-45
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
7. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1997, the Company and one of its shareholders settled a dispute
whereby the shareholder would i) reduce the principal balance of the notes
payable--shareholder from $3,000 to $1,000 and ii) purchase two-thirds of the
common shares subject to warrants (62,834 shares) by paying the exercise price
of $2,000. The balance of the warrants remains outstanding and subject to their
original terms. As part of the settlement, the entire escrow fund of
approximately $2,475 held under the Escrow Agreement entered into pursuant to
the IQI Agreement was returned to Thayer who, in turn, contributed the amounts
released to the Company.
8. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options issued
and warrants (using the if converted method) have been excluded from the
computation because their effects are antidilutive.
9. CAPITAL LEASES
In July 1996, IQI entered into a sale leaseback transaction related to
certain telecommunication and computer equipment under a Master Lease Agreement.
The note was secured by a first security interest in the equipment acquired with
the proceeds of the note. Payments, including interest at 8.05% per annum, were
due monthly in the amount of $53. In connection with the IQI Agreement, the note
was prepaid in full on November 19, 1996.
Lexi leases a telephone network and certain office equipment under capital
lease arrangements and has the option to purchase certain office equipment for a
nominal cost at the termination of the lease. Aggregate minimum future lease
payments are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998.............................................................. $ 874
1999.............................................................. 645
2000.............................................................. 205
2001.............................................................. 7
---------
1,731
Less amount representing interest................................... 198
---------
Total obligation under capital leases ($751 payable currently)...... $ 1,533
---------
---------
</TABLE>
The fixed asset balances include assets under capital lease agreements
entered into by the Company with a cost basis of $2,228 and $2,356 at December
31, 1997 and 1996, respectively, and accumulated depreciation of $574 and $56 as
of December 31, 1997 and 1996, respectively.
F-46
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
10. INCOME TAXES
IQI was taxed as an S-corporation through November 17, 1996, when its
election to be taxed as such terminated. Therefore, no provision for federal and
certain state income taxes was provided for any periods prior to November 17,
1996. The current tax provisions for the years ended July 31, 1996 and 1995 and
for the period from August 1, 1996 to November 17, 1996 consist of state income
taxes for the jurisdictions in which the Company did not have S-corporation
status.
The Company files a consolidated tax return on the basis of a July 31
year-end.
In 1996, Lexi recorded reserves for liabilities related to tax, interest and
penalties with respect to deductions claimed in previous tax return filings for
certain payments to, and on behalf of, shareholders. The aggregate reserve for
such liabilities as of December 31, 1996, is $2.4 million, which is included in
other current liabilities. During 1997, Lexi's tax return for the year ended
September 30, 1995, was examined by the Internal Revenue Service and the Company
reached a settlement agreement with the IRS. As part of the settlement, the
Company agreed to amend its returns for the years ended September 30, 1994 and
September 30, 1996. At December 31, 1997, the $2.4 million reserve was reduced
to $200 and the escrow receivable was eliminated due to the resolution of these
matters. These items were both charged to goodwill.
In addition, Lexi has claimed certain other deductions in a prior year, for
which a favorable ruling has been obtained from the IRS. However, the IRS
reserves the right to challenge the conditions of such ruling in future
examination and disallow these deductions. No amounts have been recorded for
these items. Management believes that any required adjustments to the Company's
tax liabilities will not have a material adverse impact on its financial
position or results of operations.
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Effect of cash to accrual accounting change...................................... $ (2,222) $ (3,006)
Depreciation..................................................................... (496) (422)
Other............................................................................ (125) --
--------- ---------
Total deferred tax liabilities..................................................... (2,843) (3,428)
Deferred tax assets:
Bad debt reserve................................................................. 764 322
Compensation accruals............................................................ 403 191
Royalty accrual.................................................................. 120 120
Net operating losses (NOL)....................................................... 103 240
Deferred income.................................................................. 60 173
Other............................................................................ 68 8
--------- ---------
Total deferred tax assets.......................................................... 1,518 1,054
Valuation allowance................................................................ (103) --
--------- ---------
Net deferred tax liability......................................................... $ (1,428) $ (2,374)
--------- ---------
--------- ---------
</TABLE>
F-47
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
10. INCOME TAXES (CONTINUED)
The income tax expense is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED JULY 31,
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal.................................................. $ 1,175 $ 10 $ -- $ --
State.................................................... 216 2 17 53
------ ------ --------- ---------
1,391 12 17 53
Deferred:
Federal.................................................. (672) 1,492 -- --
State.................................................... (124) 290 -- 261
------ ------ --------- ---------
(796) 1,782 -- 261
------ ------ --------- ---------
Total provision for income taxes........................... $ 595 $ 1,794 $ 17 $ 314
------ ------ --------- ---------
------ ------ --------- ---------
</TABLE>
A reconciliation of the Company's statutory federal income tax using the
effective rates based on the pre-tax loss is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED DECEMBER
YEAR ENDED ENDED 31,
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Federal tax (benefit) at the statutory rate................ $ (217) $ (822) $ -- $ --
State taxes, net of federal benefit........................ (225) (336) 17 314
Goodwill and acquisition costs............................. 798 123 -- --
Valuation allowance........................................ 103 -- -- --
Termination of S-corporation............................... -- 3,043 -- --
Other items................................................ 136 (214) -- --
----- ------ --------- ---------
$ 595 $ 1,794 $ 17 $ 314
----- ------ --------- ---------
----- ------ --------- ---------
</TABLE>
11. BILLING SETTLEMENT
In 1995, Lexi entered into an agreement to reimburse its principal customer
for billing discrepancies in the amount of $2,700. Reimbursements commenced in
1995 and concluded in March 1997.
The consolidated financial statements at December 31, 1996, reflect $1,198
of obligations to four customers relating to billing discrepancies. During 1997,
management settled these matters for a total amount of $1,114.
12. STOCK OPTION PLAN
In November 1996, the Company established the 1996 Incentive Stock Option
Plan (the Plan). The Plan provides for the award of incentive stock options to
directors, officers, key employees and members of
F-48
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
12. STOCK OPTION PLAN (CONTINUED)
Thayer's Advisory Board. The Plan is administered by a Compensation Committee,
as established by the Company's Board of Directors. These options are intended
to qualify as incentive stock options (ISOs) under the Internal Revenue Code or
nonstatutory stock options (NSOs) which are not intended to qualify. The Company
has reserved 403,000 shares of common stock for issuance under the Plan.
The following table summarizes certain information related to options for
common stock:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------- --------------
<S> <C> <C>
Granted during five months ended December 31, 1996....................... 144,414 $20.38
Forfeited................................................................ -- --
Exercised................................................................ -- --
----------- --------------
Outstanding at December 31, 1996........................................... 144,414 $20.38
Granted during 1997...................................................... 264,671 $8.33-$26.49
Forfeited................................................................ 21,282 $20.38
Exercised................................................................ 4,190 $8.33-$26.49
----------- --------------
Outstanding at December 31, 1997........................................... 383,613 $8.33-$26.49
----------- --------------
----------- --------------
</TABLE>
Included in options granted in 1997 are 69,915 options granted to certain
former option holders of InterServ which were issued at exercise prices below
the fair market value of IQI common stock. These options were issued as
replacements for similarly valued options held by such option holders prior to
the acquisition of InterServ by IQI. As a result of these arrangements, the
Company recorded additional goodwill of $1,472.
Information with respect to stock options outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Weighted average price per share....................................... $ 19.16 $ 20.38
Exercisable options.................................................... 141,315 35,393
Options available for future grants.................................... 14,747 35,018
Weighted average remaining contractual life............................ 9.0 9.9
</TABLE>
Pro forma information regarding the effect on operations has been determined
as if the Company had accounted for its employee stock options under the
fair-value method. The fair value for these options was estimated at the date of
grant using the minimum-value method, which utilizes a near-zero volatility
factor.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Expected life (years).................................................... 5 years 5 years
Risk-free interest rate.................................................. 6.30% 6.30%
Dividend yield........................................................... -- --
</TABLE>
F-49
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
12. STOCK OPTION PLAN (CONTINUED)
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because change in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net loss, as reported............................................ $ (984) $ (5,288)
------------ ------------
------------ ------------
Pro forma net loss............................................... $ (1,162) $ (5,416)
------------ ------------
------------ ------------
Net loss per share
Basic and diluted.............................................. $ (.42) $ (2.16)
------------ ------------
------------ ------------
</TABLE>
13. RETIREMENT PLANS
IQI has two qualified defined contribution 401(k) plans (the Plans) covering
all eligible employees of IQI. Under the Plan which covers EBA and Lexi
employees, IQI contributes up to 4% of eligible employee salaries at the rate of
$.50 for every dollar the employee contributes ($.25 for every dollar, for
fiscal years ended July 31, 1996 and prior). Under the Plan which covers
InterServ employees, the Company contributes amounts on a discretionary basis
equal to a percentage of each eligible employee's salary deferral, subject to
amounts allowed by the Internal Revenue Service. Contributions to the Plans for
the year ended December 31, 1997, the five months ended December 31, 1996, and
the years ended July 31, 1996 and 1995, were approximately $231, $108, $103 and
$21, respectively.
14. MAJOR CUSTOMERS
One customer accounted for approximately 43% of IQI's revenue for the year
ended December 31, 1997, and 22% of IQI's accounts receivable at December 31,
1997. Two customers accounted for approximately 43% and 18% of IQI's revenue for
the five months ended December 31, 1996, and 5% and 68% of IQI's accounts
receivable at December 31, 1996, respectively. Four customers accounted for
approximately 81% and 84% of the Company's revenue and accounts receivable,
respectively, for the year ended July 31, 1996. Three customers accounted for
70% and 77% of the Company's revenue and accounts receivable, respectively, for
the year ended July 31, 1995. Contracts with such customers are subject to
annual or bi-annual renegotiation.
15. RELATED PARTY TRANSACTIONS
Effective January 1, 1997, the Company entered into an agreement with an
affiliate of Thayer pursuant to which such affiliate will provide the Company
certain management and consulting services. As
F-50
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
consideration for the management and consulting services provided, the Company
is obligated to pay a quarterly fee of $138, plus certain direct expenses.
The Company provides services to certain customers, including its most
significant customer, who, directly or through affiliates, have an ownership
interest in Thayer.
During fiscal 1996, an affiliate of IQI purchased a building in which the
Company is leasing space. IQI funded the purchase of this building by lending
the affiliate approximately $2,203. This loan earned interest at the prime rate
plus 1% and was due on November 30, 1996. In connection with the IQI Agreement,
the loan, including accrued interest, was repaid in full on November 18, 1996.
Total rent expense relating to this space and additional space leased from this
affiliate amounted to approximately $115 for the five months ended December 31,
1996 and $172 and $102 for the years ended July 31, 1996 and 1995, respectively.
Interest income on the amounts due from this affiliate amounted to
approximately $107 for the five months ended December 31, 1996 and $109 for the
year ended July 31, 1996.
16. LEASES, COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company is obligated under leases for corporate office space, calling
centers and certain vehicles under operating leases. Aggregate minimum future
lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................. $ 5,218
1999............................................................. 3,008
2000............................................................. 2,695
2001............................................................. 2,082
2002............................................................. 1,634
Thereafter....................................................... 649
---------
$ 15,286
---------
---------
</TABLE>
Certain leases provide for wage and cost of living adjustments and renewal
options. Rent expense for the year ended December 31, 1997, the five months
ended December 31, 1996, and the years ended July 31, 1996 and 1995, was
approximately $3,455, $470, $1,199 and $948, respectively.
EMPLOYMENT AGREEMENTS
IQI had employment agreements with seven employees, five of whom are
employed as of December 31, 1997, which provide for, among other matters, annual
base compensation and certain additional compensation upon a change in control
of the Company, as defined. In 1997, the Company incurred $1,162 of additional
compensation related to these agreements, which is included in corporate
selling, general and administrative expenses.
F-51
<PAGE>
IQI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
16. LEASES, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION
The Company, in the normal course of business, is party to various
litigation matters, including litigation arising from employment issues. In the
opinion of management, the ultimate outcome of all litigation matters will not
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
17. CONCENTRATION OF CREDIT RISK
The Company provides its services to companies in diversified industries.
Accounts receivable from companies in the financial services industry and the
telecommunications industry totaled approximately $5,908 and $9,260 in 1997 and
$2,600 and $7,100 in 1996, respectively. The Company extends credit without any
collateral requirements; however, credit losses have historically been within
management's expectations.
18. SUBSEQUENT EVENTS
On April 7, 1998, IQI entered into a reverse merger agreement with ATC
Communications Group, Inc., a publicly traded company, (Nasdaq symbol "ATCT").
The merger agreement provides that a newly formed wholly owned subsidiary of ATC
(Newco) will merge with and into IQI, with IQI being the surviving corporation
and becoming a wholly owned subsidiary of ATC. Upon consummation, each issued
and outstanding share of IQI common stock will be converted into 9.7513 shares
of ATC common stock. The stock for stock exchange rate is not subject to
adjustment and, accordingly, will not increase or decrease as a result of
fluctuations in the market price of ATC common stock.
After the merger, IQI will control approximately 57% of the outstanding ATC
common stock, with approximately 43% remaining with current ATC shareholders.
The consummation of this transaction is subject to several conditions,
including the approval of ATC's shareholders, on which there can be no
assurance.
F-52
<PAGE>
IQI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, ------------
1998
------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 3,957 $ 5,288
Accounts receivable, less allowance for doubtful accounts of $437 in 1998 and $550 in
1997.................................................................................... 25,040 21,209
Unbilled accounts receivable, net......................................................... 5,268 4,367
Prepaid expenses and other current assets................................................. 2,513 2,720
Deferred income taxes..................................................................... 1,415 1,415
------------ ------------
Total current assets........................................................................ 38,193 34,999
Equipment, furniture and leasehold improvements, net........................................ 22,149 21,623
Goodwill, net of accumulated amortization of $571 in 1998 and $1,647 in 1997................ 43,100 43,558
Deferred financing costs, net............................................................... 1,177 1,242
Other assets................................................................................ 280 314
------------ ------------
Total assets................................................................................ $ 104,899 $ 101,736
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--bank, current portion...................................................... $ 350 $ 350
Accounts payable and accrued expenses..................................................... 9,202 5,535
Accrued payroll and related liabilities................................................... 5,153 4,543
Due to shareholders....................................................................... 1,908 1,908
Deferred income........................................................................... 1,909 3,262
Capital lease, current portion............................................................ 751 751
Income taxes payable...................................................................... 552 261
Deferred income taxes..................................................................... 512 512
Other current liabilities................................................................. 847 253
------------ ------------
Total current liabilities................................................................... 21,184 17,375
Notes payable--bank, net of current portion................................................. 49,388 49,475
Capital lease, net of current portion....................................................... 517 782
Deferred income taxes....................................................................... 2,331 2,331
Subordinated note payable--shareholder...................................................... 1,166 1,000
Other long-term liabilities................................................................. 200 200
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.001 par value; 1,000,000 shares authorized; none issued or
outstanding............................................................................. -- --
Common stock--$.001 par value; 4,000,000 shares authorized; 3,063,216 and 3,062,766 shares
issued and outstanding in 1998 and 1997, respectively................................... 3 3
Additional paid-in capital................................................................ 28,321 28,321
Cumulative translation adjustment......................................................... 13 13
Retained earnings......................................................................... 1,776 2,236
------------ ------------
Total stockholders' equity.................................................................. 30,113 30,573
------------ ------------
Total liabilities and stockholder's equity.................................................. $ 104,899 $ 101,736
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-53
<PAGE>
IQI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Teleservices.......................................................................... $ 34,194 $ 23,438
Marketing research services........................................................... 8,019 --
---------- ----------
42,213 23,438
Operating expenses:
Cost of revenues--teleservices........................................................ 21,382 15,705
Cost of revenues--marketing research services......................................... 5,447 --
Selling, general and administrative expenses.......................................... 13,797 7,280
Amortization of goodwill.............................................................. 571 218
---------- ----------
Operating income........................................................................ 1,016 235
Interest expense, net................................................................... (1,216) (543)
---------- ----------
Loss before provision (benefit) for income taxes........................................ (200) (308)
Income tax provision (benefit):
Current............................................................................... 260 (36)
Deferred.............................................................................. -- --
---------- ----------
260 (36)
---------- ----------
Net loss................................................................................ $ (460) $ (272)
---------- ----------
---------- ----------
Net loss per share:
Basic and diluted..................................................................... $ (0.15) $ (0.10)
---------- ----------
---------- ----------
Shares used in computation of net loss per share:..................................... 3,063,091 2,605,559
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-54
<PAGE>
IQI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities.......................................... $ 1,115 $ (1,089)
INVESTING ACTIVITIES
Purchases of fixed assets.................................................................... (2,158) (1,060)
--------- ---------
Net cash used in investing activities........................................................ (2,158) (1,060)
FINANCING ACTIVITIES
Deferred financing costs..................................................................... 65 --
Proceeds from notes payable--bank............................................................ -- 2,000
Principal payments of notes payable--bank.................................................... (88) (563)
Principal payments of capital leases payable................................................. (265) (98)
Repurchase of common stock................................................................... -- (90)
--------- ---------
Net cash provided by (used in) financing activities.......................................... (288) 1,249
Effect of exchange rates on cash............................................................. -- 7
--------- ---------
Decrease in cash and cash equivalents........................................................ (1,331) (893)
Cash and cash equivalents--beginning of period............................................... 5,288 2,250
--------- ---------
Cash and cash equivalents--end of period..................................................... $ 3,957 $ 1,357
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................................................... $ 1,088 $ 525
--------- ---------
--------- ---------
Income taxes............................................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-55
<PAGE>
IQI, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial statements. These financial statements do not include all disclosures
associated with annual financial statements. Accordingly, these statements
should be read in conjunction with the consolidated financial statements of IQI,
Inc. (the "Company") and notes thereto for the year ended December 31, 1997.
In the opinion of management, all adjustments (which include all material,
normal and recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented have
been made. Interim results are not necessarily indicative of results expected
for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 ("SFAS 128"). The Company has adopted SFAS 128, which establishes standards
for computing and presenting earnings per share ("EPS"). 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 and diluted EPS are
computed by dividing net income applicable to common stock by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Basic EPS excludes the effect of potentially
dilutive securities while diluted 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. Common stock
equivalents consist of common stock issuable under the assumed exercise of stock
options and warrants, computed based on the treasury stock method, and the
assumed conversion of the Company's issued and outstanding preferred stock.
Common stock equivalents are not included in diluted EPS calculations because
their inclusion would be anti-dilutive.
Basic and diluted weighted average shares outstanding were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Shares used in basic and diluted EPS computation................ 3,063,091 2,605,559
------------ ------------
------------ ------------
</TABLE>
3. ACQUISITIONS
In July 1997, the Company acquired InterServ Services Corporation
("InterServ") and accounted for the acquisition using the purchase method of
accounting. The following unaudited condensed consolidated pro forma information
for the three months ended March 31, 1997 presents results of operations of the
Company as if the acquisition had occurred on January 1, 1997 and are not
necessarily indicative of results
F-56
<PAGE>
IQI, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS (CONTINUED)
of operations that would have occurred had the acquisition taken place on such
date, nor do they purport to be indicative of results of operations for any
future period.
<TABLE>
<S> <C> <C>
Revenues.............................................. $ 34,677
Gross profit.......................................... 11,536
Operating loss........................................ (162)
Net loss.............................................. (1,291)
Pro forma net loss per share:
Basic and diluted................................... $ (0.43)
Weighted average shares............................. 2,998,630
</TABLE>
F-57
<PAGE>
FINANCIAL STATEMENTS
INTERSERV SERVICES CORPORATION
PERIOD ENDED JULY 11, 1997
WITH REPORT OF INDEPENDENT AUDITORS
F-58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
InterServ Services Corporation
We have audited the accompanying statement of operations of InterServ
Services Corporation, and the related statements of shareholder's equity and
cash flows for the six months and eleven days then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of InterServ
Services Corporation for the six months and eleven days ended July 11, 1997 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
January 16, 1998
F-59
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENT OF OPERATIONS
SIX MONTHS AND ELEVEN DAYS ENDED JULY 11, 1997
<TABLE>
<S> <C>
Revenues....................................................................... $25,321,386
Cost of sales.................................................................. 16,784,866
----------
Gross profit................................................................... 8,536,520
Selling, general and administrative expenses................................... 8,340,228
Depreciation and amortization.................................................. 935,780
Interest expense (NOTE 3)...................................................... 221,016
----------
Loss before income tax provision............................................... (960,504)
Income tax provision (NOTE 6).................................................. 220,207
----------
Net loss....................................................................... $(1,180,711)
----------
----------
</TABLE>
See accompanying notes.
F-60
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS AND ELEVEN DAYS ENDED JULY 11, 1997
<TABLE>
<CAPTION>
$.01 PAR VALUE
---------------------- RETAINED
COMMON PREFERRED PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) EQUITY
--------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996...................... $ 3,167 $ 65,200 $ 6,471,333 $ 1,051,981 $ 7,591,681
Shares repurchased (NOTES 4 AND 9)............ (1,178) -- -- -- (1,178)
Exercise of stock options (NOTES 4 AND 9)..... 4,401 -- 977,947 (360,442) 621,906
Net loss...................................... -- -- -- (1,180,711) (1,180,711)
--------- ----------- ------------ ------------- -------------
Balance, July 11, 1997.......................... $ 6,390 $ 65,200 $ 7,449,280 $ (489,172) $ 7,031,698
--------- ----------- ------------ ------------- -------------
--------- ----------- ------------ ------------- -------------
</TABLE>
F-61
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENT OF CASH FLOWS
SIX MONTHS AND ELEVEN DAYS ENDED JULY 11, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................... $ (1,180,711)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 935,780
Deferred tax provision....................................................... (149,782)
Changes in operating assets and liabilities:
Accounts receivable, net................................................... 2,115,463
Earned not billed.......................................................... (1,105,545)
Other assets............................................................... 126,292
Accounts payable........................................................... (275,021)
Billed not earned.......................................................... (579,510)
Accrued taxes.............................................................. (439,000)
Accrued and other current liabilities...................................... (281,242)
Deferred rent.............................................................. (15,513)
-------------
Total adjustments............................................................ 331,922
-------------
Net cash used in operating activities........................................ (848,789)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets....................................................... (1,231,933)
-------------
Net cash used in investing activities.......................................... (1,231,933)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock..................................................... (478,132)
Proceeds from stock options.................................................... 511,243
Stock compensation............................................................. 587,617
Proceeds from loan agreement with ITC Holding Company.......................... 2,000,000
Payments on loan agreement with ITC Holding Company............................ (1,500,000)
-------------
Net cash provided by financing activities...................................... 1,120,728
-------------
Decrease in cash and temporary investments..................................... (959,994)
Cash and temporary investments at beginning of period.......................... 2,066,289
-------------
Cash and temporary investments at July 11, 1997................................ $ 1,106,295
-------------
-------------
</TABLE>
See accompanying notes.
F-62
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 11, 1997
1. ORGANIZATION AND NATURE OF BUSINESS
InterServ Services Corporation ("InterServ" or the "Company"), a
majority-owned subsidiary of ITC Holding Company, Inc. ("ITC Holding"), was
formed on March 16, 1993 as a Delaware corporation. On August 1, 1995, the
Company purchased substantially all of the assets of Elrick & Lavidge, Inc.
("E&L").
InterServ is operationally organized in two business units, E&L and
Teleservices. E&L provides full-service marketing research specifically designed
to meet the needs of individual clients primarily in the telecommunications and
consumer packaged goods industries. The Teleservices business unit provides
outsourced customer and telemarketing services for clients primarily in the
telecommunications industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
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. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company's normal year-end is December 31. Amounts disclosed in the
financial statements and footnotes are as of July 11, 1997 and for the six
months and eleven days then ended.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees ("APB
No. 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies which do not choose to
account for stock-based compensation as prescribed by this statement shall
disclose the pro forma effects on net income as if SFAS No. 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used to determine the pro forma effects
of SFAS No. 123 (see Note 4).
REVENUE RECOGNITION
Revenues are recognized as the Company performs services in accordance with
contract terms. There was one customer who provided approximately 12% of total
revenues for the period ending July 11, 1997.
Most clients are billed in installments at predetermined milestones of a
project, not necessarily as the services are performed. Earned not billed and
billed not earned are used for the recognition of a deferred asset and a
liability, respectively, related to the installment billings.
CASH AND TEMPORARY INVESTMENTS
For purposes of the statements of cash flows, temporary investments
represent securities with maturities of 90 days or less and are considered cash
equivalents.
F-63
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (three to
five years). Amortization of leasehold improvements is provided over the life of
the related leases or estimated useful life, whichever is shorter.
Property and equipment consisted of the following at July 11, 1997:
<TABLE>
<S> <C>
Computer equipment and software................................. $3,476,088
Office furniture and equipment.................................. 2,673,721
Leasehold equipment............................................. 441,558
---------
6,591,367
Less accumulated depreciation................................... 3,286,513
---------
Property and equipment, net..................................... $3,304,854
---------
---------
</TABLE>
GOODWILL
Goodwill is stated at cost, less accumulated amortization, and is amortized
using the straight-line method over 15 years. The Company periodically reviews
the value assigned to goodwill to determine whether it has been other than
temporarily impaired by adverse conditions affecting the Company. Management is
of the opinion that there has been no diminution in the value assigned to
goodwill.
ORGANIZATIONAL COSTS
Organizational costs include the costs incurred in bringing the Company into
legal existence and for the E&L acquisition. These costs are being amortized on
a straight-line basis over a period of five years.
INCOME TAXES
The Company calculates income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No.
109 requires, among other things, the use of an asset and liability method for
the recognition of deferred tax liabilities and assets. The Company provides
deferred income taxes for all significant income tax temporary differences (see
Note 6).
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments for interest amounted to $202,001 for the six months and
eleven days ended July 11, 1997. Cash payments for income taxes amounted to
$811,555 for the six months and eleven days ended July 11, 1997.
3. LONG-TERM OBLIGATIONS
In connection with the E&L acquisition, in July 1995, the Company entered
into a $10,000,000 revolving lending arrangement with ITC Holding. The
outstanding balance as of July 11, 1997 was $6,200,000, with an interest rate
equal to the interest rate paid by ITC Holding on its revolving line of credit.
The interest rate at July 11, 1997 was 7.4375% per annum. Accrued interest of
$17,933 is included in
F-64
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
3. LONG-TERM OBLIGATIONS (CONTINUED)
accounts payable in the accompanying balance sheets at July 11, 1997. Interest
expense for the six months and eleven days ended July 11, 1997 was $221,016.
ITC Holding maintains loan facilities in an aggregate principal amount of up
to $80,000,000 in which the Company is a co-borrower and guarantor. All assets
of the Company have been pledged as collateral under these loan facilities.
Subsequent to July 11, 1997 the Company merged with another company (see
Note 9). The merger agreement included amongst other things, provisions for the
repayment of all outstanding amounts related to this credit arrangement. Upon
repayment the credit arrangement was terminated.
4. EQUITY
The Company has a stock option plan (the "1993 Stock Option Plan") under
which options to purchase shares of common stock may be granted to employees.
The authorized number of shares reserved under the 1993 Stock Option Plan is
1,075,000. Options generally are granted at a price (established by the board of
directors) equal to at least 100% of the fair market value of the common stock
on the option grant date; however, the exercise price with respect to options
granted to an individual who owns more than 10% of the combined voting power of
all classes of the stock of the Company must be at least 110% of the fair market
value of the common stock at the date of the grant. All options vest 50% after
two years, 75% after three years, and 100% after four years from the grant date.
Additionally, all options expire ten years from the date of grant (see Note 8).
In accordance with individual option agreements, all options outstanding as of
July 11, 1997 are exercisable, in various increments, through 2007. Total shares
exercisable at July 11, 1997 were 70,907 with a weighted average price of $1.00
per share. No options expired from December 31, 1996 through July 11, 1997.
During 1995, the FASB issued SFAS No. 123, which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB No. 25. Entities electing to continue to account for stock options under the
provisions of APB No. 25 must make pro forma disclosures of net income as if the
fair value-based method of accounting defined in the SFAS No. 123 had been
applied. The Company has elected to account for this plan under APB No. 25,
under which no compensation cost has been recognized. The Company has computed
(for pro forma disclosure purposes) the value of all options granted from
December 31, 1996 through July 11, 1997, using the minimum value method as
prescribed by SFAS No. 123 and using the following weighted average assumptions
used for grants during that same period.
<TABLE>
<CAPTION>
<S> <C>
Risk-free interest rate...................................................... 5.78%-7.24%
Expected dividend yield...................................................... 0%
Expected lives............................................................... ten years
Expected volatility.......................................................... 0%
</TABLE>
F-65
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
4. EQUITY (CONTINUED)
The total fair value of the options granted during the six months and eleven
days ended July 11, 1997 was computed as approximately $309,386, which would be
amortized over the vesting period of the options. If the Company had accounted
for these plans in accordance with SFAS No. 123, the Company's reported pro
forma net loss for the six months and eleven days ended July 11, 1997 would have
been as follows:
<TABLE>
<CAPTION>
<S> <C>
Net loss:
As reported................................................................... $ 1,180,711
Pro forma..................................................................... 1,244,109
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following table summarizes stock option transactions under the 1993
Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
---------- ---------------
<S> <C> <C>
Outstanding at December 31, 1996................................... 891,500 1.01
Granted.......................................................... 227,490 2.76
Forfeited........................................................ (28,800) 1.00
Exercised........................................................ (440,116) 1.16
---------- ---
Outstanding at July 11, 1997....................................... 650,074 1.51
----------
----------
</TABLE>
The range of exercise prices for options outstanding at July 11, 1997 and
the weighted average remaining contractual lives are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF WEIGHTED-AVERAGE REMAINING
SHARES EXERCISE PRIME CONTRACTUAL LIFE
- --------- ----------------- ----------------
<S> <C> <C>
490,900 $ 1.00 8.0 years
16,000 1.50 9.3
85,174 2.31 9.6
58,000 4.06 9.9
- ---------
650,074
- ---------
- ---------
</TABLE>
During the year the Company accelerated the vesting on approximately 200,000
stock options. The Company has used re-measurement accounting and has recognized
compensation expense equal to the difference between the original option price
and the value of the stock as of the date of modification. This resulted in
recognition of additional compensation expense of $590,000 which is included in
"Selling, general and administrative expense" on the Statement of Operations.
Immediately subsequent to July 11, 1997 the Company merged with a surviving
company (see Note 9). Concurrent with the merger, all outstanding option and
shares of stock were converted to options and shares in the surviving company.
As a result of the merger and conversion there are no additional
F-66
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
4. EQUITY (CONTINUED)
Company options available for grant at July 11, 1997. The above outstanding
options and weighted average price per share at July 11, 1997 are prior to the
merger. The merger did not substantially change the option terms with the
exception of the number of options and exercise price which changed based on the
terms of the merger agreement.
The Company acquired approximately 118,000 shares of treasury stock which
were subsequently reissued. The Company acquired these shares at the current
market price of $4.06 per share and subsequently reissued them through its stock
option plan at substantially lower prices. The Company has accounted for this
transaction in accordance with Accounting Principle Board's Opinion No. 6, which
requires the Company to recognize the difference between the price paid for
treasury stock and the price received upon re-issuance of approximately $360,000
as a charge directly to retained earnings.
5. OPERATING LEASES
The Company maintains certain noncancelable leases for office space with
varying maturities through 2001 and thereafter. From December 31, 1996 through
July 11, 1997, expenses under operating leases were approximately $1,312,569. At
July 11, 1997, the future minimum rental obligations for the remaining terms are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 2,076,000
1999............................................................................ 1,639,000
2000............................................................................ 1,331,000
2001............................................................................ 806,000
2002 and thereafter............................................................. 598,000
------------
Total minimum lease commitments................................................. $ 6,450,000
------------
------------
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
F-67
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
6. INCOME TAXES (CONTINUED)
significant components of the Company's deferred tax assets and liabilities as
of July 11, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation.................................................... $ 29,078
Amortization.................................................... 14,000
---------
Total deferred tax liabilities.................................... 43,078
---------
Deferred tax assets:
Allowance for doubtful accounts................................. 131,980
Benefits accrual................................................ 20,900
Other........................................................... 39,980
---------
Total deferred tax assets......................................... 192,860
---------
Net deferred tax asset............................................ $ 149,782
---------
---------
</TABLE>
A reconciliation of the statutory U.S. income tax rate to the effective
income tax rate for the period ended July 11, 1997 is as follows:
<TABLE>
<S> <C>
Tax (benefit) at statutory federal rate.................................. $(320,000)
State taxes net of federal benefit....................................... (48,000)
Stock options............................................................ 206,000
Acquisition costs........................................................ 233,000
Depreciation............................................................. (30,000)
Reserve for uncollectible accounts receivable............................ 132,000
Amortization of goodwill................................................. (14,000)
Other - net.............................................................. 61,000
---------
Total income tax expense............................................... $ 220,000
---------
---------
</TABLE>
Significant components of the Company's income tax provision include
approximately $369,000 of current expense and approximately $149,000 of deferred
tax income.
7. RELATED-PARTY TRANSACTIONS
J. Smith Lanier Insurance, Inc. ("J. Smith Lanier") provides the Company
with insurance and 401(k) administration services. Relatives of the stockholders
of ITC Holding are stockholders and employees of J. Smith Lanier. Additionally,
stockholders of J. Smith Lanier are directors of the Company. Payments of annual
premiums to J. Smith Lanier for insurance coverage amounted to approximately
$94,052 during the six months and eleven days ended July 11, 1997. Payments for
administration services related to the Company's 401(k) plan was approximately
$9,373 for the six months and eleven days ended July 11, 1997.
The Company also uses the services of certain affiliates of ITC Holding
during the normal course of business. The total expenses for the six months and
eleven days ended July 11, 1997 were approximately $228,492. Net amounts payable
to associated companies were approximately $85,160 at July 11, 1997.
F-68
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
8. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution employee benefit plan (the "Plan")
which covers all qualifying employees. The Plan provides for voluntary employee
contributions and a discretionary matching Company contribution equal to a
percentage of each eligible employee's elected salary deferral, subject to
maximum amounts allowed by the Internal Revenue Code. The cost of the Company's
Plan was $66,350.
9. SUBSEQUENT EVENT
Immediately subsequent to July 11, 1997, the Company was merged with another
company. The basis of the merger includes the Company receiving consideration in
exchange for the majority of its outstanding voting shares of common stock.
Consideration received by the Company includes amongst other things the
repayment of outstanding debt in the amount of $6,200,000. As a result of the
merger, operations have continued although the identity and separate legal
corporate existence of the Company has ceased and the acquiring company
continues as the surviving corporation.
As part of the merger agreement, preferred stock shareholders were offered
an option of conversion to the common stock of the surviving corporation, or a
cash settlement.
Effective prior to the merger all outstanding stock options immediately
vested. Corresponding with the merger all unexercised options were converted to
options of the surviving corporation.
In addition, subsequent to July 11, 1997 and related to the merger, several
key Company personnel were terminated.
10. FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Allowance for Doubtful Accounts:
Balance, January 1, 1997................................................ $ 298,390
Provision for doubtful accounts......................................... 79,224
Write-offs charged against allowance.................................... (29,614)
---------
Balance, July 11, 1997.................................................. $ 348,000
---------
---------
</TABLE>
F-69
<PAGE>
INTERSERV SERVICES CORPORATION
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
F-70
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
InterServ Services Corporation:
We have audited the accompanying balance sheets of INTERSERV SERVICES
CORPORATION (a Delaware corporation) as of December 31, 1996 and 1995 and the
related statements of operations, stockholders' equity, and cash flows for the
years then ended. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterServ Services
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 6, 1997
F-71
<PAGE>
INTERSERV SERVICES CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and temporary investments..................................................... $ 2,066,289 $ 1,828,144
Accounts receivable, net of allowance for doubtful accounts of $298,390 and
$198,199 at December 31, 1996 and 1995, respectively............................. 8,434,817 5,994,204
Earned not billed (Note 2)......................................................... 2,363,544 1,493,415
Prepaid expenses................................................................... 431,415 202,837
------------ ------------
13,296,065 9,518,600
------------ ------------
Property and equipment, net (Note 2) 2,844,284 2,894,208
------------ ------------
Other noncurrent assets:
Goodwill, net of accumulated amortization of $336,598 and $122,547 at December 31,
1996 and 1995, respectively...................................................... 3,259,328 4,424,657
Organizational costs, net of accumulated amortization of $114,216 and $67,846 at
December 31, 1996 and 1995, respectively......................................... 173,745 200,685
Intangible assets, net of accumulated amortization of $150,000 and $129,167 at
December 31, 1996 and 1995, respectively......................................... 0 20,833
Other.............................................................................. 19,617 6,800
------------ ------------
3,452,690 4,652,975
------------ ------------
$ 19,593,039 $ 17,065,783
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................... $ 1,178,872 $ 1,122,828
Billed not earned (Note 2)......................................................... 2,330,553 1,786,718
Note payable--ITC Holding Company due within one year.............................. 712,500 0
Accrued and other current liabilities.............................................. 2,776,419 1,635,539
------------ ------------
Total current liabilities........................................................ 6,998,344 4,545,085
------------ ------------
LONG-TERM OBLIGATIONS (Note 4):
Note payable--ITC Holding Company.................................................. 4,987,500 6,375,000
------------ ------------
Deferred Rent........................................................................ 15,514 29,757
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; $.05 per year noncumulative
dividend, $1 per share liquidation preference; 10,000,000 shares authorized and
6,520,000 shares outstanding at December 31, 1996 and 1995....................... 65,200 65,200
Common stock, $.01 par value; 10,000,000 shares authorized, 316,700 and 314,000
shares outstanding at December 31, 1996 and 1995, respectively................... 3,167 3,140
Additional paid-in capital......................................................... 6,471,333 6,468,660
Retained earnings (deficit)........................................................ 1,051,981 (421,059)
------------ ------------
7,591,681 6,115,941
$ 19,593,039 $ 17,065,783
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-72
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 48,192,031 $ 22,523,124
Cost of sales...................................................................... 32,685,513 15,194,132
------------- -------------
Gross profit................................................................... 15,506,518 7,328,992
Selling, general, and administrative expenses...................................... 11,850,808 5,697,889
Depreciation and amortization...................................................... 1,470,000 910,875
Interest expense (Note 4).......................................................... 478,823 220,775
Other income, net (Note 5)......................................................... (397,460) (58,728)
------------- -------------
Income before income tax provision................................................. 2,104,347 558,181
Income tax provision (Note 8)...................................................... 631,307 20,000
------------- -------------
Net income......................................................................... $ 1,473,040 $ 538,181
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
$.01 PAR VALUE
------------------------ TREASURY STOCK RETAINED
COMMON PREFERRED PAID-IN ---------------------------- EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL COMMON PREFERRED (DEFICIT) EQUITY
----------- ----------- --------- ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994...... $ 3,000 $ 40,000 $3,960,000 $ 0 $ 0 $(959,240) $3,043,760
Issuance of preferred stock
connected with Elrick &
Lavidge acquisition (Note
3).......................... 0 25,200 2,494,800 0 0 0 2,520,000
Exercise of stock options
(Note 6).................... 140 0 13,860 0 0 0 14,000
Net income.................... 0 0 0 0 0 538,181 538,181
----------- ----------- --------- --- --- --------- ------------
BALANCE, December 31, 1995...... 3,140 65,200 6,468,660 0 0 (421,059) 6,115,941
Exercise of stock options
(Note 6).................... 27 0 2,673 0 0 0 2,700
Net income.................... 0 0 0 0 0 1,473,040 1,473,040
----------- ----------- --------- --- --- --------- ------------
BALANCE, December 31, 1996...... $ 3,167 $ 65,200 $6,471,333 $ 0 $ 0 $1,051,981 $7,591,681
----------- ----------- --------- --- --- --------- ------------
----------- ----------- --------- --- --- --------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE>
INTERSERV SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 1,473,040 $ 538,181
------------- --------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 1,470,000 910,875
Gain on disposal of asset (Note 5)............................................. (438,824) 0
Changes in operating assets and liabilities:
Accounts receivable, net..................................................... (2,430,599) (893,375)
Earned not billed............................................................ (870,129) 1,121,254
Prepaids..................................................................... (158,879) (20,845)
Organizational costs......................................................... (19,429) (190,351)
Other assets................................................................. (22,788) (5,000)
Accounts payable:
Associated company......................................................... (48,232) 38,218
Trade...................................................................... 86,812 424,248
Billed not earned............................................................ 543,835 687,752
Accrued and other current liabilities........................................ 1,090,881 998,105
Deferred rent................................................................ (14,244) (5,935)
------------- --------------
Total adjustments.......................................................... (811,596) 3,064,946
------------- --------------
Net cash provided by operating activities.................................. 661,444 3,603,127
------------- --------------
Cash flows from investing activities:
Purchase of fixed assets......................................................... (1,073,822) (631,823)
Proceeds from disposal of asset (Note 5)......................................... 1,322,823 0
Acquisition of Elrick & Lavidge assets, net of cash acquired..................... 0 (11,185,175)
------------- --------------
Net cash provided by (used in) investing activities............................ 249,001 (11,816,998)
------------- --------------
Cash flows from financing activities:
Proceeds from sales of preferred stock........................................... 0 2,520,000
Proceeds from exercise of stock options.......................................... 2,700 14,000
Proceeds from loan agreement with ITC Holding Company............................ 0 8,000,000
Payments on loan agreement with ITC Holding Company.............................. (675,000) (1,625,000)
------------- --------------
Net cash (used in) provided by financing activities............................ (672,300) 8,909,000
------------- --------------
Increase in cash and temporary investments......................................... 238,145 695,129
Cash and temporary investments at beginning of year................................ 1,828,144 1,133,015
------------- --------------
Cash and temporary investments at end of year...................................... $ 2,066,289 $ 1,828,144
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND NATURE OF BUSINESS
InterServ Services Corporation ("InterServ" or the "Company"), a
majority-owned subsidiary of ITC Holding Company, Inc. ("ITC Holding"), was
formed on March 16, 1993 as a Delaware corporation. On August 1, 1995, the
Company purchased substantially all of the assets of Elrick & Lavidge, Inc.
("E&L") (Note 3).
InterServ is operationally organized in two business units, E&L and
Teleservices. E&L provides full-service marketing research specifically designed
to meet the needs of individual clients primarily in the telecommunications and
consumer packaged goods industries. The Teleservices business unit provides
outsourced customer and telemarketing services for clients primarily in the
telecommunications industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
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. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which becomes effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 established standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company adopted SFAS No. 121 effective January 1, 1996. The financial
statement impact of adopting SFAS No. 121 was not material.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issue to Employees" ("APB
No. 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies which do No. choose to
account for stock-based compensation as prescribed by this statement shall
disclose the pro forma effects on net income as if SFAS No. 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used to determine the pro forma effects
of SFAS No. 123 (Note 6).
REVENUE RECOGNITION
Revenues are recognized as the Company performs services in accordance with
contract terms.
Most clients are billed in installments at predetermined milestones of a
project, No. necessarily as the services are performed. Earned No. billed and
billed No. earned are used for the recognition of a deferred asset and a
liability, respectively, related to the installment billings.
F-76
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND TEMPORARY INVESTMENTS
For purposes of the statements of cash flows, temporary investments
represent securities with maturities of 90 days or less and are considered cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (three to
five years). Amortization of leasehold improvements is provided over the life of
the related leases or estimated useful life, whichever is shorter.
Property and equipment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Computer equipment and software................................... $ 2,584,641 $ 1,836,447
Office furniture and equipment.................................... 2,533,481 2,241,253
Leasehold equipment............................................... 241,313 207,912
------------ ------------
5,359,435 4,285,612
Less accumulated depreciation..................................... 2,515,151 1,391,404
------------ ------------
Property and equipment, net....................................... $ 2,844,284 $ 2,894,208
------------ ------------
------------ ------------
</TABLE>
GOODWILL
Goodwill is stated at cost, less accumulated amortization, and is amortized
using the straight-line method over 15 years. The Company periodically reviews
the value assigned to goodwill to determine whether it has been other than
temporarily impaired by adverse conditions affecting the Company. Management is
of the opinion that there has been no diminution in the value assigned to
goodwill.
ORGANIZATIONAL COSTS
Organizational costs include the costs incurred in bringing the Company into
legal existence and for the E&L acquisition. These costs are being amortized on
a straight-line basis over a period of five years.
INCOME TAXES
The Company calculates income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No.
109 requires, among other things, the use of an asset and liability method for
the recognition of deferred tax liabilities and assets. The Company provides
deferred income taxes for all significant income tax temporary differences (Note
8).
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments for interest amounted to $517,041 and $182,557 for the years
ended December 31, 1996 and 1995, respectively. Cash payments for income taxes
amounted to $120,512 and $11,000 for the years ended December 31, 1996 and 1995,
respectively.
F-77
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. ELRICK & LAVIDGE ACQUISITION
On July 31, 1995, InterServ entered into a sales contract with Equifax Inc.
("Equifax") to purchase substantially all of the assets of E&L, a wholly owned
subsidiary of Equifax, for a final negotiated amount of $11,235,175. In
connection with the acquisition, the Company issued 2,520,000 shares of
preferred stock and entered a revolving lending arrangement with ITC Holding for
an available line of $10,000,000 (Note 4). The E&L acquisition was accounted for
as a purchase, and goodwill was recorded in the amount of $4,547,204. In 1996,
E&L sold its retail tracking services product. Goodwill has been allocated in
the amount of $945,000 to the asset sold (Note 5).
4. LONG-TERM OBLIGATIONS
In connection with the E&L acquisition, in July 1995, the Company entered
into a $10,000,000 revolving lending arrangement with ITC Holding. The Company
has the right through July 31, 1997 to obtain advances of principal. The unpaid
principal amount of the note is due and payable in equal quarterly installments
beginning on October 31, 1997 and continuing on each January 31, April 30, July
31, and October 31 through July 31, 1999, when the entire remaining unpaid
principal and interest are due. The outstanding balance as of December 31, 1996
and 1995 was $5,700,000 and $6,375,000, respectively, with an interest rate
equal to the interest rate paid by ITC Holding on its revolving line of credit.
The interest rate at December 31, 1996 and 1995 was 7.8% and 7.4% per annum,
respectively. Accrued interest of $0 and $38,218 is included in accounts payable
in the accompanying balance sheets at December 31, 1996 and 1995, respectively.
Interest expense for the years ended December 31, 1996 and 1995 was $478,823 and
$220,775, respectively.
Aggregate maturities of long-term obligations for the years ended December
31 are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 712,500
1998.................................................... 2,850,000
1999.................................................... 2,137,500
2000 and thereafter..................................... 0
---------
$5,700,000
---------
---------
</TABLE>
Management is currently in discussions with ITC Holding to convert the
long-term obligation into a revolving line of credit.
In January 1996, ITC Holding entered into two loan facilities in an
aggregate principal amount of up to $112,500,000 in which the Company is a
coborrower and guarantor. This financing arrangement was amended to increase the
amount of credit available by $15,000,000 in June 1996. All assets of the
Company have been pledged as collateral under these loan facilities.
F-78
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
5. DISPOSAL OF ASSET
On July 12, 1996, the Company sold all rights under commitments and other
agreements relating to the operations of the Elrick & Lavidge Computerized Audit
Program ("ELCAP"), a retail tracking service, for net proceeds of $1,322,824.
The Company recorded a gain of $438,824, which is included in other income in
the accompanying statements of operations. Goodwill from the acquisition of E&L
(Note 3) has been adjusted for the value attributable to the ELCAP asset in the
net amount of $900,000, net of $45,000 in accumulated amortization.
6. EQUITY
The Company has a stock option plan (the "1993 Stock Option Plan") under
which options to purchase shares of common stock may be granted to employees.
The authorized number of shares reserved for the 1993 Stock Option Plan is
1,075,000. Options generally are granted at a price (established by the board of
directors) equal to at least 100% of the fair market value of the common stock
on the option grant date; however, the exercise price with respect to options
granted to an individual who owns more than 10% of the combined voting power of
all classes of the stock of the Company must be at least 110% of the fair market
value of the common stock at the date of the grant. All options vest 50% after
two years, 75% after three years, and 100% after four years from the grant date.
Additionally, all options expire ten years from the date of grant. In accordance
with individual option agreements, all options outstanding as of December 31,
1996 are exercisable, in various increments, through 2006. Total shares
exercisable at December 31, 1996 and 1995 were 198,000 and 139,342,
respectively, with a weighted average price of $1.00 per share. No shares
expired during 1996 or 1995.
During 1995, the FASB issued SFAS No. 123, which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB No. 25. Entities electing to remain with the accounting in APB No. 25 must
make pro forma disclosures of net income as if the fair value-based method of
accounting defined in the statement had been applied.
The Company has elected to account for this plan under APB No. 25, under
which no compensation cost has been recognized. The Company has computed for pro
forma disclosure purposes the value of all options granted during 1996 and 1995
using the minimum value method as prescribed by SFAS No. 123 and using the
following weighted average assumptions used for grants in 1996 and 1995:
<TABLE>
<S> <C>
Risk-free interest rate....................................... 6.47%-6.54%
Expected dividend yield....................................... 0%
Expected lives................................................ ten years
Expected volatility........................................... 0%
</TABLE>
The total fair value of the options granted during the years ended December
31, 1996 and 1995 was computed as approximately $118,000 and $250,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS
F-79
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
6. EQUITY (CONTINUED)
No. 123, the Company's reported pro forma net income for the years ended
December 31, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Net income:
As reported............................................. $ 1,473,040 $ 538,181
Pro forma............................................... 1,382,594 439,088
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following table summarizes stock option transactions under the 1993
Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
---------- -----------
<S> <C> <C>
Outstanding at December 31, 1994................................................. 309,700
Granted........................................................................ 537,300 $ 1.00
Forfeited...................................................................... (72,300) 1.00
Exercised...................................................................... (14,000) 1.00
----------
Outstanding at December 31, 1995................................................. 760,700 1.00
Granted........................................................................ 245,000 1.03
Forfeited...................................................................... (111,500) 1.00
Exercised...................................................................... (2,700) 1.00
----------
Outstanding at December 31, 1996................................................. 891,500 1.01
----------
----------
Options available for grant at December 31, 1996................................. 166,800
----------
----------
</TABLE>
The range of exercise prices for options outstanding at December 31, 1996
was $1.00-$1.50, with a weighted average remaining contractual life of 8.8
years.
7. OPERATING LEASES
The Company maintains certain noncancelable leases for office space with
varying maturities through 2001 and thereafter. During 1996 and 1995, expenses
under operating leases were approximately
F-80
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. OPERATING LEASES (CONTINUED)
$2,315,000 and $1,044,000, respectively. At December 31, 1996, the future
minimum rental obligations for the remaining terms are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................................ $ 2,338
1998........................................................ 1,801
1999........................................................ 873
2000........................................................ 539
2001 and thereafter......................................... 135
---------
Total minimum lease commitments........................... $ 5,686
---------
---------
</TABLE>
8. INCOME TAXES
In 1996, the Company has recorded $631,000 in tax expense after utilizing
the balance of its net operating loss carryforwards. In 1995, the Company
utilized its net operating loss carryforwards to reduce taxable income to $0.
However, due to the alternative minimum tax requirements of the Internal Revenue
Service, the Company has recorded $20,000 in tax expense. Deferred income taxes
reflect the net tax effect of temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The significant components of the Company's deferred
tax assets and liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................................ $ (177,621) $ (182,897)
Other....................................................................... 0 (139,302)
----------- -----------
Total deferred tax liabilities............................................ (177,621) (322,199)
----------- -----------
Deferred tax assets:
Amortization................................................................ 15,280 0
Net operating loss carryforwards............................................ 0 194,805
Allowance for doubtful accounts............................................. 116,372 74,325
Benefits accruals........................................................... 24,180 38,481
Other....................................................................... 21,789 14,588
----------- -----------
Total deferred tax assets................................................. 177,621 322,199
----------- -----------
Net deferred tax asset (liability)........................................ $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
9. SIGNIFICANT CUSTOMERS
There were three customers for the year ended December 31, 1996 and two
customers for the year ended December 31, 1995 who provided greater than 10% of
total revenues for the respective years. One customer provided 12% in 1996 and
1995; a second customer provided 13% in 1996 and 11% in 1995; and a third
customer provided 2% in 1996 and 11% in 1995.
F-81
<PAGE>
INTERSERV SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
10. RELATED-PARTY TRANSACTIONS
J. Smith Lanier Insurance, Inc. ("J. Smith Lanier") provides the Company
with insurance and 401(k) administration services. Relatives of the stockholders
of ITC Holding are stockholders and employees of J. Smith Lanier. Additionally,
stockholders of J. Smith Lanier are directors of the Company. Payments of annual
premiums to J. Smith Lanier for insurance coverage amounted to approximately
$74,000 and $0 during the years ended December 31, 1996 and 1995, respectively.
Payments for administration services related to the Company's 401(k) plan was
approximately $6,000 and $4,000 for the years ended December 31, 1996 and 1995,
respectively.
The Company uses the services of certain subsidiaries of ITC Holding during
the normal course of business. The total expenses for the years ended December
31, 1996 and 1995 were approximately $290,000 and $0, respectively. Net amounts
receivable from (payable to) associated companies were approximately $10,000 and
$(38,000) at December 31, 1996 and 1995, respectively.
During 1993, the Company loaned ITC Holding $900,000. The loan was repaid in
September 1995. The Company recorded approximately $30,000 for the year ended
December 31, 1995 in interest income related to the loan. See Note 4 for other
related-party debt.
In January 1996, ITC Holding entered into two loan facilities in which
InterServ was a coborrower and guarantor (Note 4).
11. SUBSEQUENT EVENT
In January 1997, the board of directors approved an increase in the number
of shares reserved for the 1993 Stock Option Plan to 1,206,476.
In 1993, the Company received $25,000 from Interquest (a wholly owned
subsidiary of ITC Holding Company ["ITC"]) for marketing sales rights that the
Company granted to Interquest. The contractual requirements of this payment were
met in 1994. Additionally, the Company recorded a payable of approximately
$9,500 to Interquest for other amounts due as of December 31, 1993.
The chairman of J. Smith Lanier, Inc. is a director on the board of
directors of InterServ. J. Smith Lanier, Inc. is the Company's insurance broker.
In 1994, the Company paid approximately $32,000 to J. Smith Lanier for insurance
premiums.
F-82
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
F-83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Lexi International, Inc.:
We have audited the accompanying consolidated balance sheets of Lexi
International, Inc. (a California corporation) and subsidiary as of September
30, 1996, 1995 and 1994, and the related consolidated statements of operations
and changes in retained deficit and cash flows for the years then ended. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lexi International, Inc. and
subsidiary as of September 30, 1996, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 25, 1997
F-84
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS--SEPTEMBER 30, 1996, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 139,423 $ 5,629 $ 150,616
Billed trade receivables, less allowance for doubtful accounts of
$40,000, $120,481 and $0 for 1996, 1995 and 1994, respectively... 3,144,525 4,514,631 2,106,271
Unbilled trade receivables......................................... 1,504,257 4,930,958 2,414,763
Note receivable.................................................... 327,513 -- --
Deferred tax asset................................................. -- -- 327,237
Prepaid expenses and other......................................... 292,715 181,244 91,926
------------- ------------- ------------
5,408,433 9,632,462 5,090,813
FIXTURES AND EQUIPMENT:
less accumulated depreciation of $1,675,562, $1,206,511 and
$800,790 for 1996, 1995 and 1994, respectively..................... 1,678,135 1,736,309 1,286,851
EQUIPMENT UNDER CAPITAL LEASES:
less accumulated amortization of $936,769, $323,973 and $119,904
for 1996, 1995 and 1994, respectively.............................. 2,601,704 2,416,315 507,914
DEPOSIT.............................................................. 154,527 214,527 --
OTHER ASSETS......................................................... 822,591 99,836 24,288
------------- ------------- ------------
$ 10,665,390 $ 14,099,449 $ 6,909,866
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-85
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS--SEPTEMBER 30, 1996, 1995 AND 1994
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short term borrowings.............................................. $ 2,234,030 $ 2,000,000 $ --
Bank overdrafts.................................................... 701,598 2,330,557 1,069,504
Accounts payable................................................... 2,157,826 1,274,761 552,127
Accrued liabilities................................................ 1,117,838 876,443 395,426
Current portion of obligations under capital leases................ 1,003,853 580,675 267,462
Current portion of settlement payable.............................. 1,116,667 1,984,000 --
Other.............................................................. 2,731,596 2,034,342 1,099,392
Commission to affiliates........................................... 92,764 138,105 --
Notes payable to shareholders...................................... 875,000 1,134,777 --
Note payable to affiliate.......................................... 512,798 510,000 510,000
Accrued shareholders' bonus........................................ 250,000 -- 2,985,340
Deferred tax liability............................................. -- -- 293,032
------------- ------------- ------------
12,793,970 12,863,660 7,172,283
------------- ------------- ------------
OBLIGATIONS UNDER CAPITAL LEASES..................................... 2,445,231 2,282,718 394,998
Less current portion............................................... (1,003,853) (580,675) (267,462)
------------- ------------- ------------
1,441,378 1,702,043 127,536
COMMITMENTS AND CONTINGENCIES:
Settlement payable................................................. 1,116,667 2,734,000 --
Less current portion............................................... (1,116,667) (1,984,000) --
------------- ------------- ------------
-- 750,000 --
------------- ------------- ------------
14,235,348 15,315,703 7,299,819
SHAREHOLDERS' DEFICIT:
Common stock, no stated par value 10,000,000, 9,000,000 and
9,000,000 shares authorized and 4,698,236 shares outstanding for
1996, 1995 and 1994, respectively................................ 857,400 857,400 857,400
Treasury stock..................................................... (328,172) (328,172) (328,172)
Retained deficit................................................... (4,099,186) (1,745,482) (919,181)
------------- ------------- ------------
(3,569,958) (1,216,254) (389,953)
------------- ------------- ------------
$ 10,665,390 $ 14,099,449 $ 6,909,866
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-86
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED DEFICIT
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................ $ 38,307,397 $ 35,410,325 $ 25,079,641
OPERATING EXPENSES:
Cost of services.................................................. 29,380,702 22,311,318 12,814,502
Selling, general and administrative expenses...................... 10,833,258 13,458,232 12,009,932
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS....................................... (1,906,563) (359,225) 255,207
INTEREST EXPENSE.................................................... (447,141) (467,076) (82,586)
------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES..................... (2,353,704) (826,301) 172,621
PROVISION FOR INCOME TAXES.......................................... -- -- 125,487
------------- ------------- -------------
NET INCOME (LOSS)................................................... (2,353,704) (826,301) 47,134
RETAINED DEFICIT, BEGINNING OF YEAR................................. (1,745,482) (919,181) (966,315)
------------- ------------- -------------
RETAINED DEFICIT, END OF YEAR....................................... $ (4,099,186) $ (1,745,482) $ (919,181)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
operations and changes in retained deficit.
F-87
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ (2,353,704) $ (826,301) $ 47,134
Adjustments to reconcile net income (loss) to net cash provided by
(used in)operating activities:
Depreciation and amortization.................................... 1,081,847 609,790 279,068
Bad debt expense................................................. 40,000 120,481 --
Deferred income tax benefit...................................... -- -- (12,071)
Elimination of deferred tax accounts............................. -- 34,205 --
Decrease (increase) in:
Billed and unbilled receivables.................................. 4,756,807 (5,045,036) (3,046,683)
Notes receivable................................................. (327,513) -- --
Prepaid expenses and other....................................... (72,979) (164,866) 23,539
Deposit.......................................................... 59,998 (214,527) --
Increase (decrease) in:
Bank overdrafts.................................................. (1,628,959) 1,261,053 1,041,321
Accounts payable................................................. 837,724 860,739 290,852
Accrued liabilities.............................................. 241,395 481,017 (109,701)
Other liabilities................................................ 697,254 934,950 637,270
Accrued shareholders bonus....................................... 250,000 (2,985,340) 2,985,340
Settlement payable............................................... (1,617,333) 2,734,000 --
------------- ------------- -------------
Net cash provided by (used in) operating activities............ 1,964,537 (2,199,835) 2,136,069
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixtures and equipment................................ (306,268) (597,176) (952,132)
Capitalized software costs......................................... (761,245) -- --
------------- ------------- -------------
Net cash used in investing activities.......................... (1,067,513) (597,176) (952,132)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
cash flows.
F-88
<PAGE>
LEXI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit...................................... $ 234,030 $ 2,000,000 $ --
Proceeds from (repayment of) related parties payables................. (256,979) 1,134,777 (463,002)
Payments on capital lease obligations................................. (740,281) (482,753) (279,585)
Payments on notes payable............................................. -- -- (128,700)
Repurchases of stock.................................................. -- -- (328,172)
----------- ------------ -------------
Net cash provided by (used in) financing activities................. (763,230) 2,652,024 (1,199,459)
----------- ------------ -------------
NET INCREASE (DECREASE) IN CASH......................................... 133,794 (144,987) (15,522)
CASH, BEGINNING OF YEAR................................................. 5,629 150,616 166,138
----------- ------------ -------------
CASH, END OF YEAR....................................................... $ 139,423 $ 5,629 $ 150,616
----------- ------------ -------------
----------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment purchased during the period under capital leases............ $ 902,794 $ 2,370,473 $ 432,463
----------- ------------ -------------
----------- ------------ -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................................... $ 558,227 $ 266,480 $ 37,530
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
cash flows.
F-89
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS
Lexi International, Inc.(the "Company"), a California Corporation, was
incorporated on November 17, 1985. The Company's primary office is located in
Hollywood, California from where it provides telemarketing services throughout
the United States. The Company also maintains sales offices in Ohio,
Pennsylvania, and New Jersey. The Company's significant customer is in the
long-distance carrier industry.
Effective November 22, 1996, the Company entered into a purchase agreement
with Thayer Capital Partners (a Delaware Limited Partnership) to issue 3,578,789
of newly issued shares for $9.0 million. Proceeds were used to repay certain
liabilities of the Company. In addition, current shareholders and option holders
sold 2,458,456 of existing shares for $6,511,531. The purchase agreement is
subject to compliance with various conditions and covenants. Upon completion of
this transaction, Thayer Capital Partners owned approximately 72.9% of this
outstanding common stock of Lexi International, Inc. These financial statements
are prepared on an historical basis and do not reflect the effect of the
aforementioned acquisition by Thayer Capital Partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. CASH
Cash is comprised of amounts in operating. Bank overdrafts represent
proceeds drawn or checks issued in excess of existing cash balances.
b. NOTE RECEIVABLE
The Company has converted certain accounts receivable into a note
receivable which is non-interest bearing and is payable in monthly
installments. This note was paid in April 1997.
c. FIXTURES AND EQUIPMENT
Fixtures and equipment are stated at cost. The Company depreciates
fixtures and equipment on a straight-line basis over 3 to 5 years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the useful life of the improvement or the remaining term of the
lease.
When assets are retired or sold, the cost and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss is reflected in the statement of operations.
d. OTHER ASSETS
Other assets include capitalized software costs of $741,322, net of
amortization of $19,923, at fiscal year end 1996. The Company amortizes
capitalized software costs on a straight-line basis over 3 to 5 years.
e. EQUIPMENT UNDER CAPITAL LEASES
Equipment under capital leases is amortized on a straight-line basis
over the shorter of the useful life of the equipment or the term of the
lease.
F-90
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. REVENUE RECOGNITION
Marketing Revenue--The Company provides marketing of telecommunication
services to clients under contracts which provide for payments based on
accepted subscribers and the type of service purchased by the subscriber.
Revenues related to these sales are recognized on the date the application
for service installment is independently verified by an agent of the
customer or upon confirmation by the customer.
Commercial Revenue--The Company also provides various services under
contracts which provide payment based on hours worked or certain performance
measures.
g. SHORT-TERM DEBT
The carrying amount of the Company's borrowings under its short-term
line of credit agreement approximates its fair value.
h. SETTLEMENT PAYABLE
In 1995, the Company had entered into an agreement to reimburse its
principal customer in the amount of $2.7 million, commencing in 1995. The
settlement was fully paid in March 1997.
i. ESTIMATES AND ASSUMPTIONS
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.
j. CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to trade receivables and is
subject to the financial condition of a major customer as described in Note
3. The Company's receivables are concentrated with a customer in the
telecommunications industry. The Company does not require collateral or
other security to support the customer's receivables.
k. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Business Information Data,
Inc.("BIDI").
l. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or
tax returns. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than enactment of changes in the
tax law or rates. Income tax accounting information is disclosed in Note 8
to the consolidated financial statements.
F-91
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of October 1, 1995, the Company changed its tax status to a
non-taxable S Corporation. In accordance with the provisions of SFAS 109,
the deferred income tax assets and liabilities have been eliminated as of
such date and a charge has been recorded in the amount of $34,205 in the
fiscal year 1995 statement of operations.
3. SIGNIFICANT CUSTOMER
The Company has a customer which represented 82%, 79% and 89% of the
Company's revenues for fiscal year 1996, 1995 and 1994, respectively. The loss
of this customer would have a material adverse effect on the Company's business.
The Company's principal contracts with this customer extend through December 31,
1997. These contracts represent approximately 43% and 27%, 44% and 30%, and 53%
and 30%, respectively, of the Company's fiscal year 1996, 1995 and 1994
revenues.
4. FIXTURES AND EQUIPMENT
Fixtures and equipment consists of the following as of September 30, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Telephone systems............................................. $ 413,640 $ 278,459 $ 443,369
Furniture and fixtures........................................ 258,007 249,549 198,716
Computers..................................................... 1,639,194 1,437,799 889,592
Office equipment.............................................. 153,511 150,993 136,815
Leasehold improvements........................................ 889,345 826,020 419,149
------------ ------------ ------------
3,353,697 2,942,820 2,087,641
Accumulated depreciation...................................... 1,675,562 1,206,511 800,790
------------ ------------ ------------
$ 1,678,135 $ 1,736,309 $ 1,286,851
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
5. DEBT
During fiscal year 1995, the Company entered into a revolving credit
agreement with a bank that provided a line of credit up to $2,000,000 at an
interest rate of 3.5% above the prime rate. In December 1995, the Company
refinanced this line by entering into a new revolving credit agreement with a
bank that provided for a line of credit up to $3,500,000 through November 27,
1996. This line is collateralized by the Company's accounts receivable,
equipment, and general intangibles. The interest rate under this new agreement
is 3.5% above the prime rate. As of September 30, 1995 and 1996, the prime rate
was 8.75%.
The credit agreement contains various restrictive covenants. The Company was
not in compliance with the current ratio, leverage ratio, profit, EBITDA
Coverage Ratio and City permit requirements. This line of credit therefore has
been classified as a current liability.
Effective November 22, 1996, this line of credit was repaid with the
proceeds of the newly issued shares described in Note 1.
F-92
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
6. LEASES
The Company leases office space for its operations in Hollywood, California,
and certain vehicles under operating leases. The Company also leases a telephone
network and office equipment under capital lease arrangements and has an option
to purchase certain office equipment for a nominal cost at the termination of
the lease. Aggregate minimum future lease payments are as follows as of
September 30, 1996:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDING CAPITAL OPERATING
SEPTEMBER 30, LEASES LEASES
- -------------------------------------------------------- ------------ ------------
<S> <C> <C>
1997.................................................. $ 1,260,035 $ 643,025
1998.................................................. 796,996 623,252
1999.................................................. 592,916 587,519
2000.................................................. 282,597 633,023
2001.................................................. 13,162 633,240
Thereafter............................................ -- 717,203
------------ ------------
Total minimum lease payments.......................... 2,945,706 $ 3,837,262
------------ ------------
------------ ------------
Less--Amount representing interest.................... 500,475
------------
Total obligation under capital leases................. $ 2,445,231
------------
------------
</TABLE>
Operating lease expense for fiscal year 1996, 1995 and 1994 was $632,083,
$735,595 and $726,096, respectively.
7. TREASURY STOCK AND STOCK PARTICIPATION AGREEMENT
During September 1994, the Company acquired 211,723 shares of its loan stock
from former shareholders for $328,172. Under the terms of the agreements, the
former shareholders have the right to participate in net sales proceeds of any
purchase of the Company or public offering, within five years of September 30,
1994.
Certain Corporate Officers and employees were included in a stock
participation agreement. Should the Company be sold or have an initial public
offering, these participants would in aggregate receive 277,500 units in the
Company's Corporate Sales Phantom Stock Participation Agreement. Each unit
carries the same economic rights as a share of common stock. These participation
rights expire 90 days after termination of employment.
On November 22, 1996, the Company established an Incentive Stock Option Plan
(the "Plan"). The Plan includes both incentive stock options and nonqualified
stock options. Each option gives the holder the right to purchase one share of
the Company's common stock at the exercise price. The exercise price of the
options is determined by the Plan as no less than the fair value of the
Company's common stock on the grant date. The options vest over a three year
period from the date of grant and expire on November 22, 2006. In addition,
options covering 236,000 shares of common stock were granted on November 22,
1996 to the former shareholders and participants in the Corporate Phantom Stock
Participation Agreement noted above, who are not currently employees of the
Company. These options vested at the date of grant.
F-93
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
7. TREASURY STOCK AND STOCK PARTICIPATION AGREEMENT (CONTINUED)
As of December 31, 1996, the Company has granted 647,131 options at an
exercise price of $2.57. The options granted are all outstanding as of December
31, 1996. There are 736,262 shares of common stock available for the grant of
options under the Plan.
8. INCOME TAXES
The Company has recorded reserves for liabilities related to tax, interest
and penalties with respect to deductions claimed in previous tax return filings
for certain payments to, and on behalf of, shareholders. Some of these
deductions may be disallowed if challenged by taxing authorities. The aggregate
reserve for such liabilities is $2.4 million, $1.5 million and $0.9 million as
of September 30, 1996, 1995 and 1994, respectively. Management believes that
such liabilities will be settled with the respective taxing authorities for an
amount not to exceed $2.4 million, but may be less than that amount when
ultimately settled with various taxing authorities.
In addition, the Company has claimed certain other deductions in the prior
year, for which a favorable ruling has been obtained from the IRS. However, the
IRS reserves the right to challenge the conditions of such ruling in future
examinations and could disallow these deductions. No reserves have been recorded
for these items.
In May 1997, The Company received notice from the Internal Revenue Service
that the Company's 1995 income tax returns will be audited.Management believes
that any required adjustments to the Company's tax liabilities will not have a
material adverse impact on its financial position or results on operations.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate include permanent differences, including meals and
entertainment expenses and officer life insurance premiums.
The significant components of the deferred tax assets and deferred tax
liabilities include accrued vacation expense, accrued interest and accounts
receivable.
The provision for income taxes for fiscal year 1994 is comprised of:
<TABLE>
<S> <C>
Federal:
Current......................................... $ 127,540
Deferred........................................ 10,018
---------
137,558
State:
Current......................................... (10,225)
Deferred........................................ (1,846)
---------
(12,071)
---------
Income tax provision.............................. $ 125,487
---------
---------
</TABLE>
F-94
<PAGE>
LEXI INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
9. RELATED PARTY TRANSACTIONS
During fiscal year 1996, 1995 and 1994, the Company paid salaries to
shareholders in the amounts of $1,586,492, $4,028,792 and $3,720,488,
respectively. In addition, the Company accrued and expensed $250,000 and
$2,985,340 for bonuses to be paid to shareholders for fiscal years 1996 and
1994, respectively. The Company also paid other shareholder costs of $184,000,
$367,000 and $390,000 for fiscal years 1996, 1995 and 1994, respectively.
Notes payable to shareholders are interest free and due on demand.
The note payable to affiliate is to a corporation which is wholly owned by a
principal shareholder. The note is interest free and due on demand.
Effective November 22, 1996, the Notes Payable to Shareholders, Note Payable
to Affiliate and Commission Payable to Affiliates were repaid from the proceeds
of the newly issued shares.
The Company performs certain accounting and administrative functions for an
affiliated entity. The management fee related to such services was $203,336,
$21,533 and $0 for fiscal years 1996, 1995 and 1994, respectively.
Under the terms of the purchase agreement referred to in Note 1, one
shareholder has a consulting arrangement with the Company, which extends to
twelve months from November 22, 1996, and provides for consulting fees of
$200,000 annually. In addition, certain other shareholders have employment
arrangements extending for two years from November 22, 1996, for compensation
aggregating $425,000 annually and one shareholder arrangement provides for a
bonus payable based upon quarterly operating income.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits, investigations and claims arising out of
the conduct of its business, including those related to commercial transactions,
contracts, government regulation and employment matters. Certain claims, suits
and complaints have been filed or are pending against the Company. In the
opinion of management, and based on all known facts, all matters are without
merit or are of such kind, or involve such amounts, as would not have a material
effect on the financial position or results of operations of the Company if
disposed of unfavorably.
11. SUBSEQUENT EVENT
During January 1997, the Company entered into a merger with LII Merger Corp.
(a California corporation), a subsidiary of Edward Blank Associates, Inc. (a New
York Corporation). As a result of this transaction, all shares of the Company
were acquired by LII Merger Corp., and the shareholders were issued 0.12393
shares of Edward Blank Associates, Inc. for each of the Company's shares
acquired. Upon completion of this merger, the separate existence of LII Merger
Corp. ceased and Lexi International, Inc. became a wholly owned subsidiary of
Edward Blank Associates, Inc.
F-95
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
IQI, INC.,
ATC COMMUNICATIONS GROUP, INC.
AND
ATC MERGER SUB, INC.
APRIL 7, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE I DEFINITIONS .................................................................................. A-1
ARTICLE II THE MERGER .................................................................................. A-6
2.01 Merger................................................................................ A-6
2.02 Effective Time........................................................................ A-6
2.03 Certificate of Incorporation, Bylaws, Directors and Officers, Name.................... A-6
2.04 Assets and Liabilities................................................................ A-6
2.05 Further Assurances.................................................................... A-7
2.06 Conversion of Securities.............................................................. A-7
2.07 Dissenting Shares..................................................................... A-8
2.08 Exchange of Shares.................................................................... A-9
2.09 Requisite Shareholder Approval........................................................ A-10
2.10 Escrow................................................................................ A-10
2.11 Representative........................................................................ A-10
2.12 Consummation of Merger................................................................ A-11
2.13 Closing............................................................................... A-11
2.14 Actions at the Closing................................................................ A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING
THE COMPANY ............................................................................................. A-11
3.01 Organization and Good Standing; Authorization......................................... A-11
3.02 No Conflicts.......................................................................... A-12
3.03 Capitalization........................................................................ A-12
3.04 Financial Statements.................................................................. A-13
3.05 Indebtedness.......................................................................... A-13
3.06 Judgments; Litigation................................................................. A-13
3.07 Corporate Records..................................................................... A-14
3.08 Employee Benefit Matters.............................................................. A-14
3.09 Income and Other Taxes................................................................ A-15
3.10 Hazardous Materials................................................................... A-16
3.11 Accounts Receivable................................................................... A-17
3.12 Material Contracts.................................................................... A-17
3.13 No Undisclosed Liabilities............................................................ A-17
3.14 Consents.............................................................................. A-18
3.15 Absence of Certain Changes............................................................ A-18
3.16 Affiliations.......................................................................... A-18
3.17 Brokers' Fees......................................................................... A-18
3.18 Severance Arrangements................................................................ A-18
3.19 Subsidiaries.......................................................................... A-18
3.20 Title to and Condition of Assets...................................................... A-18
3.21 Leased Real Property.................................................................. A-19
3.23 Compliance with Law................................................................... A-19
3.24 Labor Matters......................................................................... A-19
3.25 Customers............................................................................. A-19
3.26 Disclosure............................................................................ A-19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER ..................................................... A-20
4.01 Organization and Good Standing of Buyer............................................... A-20
4.02 Subsidiaries.......................................................................... A-20
4.03 Authorization......................................................................... A-20
</TABLE>
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<TABLE>
<CAPTION>
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<C> <S> <C>
4.04 No Conflicts.......................................................................... A-20
4.05 Capitalization........................................................................ A-20
4.06 Buyer Reports and Financial Statements................................................ A-21
4.07 Judgments; Litigation................................................................. A-21
4.08 Employee Benefit Matters.............................................................. A-22
4.09 Income and Other Taxes................................................................ A-23
4.10 Hazardous Materials................................................................... A-24
4.11 Accounts Receivable................................................................... A-25
4.12 Material Contracts.................................................................... A-25
4.13 No Undisclosed Liabilities............................................................ A-25
4.14 Consents.............................................................................. A-26
4.15 Absence of Certain Changes............................................................ A-26
4.16 Brokers' Fees......................................................................... A-26
4.17 Compliance with Law................................................................... A-26
4.18 Customers............................................................................. A-26
4.19 Severance Arrangements................................................................ A-26
4.20 Disclosure............................................................................ A-26
ARTICLE V PREPARATION OF PROXY STATEMENT AND REGISTRATION OF
MERGER SHARES ........................................................................................... A-27
5.01 Registration Statement................................................................ A-27
5.02 Preparation of Registration Statement................................................. A-27
5.03 Registration of Shares Under Stock Option Plan........................................ A-28
ARTICLE VI CONDITIONS TO CONSUMMATION OF MERGER ........................................................ A-28
6.01 Conditions to Each Party's Obligations................................................ A-28
6.02 Conditions to Obligations of Buyer and Newco.......................................... A-29
6.03 Conditions to Obligations of the Company.............................................. A-30
ARTICLE VII CONDUCT OF BUSINESS PENDING CLOSING ........................................................ A-31
7.01 Qualification......................................................................... A-31
7.02 Ordinary Course....................................................................... A-32
7.03 Organic Changes....................................................................... A-32
7.04 Indebtedness.......................................................................... A-32
7.05 Accounting............................................................................ A-32
7.06 Compliance with Legal Requirements.................................................... A-32
7.07 Disposition of Assets................................................................. A-32
7.08 Compensation.......................................................................... A-32
7.09 Modification or Breach of Agreements; New Agreements.................................. A-32
7.10 Capital Expenditures.................................................................. A-33
7.11 Maintain Insurance.................................................................... A-33
7.12 Discharge............................................................................. A-33
7.13 Actions............................................................................... A-33
7.14 Permits............................................................................... A-33
7.15 Tax Assessments and Audits............................................................ A-33
ARTICLE VIII ADDITIONAL COVENANTS ...................................................................... A-33
8.01 Covenants of the Company.............................................................. A-33
8.02 Covenants of Buyer.................................................................... A-34
8.03 Access and Information; Confidentiality............................................... A-34
8.04 Expenses.............................................................................. A-34
8.05 Certain Notifications................................................................. A-35
</TABLE>
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<TABLE>
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<C> <S> <C>
8.06 Publicity; Employee Communications.................................................... A-35
8.07 Further Assurances.................................................................... A-35
8.08 Competing Offers; Merger or Liquidation............................................... A-35
8.09 Inconsistent Action................................................................... A-36
8.10 HSR Act............................................................................... A-36
8.11 Directors and Officers of Buyer upon the Effective Time............................... A-36
8.12 Bylaw Amendment....................................................................... A-36
8.13 Company's 1997 Audit Financial Statements............................................. A-36
8.14 Santry Note........................................................................... A-37
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER ........................................................... A-37
9.01 Termination........................................................................... A-37
9.02 Effect of Termination................................................................. A-37
9.03 Amendment............................................................................. A-38
9.04 Waiver................................................................................ A-38
9.05 Breakup Fee........................................................................... A-38
ARTICLE X INDEMNIFICATION AND SURVIVAL ................................................................. A-38
10.01 Survival of Representations and Warranties............................................ A-38
10.02 Indemnification....................................................................... A-39
10.03 Third Party Claims.................................................................... A-40
ARTICLE XI GENERAL PROVISIONS .......................................................................... A-41
11.01 Notices............................................................................... A-42
11.02 Severability.......................................................................... A-42
11.03 Entire Agreement...................................................................... A-42
11.04 Successors and Assigns................................................................ A-42
11.05 Counterparts.......................................................................... A-42
11.06 Schedules and Annexes................................................................. A-42
11.07 Construction.......................................................................... A-42
11.08 Arbitration........................................................................... A-42
11.09 Governing Law......................................................................... A-43
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into as of
April 7, 1998 by and among IQI, Inc., a New York corporation (the "COMPANY"),
ATC Communications Group, Inc., a Delaware corporation ("BUYER"), and ATC Merger
Sub, Inc., a New York corporation and wholly-owned subsidiary of Buyer
("NEWCO").
R E C I T A L S
A. Buyer owns all of the outstanding shares of capital stock of Newco.
B. The Board of Directors of each of Newco and the Company have determined
that it is fair to, and in the best interests of, their respective corporations
and stockholders for Newco to be merged with and into the Company upon the terms
and subject to the conditions set forth herein (the "Merger"). It is the
intention of the parties hereto that the Merger be treated as a tax-free
reorganization pursuant to Section 368(a)(2)(E) of the Code, and that the Merger
be accounted for under the "reverse purchase" method of accounting whereby the
Company will be treated as the acquiring entity for accounting purposes.
C. The Board of Directors of each of Newco, the Buyer and the Company have
approved the Merger in accordance with the General Corporation Law of the State
of Delaware or the Business Corporation Law of the State of New York, as
applicable.
D. Concurrently with the execution and delivery of this Agreement and as a
condition and inducement to Buyer's willingness to enter into this Agreement,
certain holders of the outstanding shares of common stock of the Company which
own approximately 85% of such outstanding common stock are entering into
agreements with Buyer, pursuant to which such shareholders will agree to grant
an irrevocable proxy coupled with an interest to representatives of Buyer to
vote such shares of common stock in favor of the Merger.
E. Concurrently with the execution of this Agreement, a principal
shareholder of the Company has provided a commitment letter to Buyer (the
"COMMITMENT LETTER") pursuant to which such shareholder has committed, subject
to the terms and conditions set forth in such letter, to extend financial
accommodations to Buyer in an amount of up to $2.0 million.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Unless the context otherwise requires, the terms defined in this Article I
shall have the meanings herein specified for all purposes of this Agreement,
applicable to both the singular and plural forms of any of the terms herein
defined. All accounting terms defined in this Article I and those accounting
terms used in this Agreement and not defined in this Article I shall, except as
otherwise provided for herein, be construed in accordance with GAAP.
"AAA" shall have the meaning assigned to such term in Section 11.08.
"ACTION" shall mean any actual or threatened claim, action, suit,
arbitration, hearing, inquiry, proceeding, complaint, charge or investigation by
or before any Governmental Entity or arbitrator and any appeal from any of the
foregoing.
"ACQUISITION PROPOSAL" shall have the meaning assigned to such term in
Section 8.08.
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"ADDITIONAL SHARES" shall have the meaning assigned to such term in Section
10.02(e).
"AFFILIATE" shall mean any Person which directly or indirectly controls, is
controlled by, or is under common control with, the indicated Person.
"AGREEMENT" shall have the meaning assigned to such term in the introductory
paragraph of this Agreement.
"BALANCE SHEET" and "BALANCE SHEET DATE" shall have the respective meanings
assigned to such terms in Section 3.04(a).
"BUSINESS DAY" shall mean any day excluding Saturday, Sunday or any day
which shall be in the State of New York a legal holiday or a day on which
banking institutions are authorized by law to close.
"BUYER" shall have the meaning assigned to such term in the introductory
paragraph of this Agreement.
"BUYER BALANCE SHEET" shall mean the unaudited balance sheet of Buyer as of
the Buyer Balance Sheet Date included in Buyer's quarterly report on Form 10-Q
for the fiscal quarter ended on the Buyer Balance Sheet Date.
"BUYER BALANCE SHEET DATE" shall mean December 31, 1997.
"BUYER COMMON STOCK" shall mean the Common Stock, par value $.01 per share,
of Buyer.
"BUYER ERISA AFFILIATE" shall mean any Person which is (or at any relevant
time was) a member of a controlled group of corporations within the meaning of
Code Section 414(b), all trades or businesses under common control within the
meaning of Code Section 414(c), and all affiliated service groups within the
meaning of Code Section 414(m), of which Buyer is (or at any relevant time was)
a member.
"BUYER LEASED PROPERTY" shall have the meaning assigned to such term in
Section 4.19.
"BUYER PLAN" shall mean any "employee benefit plan" within the meaning of
Section 3(3) of ERISA and any other written or oral employee benefit plan,
arrangement, practice, contract, policy, or program (other than arrangements
merely involving the payment of wages) which are or at any time have been
established, maintained, or contributed to by Buyer or any of its Subsidiaries
or any Buyer ERISA Affiliate for the benefit of current or former employees,
with respect to which Buyer or any of its Subsidiaries or a Buyer ERISA
Affiliate has or may in the future have any liability or obligation to
contribute or make payments of any kind.
"BUYER PREFERRED STOCK" shall mean the Preferred Stock, par value $.01 per
share, of Buyer.
"BUYER REPORTS" shall have the meaning assigned to such term in Section
4.06.
"CERTIFICATES" shall have the meaning assigned to such term in Section
2.08(a).
"CERTIFICATE OF MERGER" shall have the meaning assigned to such term in
Section 2.12.
"CLAIM NOTICE" shall have the meaning assigned to such term in Section
10.03(a).
"CLOSING" and "CLOSING DATE" shall have the respective meanings assigned to
such terms in Section 2.13.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"COMMITMENT LETTER" shall have the meaning assigned to such term in Recital
E.
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"COMMON STOCK" shall mean the common stock, par value $.001 per share, of
the Company.
"COMPANY" shall have the meaning assigned to such term in the introductory
paragraph of this Agreement.
"CONFIDENTIALITY AGREEMENT" shall have the meaning assigned to such term in
Section 8.03(b).
"CONSTITUENT CORPORATIONS" shall have the meaning assigned to such term in
Section 2.01.
"DAMAGES" shall mean any and all losses, liabilities, obligations, costs,
expenses, damages or judgments of any kind or nature whatsoever (including
reasonable attorneys', accountants' and experts' fees, disbursements of counsel,
and other costs and expenses incurred pursuing indemnification claims under
Article X hereof).
"DELAWARE LAW" shall mean the Delaware General Corporation Law, as amended.
"DISSENTERS' SHARES" shall have the meaning assigned to such term in Section
2.07(a).
"EFFECTIVE TIME" shall have the meaning assigned to such term in Section
2.02.
"ENVIRONMENTAL LAWS" shall mean all Legal Requirements pertaining to the
protection of the environment, the treatment, emission and discharge of gaseous,
particulate and effluent pollutants and the use, handling, storage, treatment,
removal, transport, transloading, cleanup, decontamination, discharge and
disposal of Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA AFFILIATE" shall mean any Person which is (or at any relevant time
was) a member of a controlled group of corporations within the meaning of Code
Section 414(b), all trades or businesses under common control within the meaning
of Code Section 414(c), and all affiliated service groups within the meaning of
Code Section 414(m), of which the Company is (or at any relevant time was) a
member.
"ESCROW AGENT" shall mean Harris Trust and Savings Bank.
"ESCROW AGREEMENT" shall mean that certain Escrow Agreement to be executed
by the Escrow Agent, the Representative and Buyer at the Closing, in
substantially the form of Annex J hereto.
"ESCROW SHARES" shall have the meaning assigned to such term in Section
2.06(a).
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" shall mean Harris Trust and Savings Bank.
"EXCHANGE RATIO" shall have the meaning assigned to such term in Section
2.06(a).
"EXCHANGED OPTION SHARES" shall have the meaning assigned to such term in
Section 2.06(b).
"EXCHANGED WARRANT SHARES" shall have the meaning assigned to such term in
Section 2.06(c).
"FINANCIAL STATEMENTS" shall have the meaning assigned to such term in
Section 3.04(a).
"GAAP" means generally accepted accounting principles in the United States
consistently applied.
"GOVERNMENTAL ENTITY" shall mean any local, state, federal or foreign (i)
court, (ii) government or (iii) governmental department, commission,
instrumentality, board, agency or authority, including the IRS and other taxing
authorities.
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"HAZARDOUS MATERIAL" shall mean any flammable, ignitable, corrosive,
reactive, radioactive or explosive substance or material, hazardous waste, toxic
substance or related material and any other substance or material defined or
designated as a hazardous or toxic substance, material or waste by any
Environmental Law.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEBTEDNESS" shall mean, when used with reference to any Person, without
duplication, (i) any liability of such Person created or assumed by such Person,
or any Subsidiary thereof, (A) for borrowed money, (B) evidenced by a bond,
note, debenture or similar instrument (including a purchase money obligation,
deed of trust or mortgage) given in connection with the acquisition of, or
exchange for, any property or assets (other than inventory or similar property
acquired and consumed in the Ordinary Course), including securities and other
Indebtedness, (C) in respect of letters of credit issued for such Person's
account and interest rate swap agreements and currency exchange rate agreements
(and other interest and currency exchange rate hedging agreements) to which such
Person is a party or (D) for the payment of money as lessee under leases that
should be, in accordance with GAAP, recorded as capital leases for financial
reporting purposes; (ii) any liability of others described in the preceding
clause (i) guaranteed as to payment of principal or interest by such Person or
in effect guaranteed by such Person through an agreement, contingent or
otherwise, to purchase, repurchase or pay the related Indebtedness or to acquire
the security therefor; (iii) all liabilities or obligations secured by a Lien
(other than a Permitted Lien) upon property owned by such Person and upon which
liabilities or obligations such Person customarily pays interest or principal,
whether or not such Person has not assumed or become liable for the payment of
such liabilities or obligations; and (iv) any amendment, renewal, extension,
revision or refunding of any such liability or obligation; PROVIDED, HOWEVER,
that Indebtedness shall not include any liability for compensation of such
Person's employees or for inventory or similar property acquired and consumed in
the Ordinary Course or for services.
"INDEMNIFICATION CLAIM," "INDEMNIFIED PARTY" and "INDEMNIFYING PARTY" shall
have the respective meanings assigned to such terms in Section 10.03(a).
"INITIAL SHARES" shall have the meaning assigned to such term in Section
2.06(a).
"IRS" shall mean the United States Internal Revenue Service.
"KNOWLEDGE" shall mean, with respect to the Company, the actual knowledge,
after due inquiry, of any of the officers or directors of the Company, and with
respect to Buyer, the actual knowledge, after due inquiry, of any of the
officers or directors of Buyer.
"LEASED REAL PROPERTY" shall have the meaning assigned to such term in
Section 3.21.
"LEGAL REQUIREMENT" shall mean any statute, law, ordinance, rule,
regulation, permit, order, writ, judgment, injunction, decree or award issued,
enacted or promulgated by any Governmental Entity or any arbitrator.
"LIEN" shall mean all liens (including judgment and mechanics' liens,
regardless of whether liquidated), mortgages, assessments, security interests,
easements, claims, pledges, trusts (constructive or other), deeds of trust,
options or other charges, encumbrances or restrictions.
"MATERIAL ADVERSE EFFECT" shall mean, with respect to the Company or the
Buyer, as applicable, a material adverse effect on the business, financial
condition, properties, profitability, business prospects or operations of the
Company and its Subsidiaries, or the Buyer and its Subsidiaries, as the case may
be, taken as a whole.
"MERGER" shall have the meaning assigned to such term in Recital B hereof.
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"MERGER SHARES" shall have the meaning assigned to such term in Section
2.06(a).
"NEWCO" shall have the meaning assigned to such term in the introductory
paragraph of this Agreement.
"NEW YORK LAW" shall mean the Business Corporation Law of the State of New
York.
"OPTIONS" shall mean all outstanding options, warrants and other rights to
acquire Common Stock.
"OPTION SHARES" shall have the meaning assigned to such term in Section
2.06(b).
"ORDINARY COURSE" shall mean, when used with reference to the Company or
Buyer, the ordinary course of the Company's or Buyer's business (including their
respective Subsidiaries), respectively, consistent with past practices.
"PERMITTED LIENS" shall mean (a) Liens for ad valorem real or personal
property taxes or assessments not at the time due and (b) Liens in respect of
pledges or deposits under workers' compensation laws or similar legislation,
carriers', warehousemen's, mechanics', laborers' and materialmen's, landlord's
and similar liens, if the obligations secured by such Liens are not then
delinquent.
"PERSON" shall mean any natural person, corporation, business trust,
association, company, partnership, limited liability company, joint venture,
Governmental Entity and any other entity.
"PLAN" shall mean any "employee benefit plan" within the meaning of Section
3(3) of ERISA and any other written or oral employee benefit plan, arrangement,
practice, contract, policy, or program (other than arrangements merely involving
the payment of wages) which are or at any time have been established,
maintained, or contributed to by the Company or any of its Subsidiaries or any
ERISA Affiliate for the benefit of current or former employees, with respect to
which the Company or any of its Subsidiaries or an ERISA Affiliate has or may in
the future have any liability or obligation to contribute or make payments of
any kind.
"PLAN OPTIONS" shall have the meaning assigned to such term in Section
2.06(b).
"PROXY STATEMENT/PROSPECTUS" shall have the meaning assigned to such term in
Section 5.01.
"REGISTRATION STATEMENT" shall have the meaning assigned to such term in
Section 5.01.
"REPRESENTATIVE" shall mean Thayer Equity Investors III, L.P.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHAREHOLDER" shall mean an owner of the Shares, as set forth in Annex A
hereto, as amended as of the Closing Date.
"SHAREHOLDERS AGREEMENT" shall mean a Shareholders Agreement to be entered
into at the Closing by Thayer Equity Investors III, L.P., ITC Services Company,
Edward Blank, The Edward Blank 1995 Grantor Retained Annuity Trust, Codinvest
Limited, Michael G. Santry and Darryl D. Pounds in substantially the form of
Annex K hereto.
"SHARES" shall mean the issued and outstanding shares of Common Stock.
"STOCK PLANS" shall mean all stock option plans and other stock or
equity-related plans of the Company.
"SUBSIDIARY" of a Person shall mean any corporation, partnership,
association or other business entity at least 50% of the outstanding voting
power of which is at the time owned or controlled directly or indirectly by such
Person or by one or more of such subsidiary entities, or both.
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"SURVIVING CORPORATION" shall have the meaning assigned to such term in
Section 2.01 hereof.
"TAX" shall mean any Federal, state, local or foreign income, gross
receipts, license, payroll, unemployment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including, without limitation, taxes
under Code Section 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), employment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated tax or other tax, assessment or charge
of any kind whatsoever, including, without limitation, any interest, fine,
penalty or addition thereto, whether disputed or not.
"TAX RETURN" shall mean any return, declaration, report, claim for refund or
information, or statement relating to Taxes, and any exhibit, schedule,
attachment or amendment thereto.
"WARRANTS" shall have the meaning assigned to such term in Section 2.06(c).
"WARRANT SHARES" shall have the meaning assigned to such term in Section
2.06(c).
ARTICLE II
THE MERGER
SECTION 2.01 MERGER. Upon the terms and subject to the conditions of this
Agreement, Newco shall be merged with and into the Company in accordance with
the applicable provisions of the New York Law. The Company and Newco are herein
sometimes referred to as the "CONSTITUENT CORPORATIONS." At the Effective Time,
the identity and separate corporate existence of Newco shall cease and the
Company shall be the surviving corporation in the Merger (sometimes hereinafter
referred to as the "SURVIVING CORPORATION"). The Merger shall have the effects
set forth in Section 906 of the New York Law.
SECTION 2.02 EFFECTIVE TIME. The Merger shall become effective on the date
and at the time the Certificate of Merger referred to in Section 2.10 hereof is
filed with the Secretary of State of the State of New York in accordance with
Section 104 of the New York Law. The time at which the Merger shall become
effective as aforesaid is referred to hereinafter as the "EFFECTIVE TIME."
SECTION 2.03 CERTIFICATE OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS,
NAME.
(a) The Certificate of Incorporation of Newco, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of
the Surviving Corporation, from and after the Effective Time until amended
in accordance with applicable law.
(b) The Bylaws of Newco, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation from and after the
Effective Time until amended in accordance with applicable law, the
Surviving Corporation's Certificate of Incorporation and such Bylaws.
(c) The directors and officers of Newco in office immediately prior to
the Effective Time shall be the directors and officers of the Surviving
Corporation, and each shall hold his or her respective office or offices
from and after the Effective Time until his or her successor shall have been
elected and shall have qualified or as otherwise provided in the Bylaws of
the Surviving Corporation.
(d) The name of the Surviving Corporation from and after the Effective
Time shall be "IQI, Inc." until changed in accordance with applicable law.
SECTION 2.04 ASSETS AND LIABILITIES. At the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises of a
public as well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all the
rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, and all debts due to
any of the Constituent Corporations on whatever account, as well
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as for stock subscriptions and all other things in action or belonging to each
of the Constituent Corporations, shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the several and respective Constituent Corporations,
and the title to any real estate vested by deed or otherwise under the laws of
any jurisdiction, in any of the Constituent Corporations, shall not revert or be
in any way impaired by this Article II; but all rights of creditors and all
liens upon any property of any of the Constituent Corporations shall be
preserved unimpaired, and all debts, liabilities and duties of the respective
Constituent Corporations shall thenceforth attach to the Surviving Corporation,
and may be enforced against it to the same extent as if said debts, liabilities
and duties had been incurred or contracted by it.
SECTION 2.05 FURTHER ASSURANCES. If, at any time after the Effective Date,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, its right, title or interest in, to or under any of
the rights, properties or assets of the Constituent Corporations acquired or to
be acquired as a result of the Merger, or (ii) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and do, in the name and on behalf of the
Constituent Corporations, all such other acts and things necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or under
any of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Merger and otherwise to carry out the
purposes of this Agreement.
SECTION 2.06 CONVERSION OF SECURITIES.
(a) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of Common Stock issued and
outstanding immediately prior to the Effective Time (other than Dissenters'
Shares and other than as provided in Section 2.06(d)) shall be converted
into the right to receive, and become exchangeable for, 9.7513 (the
"EXCHANGE RATIO") validly issued, fully paid and nonassessable shares of
Buyer Common Stock (collectively, the "MERGER SHARES"). If after the date
hereof and prior to the Effective Time Buyer shall have declared a stock
split (including a reverse split) of Buyer Common Stock or a dividend
payable in Buyer Common Stock, then the Exchange Ratio shall be
appropriately adjusted to reflect such stock split or dividend of
securities. At the Effective Time, the holders of Common Stock shall be
entitled to receive, in the aggregate, such number of shares of Buyer Common
Stock as is equal to the Merger Shares less the Escrow Shares. For the
purposes hereof, the "ESCROW SHARES" shall mean 1,506,092 shares of Buyer
Common Stock. The shares of Buyer Common Stock which the holders of Common
Stock shall be entitled to receive at the Effective Time are hereinafter
referred to as the "Initial Shares." The Escrow Shares shall be deposited
into escrow pursuant to Section 2.10 and shall be held and disposed of in
accordance with the terms of the Escrow Agreement.
(b) As of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, each Option that is outstanding
under the Company's 1996 Incentive Stock Option Plan (each a "PLAN OPTION,"
and, collectively, the "PLAN OPTIONS") immediately prior to the Effective
Time shall be assumed by Buyer in such a manner that each such Plan Option
shall be exercisable upon the same terms and conditions as under the
Company's 1996 Incentive Stock Option Plan and the applicable Plan Option
agreement issued thereunder, except that (i) each such Plan Option shall be
exercisable for that number of shares of Buyer Common Stock (rounded up to
the nearest whole share) equal to the product of the number of shares of
Common stock subject to such Plan Option immediately prior to the Effective
Time multiplied by the Exchange Ratio (the "OPTION SHARES"), and (ii) the
Plan Option price per share of Buyer Common Stock shall be an amount equal
to the product of the Plan Option price per share of Common Stock subject to
such Plan Option immediately prior to
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the Effective Time divided by the Exchange Ratio (rounded up to the nearest
whole cent); PROVIDED, HOWEVER, that in the case of Plan Options intended to
qualify as "incentive stock options" pursuant to Section 422 of the Code,
any such adjustment shall be made in such manner as not to disqualify such
Plan Options as "incentive stock options." For purposes of this Agreement,
"EXCHANGED OPTION SHARES" shall mean the number of shares of Buyer Common
Stock as is equal to the aggregate number of Option Shares. As soon as
practicable after the Effective Time, Buyer shall file a registration
statement on Form S-8 (or any successor form) under the Securities Act with
respect to all of the Exchanged Option Shares that may be issued pursuant to
the Plan Options and shall use its best efforts to cause and maintain the
effectiveness of such registration statement.
(c) As of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, each Option that is outstanding
(other than under the Company's 1996 Incentive Stock Option Plan) (each a
"WARRANT," and, collectively, the "WARRANTS") immediately prior to the
Effective Time shall be assumed by Buyer in such a manner that each such
Warrant shall be exercisable upon the same terms and conditions as under the
applicable Warrant agreement issued thereunder, except that (i) each such
Warrant shall be exercisable for that number of shares of Buyer Common Stock
(rounded up to the nearest whole share) equal to the product of the number
of shares of Common Stock subject to such Warrant immediately prior to the
Effective Time multiplied by a the Exchange Ratio (the "WARRANT SHARES"),
and (ii) the Warrant price per share of Buyer Common Stock shall be an
amount equal to the product of the Warrant price per share of Common Stock
subject to such Warrant immediately prior to the Effective Time divided by
the Exchange Ratio (rounded up to the nearest whole cent). For purposes of
this Agreement, "EXCHANGED WARRANT SHARES" shall mean the number of shares
of Buyer Common Stock as is equal to the aggregate number of Warrant Shares.
(d) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of Common Stock held by the
Company as a treasury share immediately prior to the Effective Time shall be
canceled and no payment of any consideration shall be made with respect
thereto.
(e) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of common stock of Newco
that is issued and outstanding immediately prior to the Effective Time shall
be converted into one newly issued share of common stock of the Surviving
Corporation, par value $.01 per share.
SECTION 2.07 DISSENTING SHARES.
(a) Each outstanding share of Common Stock held by Shareholders who
shall have properly perfected appraisal rights with respect thereto under
Section 623 of the New York Law ("DISSENTERS' SHARES") shall not be
converted into the right to receive the consideration specified in Section
2.06, but shall be entitled to receive payment of the fair value of such
shares of Common Stock in accordance with the provisions of Sections 623 and
910 of the New York Law, except that any Dissenters' Shares held by a
Shareholder who shall thereafter withdraw its, his or her demand for payment
of fair value of such shares of Common Stock in accordance with the
provisions of such Section 623, or lose its, his or her right to such
payment, shall be converted, as of the Effective Time, into the right to
receive the applicable consideration specified in Section 2.06.
(b) The Company shall give Buyer (i) prompt notice of any written
demands for payment of fair value of any shares of Common Stock, withdrawals
of such demands, and any other instruments that relate to such demands
received by the Company and (ii) the opportunity to direct all negotiations
and proceedings with respect to demands for payment of fair value of such
shares under New York Law. The Company shall not, except with the prior
written consent of Buyer, make any payment with respect to any demands for
appraisal of shares of Common Stock or offer to settle any such demands.
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SECTION 2.08 EXCHANGE OF SHARES.
(a) Prior to the Effective Time, Buyer shall appoint the Exchange Agent
to effect the exchange of Shares for Initial Shares. On the Closing Date,
Buyer shall deliver to the Exchange Agent, in trust for the benefit of the
Shareholders, a stock certificate (issued in the name of its Exchange Agent
or its nominee) representing the Initial Shares. Each holder of a
certificate or certificates (the "CERTIFICATES") which immediately prior to
the Effective Time represented outstanding shares of Common Stock will be
entitled to receive, upon surrender to the Exchange Agent of such
Certificates for cancellation, shares of Buyer Common Stock in the amount
calculated in accordance with Section 2.06 hereof. Until properly
surrendered, each such Certificate shall be deemed for all purposes to
evidence only the right to receive such shares of Buyer Common Stock and any
distributions paid to the holders of Buyer Common Stock after the Effective
Time.
(b) If any shares of Buyer Common Stock are to be issued to a Person
other than the Person in whose name the Certificates surrendered are
registered, it shall be a condition of such issuance that the Certificates
so surrendered shall be properly endorsed or otherwise in proper form for
transfer and that the Person requesting such transfer shall pay any transfer
or other taxes required by reason of the payment to a Person other than the
registered holder of the Certificates surrendered or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is
not applicable.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Certificate
the number of Initial Shares issuable in exchange therefor pursuant to
Section 2.06. Buyer may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to give Buyer indemnity against, or post a bond for, any claim
that may be made against Buyer with respect to the Certificate alleged to
have been lost, stolen or destroyed.
(d) Prior to the Effective Time, Buyer will cause the Exchange Agent to
deliver or mail to each record holder of Certificates a form of letter of
transmittal (which will specify that delivery will be effected, and risk of
loss will pass, only upon proper delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting surrender of
Certificates for payment therefor.
(e) From and after the Effective Time, the holders of shares of Common
Stock outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such shares of Common Stock, except as
otherwise provided herein or by law.
(f) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any shares of Common Stock
which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and promptly exchanged for Initial Shares as provided
in this Section 2.08, or subject to applicable law in the case of
Dissenters' Shares.
(g) If the holder of any shares of Common Stock shall become entitled to
receive payment for such shares pursuant to Section 910 of the New York Law,
such payment shall be made by the Surviving Corporation.
(h) No certificates or scrip representing fractional shares of Buyer
Common Stock shall be issued to the Shareholders upon the surrender for
exchange of Certificates. In lieu of any fractional shares of Buyer Common
Stock that would otherwise be issued, each Shareholder that would have been
entitled to receive a fractional share of Buyer Common Stock shall, upon
proper surrender of such person's Certificates, receive one share of Buyer
Common Stock for such fractional share.
(i) No dividends or distributions that are declared on shares of Buyer
Common Stock will be paid to persons entitled to receive certificates
representing shares of Buyer Common Stock hereunder
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until such persons surrender their Certificates. Upon such surrender, there
shall be paid to the person in whose name the Certificates representing such
shares of Buyer Common Stock shall be issued, any dividends or distributions
with respect to such shares of Buyer Common Stock which have a record date
after the Effective Time and shall have become payable between the Effective
Time and the time of surrender. In no event will the Person entitled to
receive such dividends or distributions be entitled to receive interest
thereon.
SECTION 2.09 REQUISITE SHAREHOLDER APPROVAL.
(a) The Company will take all action necessary in accordance with
applicable law and its Certificate of Incorporation and Bylaws to convene a
special meeting of the Shareholders to consider and vote upon, or solicit
the written consent of the Shareholders for, the approval of the Merger and
adoption of this Agreement. The Company hereby represents and warrants to
Buyer and Newco that the approval of the Merger and the adoption of this
Agreement will require, under the New York Law and the Company's Certificate
of Incorporation, the approval of the holders of a majority of the
outstanding Shares.
(b) The Buyer will take all action necessary in accordance with
applicable law and its Certificate of Incorporation and Bylaws to convene a
special meeting of the stockholders of the Buyer to consider and vote upon
the approval of the Merger and adoption of this Agreement. The Buyer hereby
represents and warrants to the Company that the adoption of this Agreement
will require under the Delaware Law, the rules of the NASDAQ National Stock
Market and Buyer's Certificate of Incorporation, the approval of the holders
of a majority of the outstanding Buyer Common Stock, voting as a single
class.
SECTION 2.10 ESCROW. On the Closing Date, Buyer shall deliver to the
Escrow Agent a certificate (issued in the name of the Escrow Agent or its
nominee) representing the Escrow Shares, for the purpose of securing the
indemnification obligations of the Shareholders set forth in Article X of this
Agreement. The Escrow Shares shall be held by the Escrow Agent under the Escrow
Agreement pursuant to the terms thereof. The Escrow Shares shall be held as a
trust fund and shall not be subject to any lien, attachment, trustee process or
other judicial process of any creditor of any party, and shall be held and
disbursed solely for the purposes, and in accordance with the terms, of the
Escrow Agreement. The adoption of this Agreement and the approval of the Merger
by the Shareholders shall constitute approval of the Escrow Agreement and all of
the arrangements relating thereto, including without limitation the placement of
the Escrow Shares in escrow and the appointment of the Representative.
SECTION 2.11 REPRESENTATIVE. In order to efficiently administer the
transactions contemplated hereby, including (i) the defense and/or settlement of
any claims for which the Shareholders may be required to indemnify Buyer
pursuant to Article X hereof and (ii) entering into the Escrow Agreement, the
Shareholders, by their adoption of this Agreement and the approval of the
Merger, agree to the appointment of the Representative. The Representative is
hereby authorized to take any and all action as is contemplated to be taken by
the Shareholders by the terms of this Agreement and the Escrow Agreement. All
decisions and actions by the Representative shall be binding upon all of the
Shareholders and no Shareholder shall have the right to object, dissent, protest
or otherwise contest the same. By their adoption of this Agreement and the
approval of the Merger, the Shareholders further agree that:
(a) Buyer shall be able to rely exclusively on the instructions and
decisions of the Representative as to the settlement of claims for
indemnification by Buyer pursuant to Article X hereof, or any other actions
taken by the Representative hereunder, and no party hereunder shall have any
cause of action against Buyer in reliance upon the instructions or decisions
of the Representative;
(b) all actions, decisions and instructions of the Representative shall
be final, conclusive and binding upon the Shareholders;
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(c) the provisions of this Section 2.11 are independent and severable,
are irrevocable and coupled with an interest, and shall be enforceable
notwithstanding any rights or remedies that any Shareholder may have in
connection with the transactions contemplated by this Agreement and the
Escrow Agreement; and
(d) the provisions of this Section 2.11 shall be binding upon the
executors, heirs, legal representatives and successors of each Shareholder,
and any references in this Agreement to a Shareholder shall mean and include
the successors to the Shareholders' rights hereunder, whether pursuant to
testamentary disposition, the laws of descent and distribution or otherwise.
SECTION 2.12 CONSUMMATION OF MERGER. As soon as practicable after
satisfaction of the conditions set forth in Article VI hereof, the Company and
Newco shall execute and deliver to the Secretary of State of New York a duly
executed and verified Certificate of Merger (the "CERTIFICATE OF MERGER"), and
the parties shall take all such other and further actions as may be required by
law to make the Merger effective.
SECTION 2.13 CLOSING. The closing of the Merger and the other transactions
contemplated hereby (the "CLOSING") shall take place at the offices of Paul,
Hastings, Janofsky & Walker LLP, Thirty-First Floor, 399 Park Avenue, New York,
New York 10022 (or such other place as the parties may agree), at 10:00 A.M.
local time on June 30, 1998, or, if all conditions appearing in Article VI
hereof to the obligations of the parties hereto to consummate the transactions
contemplated hereby have not been satisfied or waived by such date, as promptly
as practicable upon satisfaction of such conditions as Buyer and the Company may
mutually establish (such time and date being referred to herein as the "CLOSING
DATE").
SECTION 2.14 ACTIONS AT THE CLOSING. At the Closing:
(a) The Company shall deliver or cause to be delivered to Buyer and
Newco all of the documents, certificates and instruments required to be
delivered to Buyer or Newco pursuant to Section 6.01 or 6.02.
(b) Buyer and Newco shall deliver or caused to be delivered to the
Company all of the documents, certificates and instruments required to be
delivered to the Company pursuant to Section 6.01 or 6.03.
(c) The Company and Newco shall file the Certificate of Merger with the
Secretary of State of the State of New York.
(d) Buyer shall deliver to the Exchange Agent certificates representing
the Initial Shares.
(e) Buyer, the Representative and the Escrow Agent shall enter into the
Escrow Agreement, and Buyer shall deliver to the Escrow Agent a certificate
representing the Escrow Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
REGARDING THE COMPANY
The Company hereby represents and warrants to, and covenants and agrees
with, Buyer and Newco that:
SECTION 3.01 ORGANIZATION AND GOOD STANDING; AUTHORIZATION.
(a) Each of the Company and its Subsidiaries has been duly organized and
is existing as a corporation in good standing under the laws of its
jurisdiction of incorporation with full power and authority (corporate and
other) to own and lease its properties and to conduct its business as
currently conducted. Each of the Company and its Subsidiaries has been duly
qualified as a foreign corporation
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for the transaction of business and is in good standing under the laws of
each jurisdiction in which the nature of its business or location of its
properties requires such qualification and in which the failure to so
qualify would have a Material Adverse Effect on the Company.
(b) The Company has the corporate power and authority to execute and
deliver this Agreement, to consummate the transactions contemplated hereby
and to perform its obligations under this Agreement. The execution and
delivery by the Company of this Agreement, and the consummation by the
Company of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action by the Company, subject to obtaining the
requisite shareholder approval. This Agreement, upon its execution and
delivery by the Company (assuming the due authorization, execution and
delivery hereof by the other parties hereto), will constitute the legal,
valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms.
SECTION 3.02 NO CONFLICTS. Except as set forth on Schedule 3.02, subject
to compliance with the applicable requirements of the Securities Act and any
applicable state securities laws, the HSR Act and the filing of the Certificate
of Merger as required by the New York Law, the execution, delivery and
performance of this Agreement and the consummation by the Company of the
transactions contemplated hereby will not (a) conflict with or result in a
breach or violation of any term or provision of, or constitute a default under
(with or without notice or passage of time, or both), or otherwise give any
Person a basis for accelerated or increased rights or termination or
nonperformance under, any indenture, mortgage, deed of trust, loan or credit
agreement, lease, license or other agreement or instrument to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound or affected or to which any of the property or assets of
the Company or any of its Subsidiaries is bound or affected, (b) result in the
violation of the provisions of the Certificate of Incorporation or Bylaws of the
Company or any Legal Requirement applicable to or binding upon the Company or
any of its Subsidiaries, (c) result in the creation or imposition of any Lien
upon any property or asset of the Company or any of its Subsidiaries or (d)
otherwise adversely affect the contractual or other legal rights or privileges
of the Company or any of its Subsidiaries. Schedule 3.02 set forth a list of all
agreements to which the Company or any of its Subsidiaries is a party requiring
the consent of any party thereto to any of the transactions contemplated hereby.
SECTION 3.03 CAPITALIZATION. The authorized capital stock of the Company
consists solely of (A) 4,000,000 shares of Common Stock, of which 3,089,006 are,
and immediately prior to the Effective Time (other than those resulting from any
exercised Options between the date hereof and the Effective Time) will be,
issued and outstanding, and (B) 1,000,000 shares of preferred stock, par value
$.001 per share, of which no shares are, and immediately prior to the Effective
Time will be, issued and outstanding. Annex A hereto sets forth a complete and
accurate list of (i) the Shareholders, indicating the type and number of Shares
held by each Shareholder, (ii) all holders of Options, indicating the type and
number of shares of Common Stock subject to each Option, the name of the plan
and the vesting schedule and the exercise price thereof, and (iii) all of the
Stock Plans. All of the issued and outstanding shares of Common Stock are, and
all shares of Common Stock that may be issued upon exercise of Options after the
date hereof and prior to the Effective Time will be, duly authorized, validly
issued, fully paid, nonassessable and free of all preemptive rights. Other than
as set forth on Annex A (i) there are no existing options, warrants, rights,
calls or commitments of any character relating to shares of Common Stock, (ii)
there are no outstanding securities or other instruments convertible into or
exchangeable for shares of the Company's capital stock and no commitments to
issue such securities or instruments and (iii) no Person has any right of first
refusal, preemptive right, subscription right or similar right with respect to
any shares of the Company's capital stock. The offer, issuance and sale of the
Shares were (i) exempt from the registration and prospectus delivery
requirements of the Securities Act, (ii) registered or qualified (or exempt from
registration or qualification) under the registration or qualification
requirements of all applicable state securities laws and (iii) accomplished in
conformity with all other Legal Requirements. Except as set forth on Schedule
3.03, there are no voting agreements, voting trusts or similar arrangements or
understandings
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to which the Company or any of its Subsidiaries is a party or is bound with
respect to the voting of the capital stock of the Company or its Subsidiaries.
Except as set forth in Schedule 3.03, none of the awards, grants or other
agreements pursuant to which Company stock options or warrants were issued have
provisions which accelerate the vesting or right to exercise such options or
warrants upon the execution of this Agreement, the consummation of the
transactions contemplated by this Agreement or any "change of control" events.
SECTION 3.04 FINANCIAL STATEMENTS.
(a) Schedule 3.04(a) contains true and complete copies of (i) the
unaudited balance sheet of the Company (the "BALANCE SHEET") at December 31,
1997 (the "BALANCE SHEET DATE"), and the related unaudited statements of
income, shareholders' equity and cash flows for the year then ended, and
(ii) the audited balance sheet of the Company at December 31, 1996, and the
related audited statements of income, shareholders' equity and cash flows
for the year then ended, together with the opinion thereon of Ernst & Young
LLP, the Company's independent accountants (the financial statements
described in this subparagraph (a) collectively, the "FINANCIAL
STATEMENTS").
(b) The Financial Statements present fairly the financial condition of
the Company as of the Balance Sheet Date and the results of operations and
changes in financial position of the Company for the years then ended, have
been prepared in conformity with GAAP during the period covered thereby and
prior periods, have been derived from the accounting records of the Company
and represent only actual, bona fide transactions. Since December 31, 1997,
there has been no change in accounting (including tax accounting) policies,
practices or procedures of the Company or any of its consolidated
Subsidiaries. The Company is neither aware of, nor does it anticipate, any
material audit adjustments to its financial statements for the year ended
December 31, 1997.
SECTION 3.05 INDEBTEDNESS. Neither the Company nor any of its Subsidiaries
has any liability or obligation for Indebtedness other than as set forth on
Schedule 3.05, and true and complete copies of all instruments and documents
evidencing, creating, securing or otherwise relating to such Indebtedness have
been delivered to Buyer heretofore. Except as described in Schedule 3.05, no
event has occurred and no condition has become known to the Company (including
the transactions contemplated hereby) that constitutes or, with notice or
passage of time, or both, would constitute a default or a basis of force majeure
or other claim of accelerated or increased rights, termination, excusable delay
or nonperformance by the Company or any other Person under any instrument or
document relating to or evidencing Indebtedness that would entitle any Person to
require the Company or any of its Subsidiaries to pay any portion of the
principal amount of such Indebtedness prior to the scheduled maturity thereof.
Except as set forth in Schedule 3.05, no instrument or document evidencing,
creating, securing or otherwise relating to Indebtedness of the Company or any
of its Subsidiaries will require the consent of any Person to or as a result of
the consummation of the transactions contemplated by this Agreement.
SECTION 3.06 JUDGMENTS; LITIGATION. Except as set forth on Schedule 3.06:
(a) There is no (i) outstanding judgment, order, decree, award,
stipulation, injunction of any Governmental Entity or arbitrator against or
affecting the Company or any of its Subsidiaries or their respective
properties, assets or businesses or (ii) Action pending against or affecting
the Company or any of its Subsidiaries or their respective properties,
assets or businesses.
(b) To the Company's knowledge, there is no (i) outstanding judgment,
order, decree, award, stipulation, injunction of any Governmental Entity or
arbitrator against or affecting any officer, director or employee of the
Company or any of its Subsidiaries relating to the Company or any of its
Subsidiaries or their respective businesses, (ii) Action threatened against
the Company or any of its Subsidiaries or their respective properties,
assets or businesses, (iii) Action pending or threatened against the
Company's or any of its Subsidiaries' officers, directors or employees
relating to the Company or any of its Subsidiaries or their respective
businesses or (iv) basis for the institution of any
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Action against the Company or any of its Subsidiaries or their respective
officers, directors, employees, properties or assets which, if decided
adversely, would have a Material Adverse Effect on the Company.
SECTION 3.07 CORPORATE RECORDS. The copies or originals of the Certificate
of Incorporation or Articles of Incorporation, Bylaws, minute books and stock
records of the Company and its Subsidiaries previously delivered to, or made
available for inspection by, Buyer are true, complete and correct.
SECTION 3.08 EMPLOYEE BENEFIT MATTERS.
(a) Schedule 3.08(a) is a complete list of all Plans. True and complete
copies of each of the following documents (and any amendments thereto),
where applicable, have been delivered previously to Buyer: (i) the Plan
documents; (ii) a written description of any Plan which is not in writing;
(iii) if the Plan is funded through a trust or any third-party funding
vehicle, the trust or other funding agreement; (iv) the Plan's most recent
financial statements; (v) the two most recent annual reports (including all
schedules and attachments thereto) required by ERISA; (vi) the most recent
actuarial report and valuation; (vii) the most recent determination letter
received from the IRS with respect to each Plan that is intended to be
qualified under Code Section 401 or to be recognized as tax-exempt under
Code Section 501(c); (viii) the most recent summary plan description and
each summary of material modifications required by ERISA; (ix) any agreement
providing for the provision of administrative or investment management
services with respect to the Plan; and (x) all documents and correspondence
received from or provided to the Department of Labor, IRS, and Pension
Benefit Guaranty Corporation during the past two years.
(b) Each Plan and related trust, annuity, or other funding agreement
complies and has been maintained in compliance with all applicable Legal
Requirements. No non-exempt prohibited transaction (as defined in Code
Section 4975 and ERISA Sections 406 and 408) has occurred and no "fiduciary"
(as defined in ERISA Section 3(21)) has committed any breach of duty which
could subject the Company, any ERISA Affiliate, or any director, officer, or
employee thereof to liability under Title I of ERISA or to tax under Code
Section 4975. All material obligations required to be performed by the
Company and any other Person under the terms of each Plan and applicable
Legal Requirements have been performed.
(c) All required reports and descriptions, including, without
limitation, annual reports (Form 5500), summary annual reports, and summary
plan descriptions, have been filed and distributed timely. With respect to
each Plan which is a welfare plan (as defined in ERISA Section 3(1)), the
requirements of Part 6 of Subtitle B of Title I of ERISA and of Code
Sections 162(k) and 4980B have been satisfied.
(d) All contributions, premiums, and other payments, including, without
limitation, employer contributions and employee salary reduction
contributions, have been paid when due or accrued in accordance with the
past custom and practice of the Company and any ERISA Affiliate. No Plan
that is subject to Part 3 of Subtitle B of Title I of ERISA or to Code
Section 412 has incurred any accumulated funding deficiency, whether or not
waived, and no other actual or contingent liability for any other expenses
or obligations of any Plan exists.
(e) There are no pending or, to the Company's knowledge, threatened
Actions (other than routine claims for benefits) asserted or instituted
against any Plan or the assets of any Plan, or against the Company, or any
ERISA Affiliate, trustee, administrator, or fiduciary of such Plan, and the
Company has no knowledge of any facts that could form the basis of any such
Action.
(f) The Company (or, if applicable, an ERISA Affiliate) may terminate,
suspend, or amend each Plan at any time, except to the extent otherwise
required by Code Section 4980B, without the consent of the participants or
employees covered by such Plan. Neither the Company nor any ERISA Affiliate
has announced any intention, made any amendment or binding commitment, or
given any
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written or oral notice providing that the Company or an ERISA Affiliate (i)
will create additional Plans covering employees of the Company or any ERISA
Affiliate, (ii) will increase benefits promised or provided pursuant to any
Plan, or (iii) will not exercise after the Closing Date any right or power
it may have to terminate, suspend, or amend any Plan.
(g) Neither the Company nor any ERISA Affiliate maintains or has
maintained at any time, or contributes to or has contributed to or is or was
required to contribute to, any (i) Plan subject to Title IV of ERISA,
including, without limitation, any multi-employer plan (as defined in ERISA
Section 3(37)), within the past five years, or (ii) funded or unfunded
medical, health, accident, or life insurance plan or arrangement for current
or future retirees or terminated employees or their spouses or dependents
(except to the extent required by Code Sections 162(k) or 4980B).
(h) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will constitute a
termination of employment or other event entitling any Person to any
additional or other benefits, or that would otherwise modify benefits or the
vesting of benefits, provided under any Plan.
(i) No event has occurred which could subject the Company or any ERISA
Affiliate to any material liability (i) under any Legal Requirement relating
to any Plan, or (ii) resulting from any obligation of the Company or an
ERISA Affiliate to indemnify any Person against liability incurred with
respect to or in connection with any Plan.
(j) Each Plan which is intended to be qualified under Code Section 401
has received, within the last three years, a favorable determination letter
from the IRS. No event has occurred and no facts or circumstances exist
which may cause or result in the loss or revocation of such determination.
(k) There are no material unfunded liabilities with respect to any Plan,
and each Plan could be terminated as of the date of the Closing with no
liability to Buyer, the Company or any ERISA Affiliate.
(l) There are no agreements of the Company or any of its Subsidiaries
which will or may provide payments to any officer, employee, shareholder, or
highly compensated individual of the Company or any of its Subsidiaries
which will be "parachute payments" under Code Section 280G that are
nondeductible to the Company or its Subsidiaries or subject to tax under
Code Section 4999 for which the Company or any ERISA Affiliate would have
withholding liability.
SECTION 3.09 INCOME AND OTHER TAXES. Except as set forth on Schedule 3.09:
(a) All Tax Returns required to be filed through and including the date
hereof in connection with the operations of the Company are true, complete
and correct in all respects and have been properly and timely filed. The
Company has not requested any extension of time within which to file any Tax
Return, which Tax Return has not since been filed. Buyer has heretofore been
furnished by the Company with true, correct and complete copies of each Tax
Return of the Company with respect to the past three taxable years, and of
all reports of, and communications from, any Governmental Entities relating
to such period. The Company has disclosed on its Federal income Tax Returns
all positions taken therein that could give rise to a substantial
understatement of income Taxes for federal income tax purposes within the
meaning of Code Section 6662.
(b) All Taxes required to be paid or withheld and deposited through and
including the date hereof in connection with the operations of the Company
have been duly and timely paid or deposited by the Company. The Company has
properly withheld or collected all amounts required by law for income Taxes,
employment Taxes and withholding Taxes relating to its employees, creditors,
independent contractors and other third parties, and for Taxes on sales, and
has properly and timely remitted such withheld or collected amounts to the
appropriate Governmental Entity. The Company has no liabilities for any
Taxes for any taxable period ending prior to or coincident with the Closing
Date.
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(c) The Company has made adequate provision on its books of account for
all Taxes with respect to its business, properties and operations through
the Balance Sheet Date, and the accruals for Taxes in the Balance Sheet are
adequate to cover all liabilities for Taxes of the Company for all periods
ending on or before the Closing Date.
(d) The Company has not heretofore (i) had a tax deficiency proposed,
asserted or assessed against it, (ii) executed any waiver of any statute of
limitations on the assessment or collection of any Taxes, or (iii) been
delinquent in the payment of any Taxes.
(e) No Tax Return of the Company has been audited or the subject of
other Action by any Governmental Entity. The Company has not received any
notice from any Governmental Entity of any pending examination or any
proposed deficiency, addition, assessment, demand for payment or adjustment
relating to or affecting the Company or its assets or properties, and the
Company has not any reason to believe that any Governmental Entity may
assess (or threaten to assess) any Taxes for any periods ending on or prior
to the Closing Date.
(f) The Company (i) has not filed any consent or agreement pursuant to
Code Section 341(f), and no such consent or agreement will be filed at any
time on or before the Closing Date; (ii) has not made any payments, is not
obligated to make any payments and is not a party to any agreement that
under certain circumstances could obligate the Company to make any payments
that will not be deductible under Code Section 280G; (iii) is not a United
States real property holding corporation within the meaning of Code Section
897(c)(2); (iv) is not a party to a tax allocation or sharing agreement; (v)
has never been (or does not have any liability for unpaid Taxes because it
was) a member of an affiliated group with the meaning of Code Section
1504(a); (vi) has never applied for a tax ruling from a Governmental Entity;
(vii) has never filed or been the subject of an election under Code Section
338(g) or Code Section 338(h)(10) or caused or been the subject of a deemed
election under Code Section 338(e); (viii) has not participated in, or
cooperated with, an international boycott within the meaning of Section 999
of the Code; and (ix) has not issued or assumed any acquisition indebtedness
as defined in Section 279(b) of the Code.
(g) Set forth on Schedule 3.09(g) is the amount, as of the most recent
practicable date, of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax or excess charitable
contribution.
SECTION 3.10 HAZARDOUS MATERIALS. Except as set forth on Schedule 3.10:
(a) To the Company's knowledge, no Hazardous Material (i) has been
released, placed, stored, generated, used, manufactured, treated, deposited,
spilled, discharged, released or disposed of on or under any real property
currently or previously owned or leased by the Company or any of its
Subsidiaries, (ii) is presently maintained, used, generated, or permitted to
remain in place by the Company or any of its Subsidiaries in violation of
any Environmental Law, (iii) is required by any Environmental Law to be
eliminated, removed, treated or mitigated by the Company or any of its
Subsidiaries, given the nature of its present condition, location, nature,
material or maintenance, or (iv) is of a type, location, material, nature or
condition which requires special notification to third parties by the
Company or any of its Subsidiaries under Environmental Law or common law, in
any such cases which would have a Material Adverse Effect on the Company.
(b) No notice, citation, summons or order has been received by the
Company or any of its Subsidiaries, no notice has been given by the Company
or any of its Subsidiaries and no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or, to the Company's
knowledge, threatened by any Governmental Entity, with respect to (i) any
alleged violation by the Company or any of its Subsidiaries of any
Environmental Law, or (ii) any alleged failure by the Company or any of its
Subsidiaries to have any environmental permit, certificate, license,
approval, registration or authorization required in connection with its
business or properties,
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or (iii) any use, possession, generation, treatment, storage, recycling,
transportation, release or disposal by or on behalf of the Company or any of
its Subsidiaries of any Hazardous Material.
(c) Neither the Company nor any of its Subsidiaries has received any
request for information, notice of claim, demand or notification that it is
or that indicates that it may be a "potentially responsible party" with
respect to any investigation or remediation of any threatened or actual
release of any Hazardous Material.
(d) No above-ground or underground storage tanks, whether or not in use,
are or have ever been located at any property currently owned or leased by
the Company or any of its Subsidiaries.
(e) No notice has been received by the Company or any of its
Subsidiaries with respect to the listing or proposed listing of any property
currently or previously owned, operated or leased by the Company or any of
its Subsidiaries on the National Priorities List promulgated pursuant to
CERCLA, CERCLIS or any similar state list of sites requiring investigation
or cleanup.
(f) There have been no environmental inspections, investigations,
studies, tests, reviews or other analyses conducted in relation to any real
property currently owned or leased by the Company or any of its
Subsidiaries.
(g) Neither the Company nor any of its Subsidiaries has released,
transported, or arranged for the transportation of any Hazardous Material
from any property currently or previously owned, operated or leased by the
Company or any of its Subsidiaries.
SECTION 3.11 ACCOUNTS RECEIVABLE. All accounts receivable of the Company
reflected in the Balance Sheet and all accounts receivable of the Company that
have arisen since the Balance Sheet Date (except such accounts receivable as
have been collected since such date) are valid and enforceable claims against
the account debtor, and the goods and services sold and delivered that gave rise
to such accounts were sold and delivered in conformity with all applicable
express and implied warranties, purchase orders, agreements and specifications.
Such accounts receivable of the Company are subject to no valid defense, offset
or counterclaim and are fully collectible in the Ordinary Course, except to the
extent of the allowance for doubtful accounts reflected on the Balance Sheet.
SECTION 3.12 MATERIAL CONTRACTS. All material contracts, leases,
agreements and arrangements to which the Company or any of its Subsidiaries is a
party are legally valid, binding and enforceable in accordance with their terms
and in full force and effect, and the Company has provided Buyer with the
opportunity to review and copy all such documents. The Company and, to the
knowledge of the Company, all parties to such contracts, leases, agreements and
arrangements have complied with the provisions of such contracts, leases,
agreements and arrangements, and neither the Company nor any of its Subsidiaries
and, to the knowledge of the Company, no other party is, in default thereunder,
and no event has occurred which, but for the passage of time or the giving of
notice or both, would constitute a default thereunder. Set forth on Schedule
3.12 is a list of all such material contracts, leases, agreements and
arrangements, including those contracts to which the Company or any of its
Subsidiaries is a party which cannot be terminated or do not terminate within 12
months or less without cause or obligate the Company or any of its Subsidiaries
for amounts in excess of $50,000.00. Except as set forth on Schedule 3.12, none
of such contracts or agreements will, by its terms, terminate as a result of the
transactions contemplated hereby or require any consent from any obligor thereto
in order to remain in full force and effect immediately after the Effective
Time.
SECTION 3.13 NO UNDISCLOSED LIABILITIES. Except (i) to the extent set
forth or provided for in the Balance Sheet, (ii) as set forth on Schedule 3.13
or (iii) for non-material current liabilities incurred since the Balance Sheet
Date in the Ordinary Course, as of the date hereof the Company and its
Subsidiaries have no liabilities, whether accrued, absolute, contingent or
otherwise, whether due or to become due and whether the amounts thereof are
readily ascertainable or not, or any unrealized or anticipated losses from any
commitments of a contractual nature.
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SECTION 3.14 CONSENTS. No consent, approval, authorization, license,
permit or other action by, or filing with, any governmental or regulatory
authority is required in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the transactions
contemplated hereby, except for such consents, approvals, authorizations,
licenses, permits, actions or filings as will have been obtained, taken or filed
at or prior to the Closing.
SECTION 3.15 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date,
neither the Company nor any of its Subsidiaries has made or suffered any change
in, or condition affecting, their respective condition (financial or otherwise),
properties, profitability, prospects or operations other than changes, events or
conditions in the Ordinary Course, none of which (individually or in the
aggregate) has had, or which the Company can now reasonably foresee will have, a
Material Adverse Effect on the Company.
SECTION 3.16 AFFILIATIONS. Except as disclosed on Schedule 3.16, none of
the officers, directors or key employees of the Company or any of its
Subsidiaries or any associate or Affiliate of the Company or any of such Persons
has, directly or indirectly, (i) an interest in any Person that (A) furnishes or
sells, or proposes to furnish or sell, services or products that are furnished
or sold by the Company or any of its Subsidiaries or (B) purchases from or sells
or furnishes to, or proposes to purchase from or sell or furnish to, the Company
or any of its Subsidiaries any goods or services or (ii) a beneficial interest
in any contract or agreement to which the Company or any of its Subsidiaries is
a party or by which the Company or any of its Subsidiaries or any of the assets
of the Company or any of its Subsidiaries are bound or affected.
SECTION 3.17 BROKERS' FEES. No broker, finder or similar agent has been
employed by or on behalf of the Company in connection with this Agreement or the
transactions contemplated hereby, and the Company has not entered into any
agreement or understanding of any kind with any person or entity for the payment
of any brokerage commission, finder's fee or any similar compensation in
connection with this Agreement or the transactions contemplated hereby.
SECTION 3.18 SEVERANCE ARRANGEMENTS. Except as set forth on Schedule 3.18,
neither the Company nor any of its Subsidiaries is subject to any agreement with
any employee (i) the benefits of which (including severance benefits) are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction of the nature of that contemplated by this Agreement or the
Merger, or (ii) providing for severance benefits beyond those described in
Schedule 3.18, or which are conditioned upon a change in control of the Company,
after the termination of employment of such employee regardless of the reason
for such termination of employment, and neither the Company nor any of its
Subsidiaries is a party to any employment agreement or compensation guarantee
for a period longer than one year from the date hereof. Schedule 3.18 sets forth
all employment agreements and compensation guarantees, regardless of duration,
to which the Company or any of its Subsidiaries is a party.
SECTION 3.19 SUBSIDIARIES. All the Company's Subsidiaries are set forth on
Schedule 3.19. Except as set forth on Schedule 3.19, the Company does not own
any shares of capital stock, partnership interests or other beneficial ownership
interests in any other Person.
SECTION 3.20 TITLE TO AND CONDITION OF ASSETS. Except as otherwise set
forth on Schedule 3.20 and except for assets and properties that are leased by
the Company or its Subsidiaries, the Company and its Subsidiaries hold good and
marketable title to their respective assets and properties, free and clean of
all Liens, except Permitted Liens. The assets and properties of the Company and
its Subsidiaries consisting of structures, fixtures and equipment are
structurally sound with no material defects and are in sufficient operating
order, condition and repair, ordinary wear and tear excepted, for the operation
of the Company's business as currently conducted, and none of such structures,
fixtures or equipment are in need of maintenance or repairs except for ordinary,
routine maintenance and repairs consistent with the age and use of such assets
and properties, which are not, either individually or in the aggregate,
material.
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SECTION 3.21 LEASED REAL PROPERTY.
(a) Schedule 3.21 describes the real property currently leased by the
Company or any of its Subsidiaries (the "LEASED REAL PROPERTY").
(b) Neither the Company nor any of its Subsidiaries owns any real
property. The Company and its Subsidiaries have good leasehold interests in,
and possession of, all Leased Real Property, subject to the terms of the
applicable leases. All of the leases for Leased Real Property are valid,
binding and in full force and effect, and there has been no breach, which
breach has not been cured or waived, of any such lease by the Company, or to
the Company's knowledge, the lessors thereunder.
(c) To the Company's knowledge, no fact or condition exists which could
result in the termination or reduction of the current access to or from the
Leased Real Property to existing roads or the electrical, telephone, sewer
or other utility services presently serving the Leased Real Property.
(d) To the Company's knowledge, the Leased Real Property is properly
zoned for its current use or uses, and there are presently no Legal
Requirements applicable to any parcel of Leased Real Property which prohibit
the use of such Leased Real Property for such purpose or purposes.
(e) No written notices have been received by the Company or its
Subsidiaries from any insurance company issuing any policy of insurance
covering the Leased Real Property regarding the performance of any work,
restoration or repair with respect to the Leased Real Property with which
compliance, to the satisfaction of such insurance company, has not been
made.
(f) To the Company's knowledge, the Leased Real Property is not subject
to any current use or special use assessment or any ad valorem tax
abatement.
(g) To the Company's knowledge, with respect to the improvements on the
Leased Real Property, such improvements are in conformity in all material
respects with all applicable Legal Requirements and no variances or other
waivers were obtained or are required to assure such conformity.
SECTION 3.23 COMPLIANCE WITH LAW. The Company and its Subsidiaries are in
compliance in all material respects with all Legal Requirements in connection
with the operation of their businesses and the ownership and maintenance of
their assets and properties. To the Company's knowledge, all filings and notices
required to be made by the Company and its Subsidiaries with any Governmental
Entity in connection with the operation of their businesses or the ownership and
maintenance of their assets or properties have been made or given in a timely
fashion.
SECTION 3.24 LABOR MATTERS. There is no labor strike, slowdown, stoppage
or other labor difficulty actually pending or, to the Company's knowledge,
threatened against the Company or any of its Subsidiaries. There is no
collective bargaining agreement or union contract binding upon the Company or
any of its Subsidiaries, and there has not been any such agreement or contract
in effect at any time during the preceding three years.
SECTION 3.25 CUSTOMERS. Schedule 3.25 lists the 10 largest customers of
the Company and its Subsidiaries for the most recent fiscal year and sets forth
opposite each name the percentage of total consolidated revenues attributable to
such customer for such year. Except as set forth on Schedule 3.25, no such
customer has terminated, or to the Company's knowledge, threatened to terminate,
its relationship with the Company or its Subsidiaries, and the Company believes
its relationship with such customers is good.
SECTION 3.26 DISCLOSURE. Except as set forth on Schedule 3.26, no
representation or warranty of the Company in this Agreement and no information
contained in any Schedule or other writing delivered by the Company pursuant to
this Agreement or at the Closing contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact required to
make the statements
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herein or therein not misleading. There is no fact that the Company has not
disclosed to Buyer or Newco in writing that has had or, insofar as the Company
can now foresee, may have a material adverse effect on the ability of the
Company to perform fully this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to, and covenants and agrees with, the
Company that:
SECTION 4.01 ORGANIZATION AND GOOD STANDING OF BUYER. Each of Buyer and
its Subsidiaries has been duly organized and is existing as a corporation in
good standing under the laws of the State of its jurisdiction of incorporation
with full power and authority (corporate and other) to own and lease its
properties and to conduct its business as currently conducted. Each of Buyer and
its Subsidiaries has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
jurisdiction in which the nature of its business or location of its properties
requires such qualification and in which the failure to so qualify would have a
Material Adverse Effect on Buyer.
SECTION 4.02 SUBSIDIARIES. All of Buyer's Subsidiaries, including Newco,
are set forth on Schedule 4.02. Except as set forth on Schedule 4.02, Buyer does
not own any shares of capital stock, partnership interests or other beneficial
ownership interests in any other Person.
SECTION 4.03 AUTHORIZATION. Each of Buyer and Newco has the corporate
power and authority to execute and deliver this Agreement, to consummate the
transactions contemplated hereby and to perform its obligations under this
Agreement. The execution and delivery by each of Buyer and Newco of this
Agreement, and the consummation by each of them of the transactions contemplated
hereby, have been duly authorized by all necessary corporate action on the part
of each of Buyer and Newco, subject to obtaining the requisite shareholder
approval. This Agreement, upon its execution and delivery by each of Buyer and
Newco (assuming the due authorization, execution and delivery hereof by the
other parties hereto), will constitute the legal, valid and binding obligation
of each of Buyer and Newco, enforceable against each of Buyer and Newco in
accordance with its terms.
SECTION 4.04 NO CONFLICTS. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
HSR Act and the filing of the Certificate of Merger as required by the New York
Law, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby by Buyer and Newco will not
(a) conflict with or result in a breach or violation of any term or provision
of, or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any Person a basis for accelerated or increased rights
or termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which Buyer or any of its Subsidiaries is a party or by which Buyer or any of
its Subsidiaries is bound or affected or to which any of the property or assets
of Buyer or any of its Subsidiaries is bound, (b) result in the violation of the
provisions of the Certificate of Incorporation or Bylaws of Buyer or any of its
Subsidiaries or any Legal Requirement applicable to or binding upon Buyer or any
of its Subsidiaries, (c) result in the creation or imposition of any Lien upon
any property or asset of Buyer or any of its Subsidiaries or (d) otherwise
adversely affect the contractual or other legal rights or privileges of Buyer or
any of its Subsidiaries. Schedule 4.04 set forth a list of all agreements to
which the Buyer or any of its Subsidiaries is a party requiring the consent of
any party thereto to any of the transactions contemplated hereby.
SECTION 4.05 CAPITALIZATION. The authorized capital stock of Buyer
consists solely of (i) 27,500,000 shares of Buyer Common Stock, of which
21,478,624 are issued and outstanding and 5,114,940 are reserved for issuance
upon exercise of outstanding options and warrants and conversion of Buyer
Preferred Stock, and (ii) 1,000,000 shares of Buyer Preferred Stock, of which
29,778 shares are issued and outstanding. All of the issued and outstanding
shares of Buyer Common Stock and Buyer
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Preferred Stock are duly authorized, validly issued, fully paid, nonassessable,
and free of all preemptive rights. All of the Merger Shares and Additional
Shares, if any, to be issued pursuant to this Agreement, when issued in
accordance with this Agreement, will be duly authorized, validly issued, fully
paid, nonassessable, free of all preemptive rights and, subject to official
notice of issuance, authorized for listing on the NASDAQ National Market System.
The authorized capital stock of Newco consists solely of 1,000 shares of common
stock, $.01 par value per share, 100 of which are, and on the Closing Date will
be, issued and outstanding. All of the issued and outstanding shares of capital
stock of Newco are, and on the Closing Date will be, owned beneficially and of
record by Buyer. Other than as set forth on Schedule 4.05 (i) there are no
existing options, warrants, rights, calls or commitments of any character
relating to shares of Buyer Common Stock , (ii) there are no outstanding
securities or other instruments convertible into or exchangeable for shares of
Buyer's capital stock and no commitments to issue such securities or instruments
and (iii) no Person has any right of first refusal, preemptive right,
subscription right or similar right with respect to any shares of Buyer's
capital stock. The offer, issuance and sale of the outstanding shares of Buyer
Common Stock and Buyer Preferred Stock were issued in compliance with the
registration and prospectus delivery requirements of the Securities Act (or
exemptions therefrom), the requirements of all applicable state securities laws,
and accomplished in conformity with all other Legal Requirements. Except as set
forth on Schedule 4.05, there are no voting agreements, voting trusts or similar
arrangements or understandings to which Buyer or any of its Subsidiaries is a
party or is bound with respect to the voting of the capital stock of Buyer or
its Subsidiaries. Except as set forth in Schedule 4.05, none of the awards,
grants or other agreements pursuant to which Buyer stock options or warrants
were issued have provisions which accelerate the vesting or right to exercise
such options or warrants upon the execution of this Agreement, the consummation
of the transactions contemplated by this Agreement or any "change of control"
events.
SECTION 4.06 BUYER REPORTS AND FINANCIAL STATEMENTS. Buyer has previously
furnished to the Company complete and accurate copies, as amended and
supplemented, of its (a) Annual Report on Form 10-K for its fiscal year ended
June 30, 1997, (b) Quarterly Reports on Form 10-Q for its fiscal quarters ended
September 30, 1997 and December 31, 1997, (c) Proxy Statement related to its
annual stockholders' meeting held on March 6, 1996, each as filed with the
Commission, and (d) all other reports filed by Buyer under Section 13 of the
Exchange Act with the Commission since June 30, 1997 (such reports are
collectively referred to herein as the "BUYER REPORTS"). The Buyer Reports
include all of the documents required to be filed by Buyer under the Exchange
Act with the Commission since June 30, 1997. As of their respective dates, the
Buyer Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading. The audited financial statements and
unaudited interim financial statements of Buyer included in the Buyer Reports
(i) comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto, (ii) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-Q under the Exchange Act), (iii)
fairly present the consolidated financial condition, results of operations and
cash flows of Buyer and its Subsidiaries as of the respective dates thereof and
for the periods referred to therein subject, in the case of unaudited financial
statements, to normal, recurring year-end adjustments and any other adjustments
described therein, and (iv) are consistent with the books and records of Buyer.
SECTION 4.07 JUDGMENTS; LITIGATION. Except as set forth on Schedule 4.07:
(a) There is no (i) outstanding judgment, order, decree, award,
stipulation, injunction of any Governmental Entity or arbitrator against or
affecting Buyer or any of its Subsidiaries or their respective properties,
assets or businesses or (ii) Action pending against or affecting Buyer or
any of its Subsidiaries or their respective properties, assets or
businesses.
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(b) To Buyer's knowledge, there is no (i) outstanding judgment, order,
decree, award, stipulation, injunction of any Governmental Entity or
arbitrator against or affecting any officer, director or employee of Buyer
or any of its Subsidiaries relating to Buyer or any of its Subsidiaries or
their respective businesses, (ii) Action threatened against Buyer or any of
its Subsidiaries or their respective properties, assets or businesses, (iii)
Action pending or threatened against the officers, directors or employees of
Buyer or its Subsidiaries relating to Buyer or any of its Subsidiaries or
their respective businesses or (iv) basis for the institution of any Action
against Buyer or any of its Subsidiaries or any of their respective
officers, directors, employees, properties or assets which, if decided
adversely, would have a Material Adverse Effect on Buyer.
SECTION 4.08 EMPLOYEE BENEFIT MATTERS.
(a) Schedule 4.08(a) is a complete list of all Buyer Plans. True and
complete copies of each of the following documents (and any amendments
thereto), where applicable, have been delivered previously to the Company:
(i) the Buyer Plan documents; (ii) a written description of any Buyer Plan
which is not in writing; (iii) if the Buyer Plan is funded through a trust
or any third-party funding vehicle, the trust or other funding agreement;
(iv) the Buyer Plan's most recent financial statements; (v) the two most
recent annual reports (including all schedules and attachments thereto)
required by ERISA; (vi) the most recent actuarial report and valuation;
(vii) the most recent determination letter received from the IRS with
respect to each Buyer Plan that is intended to be qualified under Code
Section 401 or to be recognized as tax-exempt under Code Section 501(c);
(viii) the most recent summary plan description and each summary of material
modifications required by ERISA; (ix) any agreement providing for the
provision of administrative or investment management services with respect
to the Buyer Plan; and (x) all documents and correspondence received from or
provided to the Department of Labor, IRS, and Pension Benefit Guaranty
Corporation during the past two years.
(b) Each Buyer Plan and related trust, annuity, or other funding
agreement complies and has been maintained in compliance with all applicable
Legal Requirements. No non-exempt prohibited transaction (as defined in Code
Section 4975 and ERISA Sections 406 and 408) has occurred and no "fiduciary"
(as defined in ERISA Section 3(21)) has committed any breach of duty which
could subject Buyer, any Buyer ERISA Affiliate, or any director, officer, or
employee thereof to liability under Title I of ERISA or to tax under Code
Section 4975. All material obligations required to be performed by Buyer and
any other Person under the terms of each Buyer Plan and applicable Legal
Requirements have been performed.
(c) All required reports and descriptions, including, without
limitation, annual reports (Form 5500), summary annual reports, and summary
plan descriptions, have been filed and distributed timely. With respect to
each Buyer Plan which is a welfare plan (as defined in ERISA Section 3(1)),
the requirements of Part 6 of Subtitle B of Title I of ERISA and of Code
Sections 162(k) and 4980B have been satisfied.
(d) All contributions, premiums, and other payments, including, without
limitation, employer contributions and employee salary reduction
contributions, have been paid when due or accrued in accordance with the
past custom and practice of Buyer and any Buyer ERISA Affiliate. No Buyer
Plan that is subject to Part 3 of Subtitle B of Title I of ERISA or to Code
Section 412 has incurred any accumulated funding deficiency, whether or not
waived, and no other actual or contingent liability for any other expenses
or obligations of any Buyer Plan exists.
(e) There are no pending or, to Buyer's knowledge, threatened Actions
(other than routine claims for benefits) asserted or instituted against any
Buyer Plan or the assets of any Buyer Plan, or against Buyer, or any Buyer
ERISA Affiliate, trustee, administrator, or fiduciary of such Buyer Plan,
and Buyer has no knowledge of any facts that could form the basis of any
such Action.
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(f) Buyer (or, if applicable, a Buyer ERISA Affiliate) may terminate,
suspend, or amend each Buyer Plan at any time, except to the extent
otherwise required by Code Section 4980B, without the consent of the
participants or employees covered by such Buyer Plan. Neither the Company
nor any Buyer ERISA Affiliate has announced any intention, made any
amendment or binding commitment, or given any written or oral notice
providing that Buyer or a Buyer ERISA Affiliate (i) will create additional
Plans covering employees of Buyer or any Buyer ERISA Affiliate, (ii) will
increase benefits promised or provided pursuant to any Buyer Plan, or (iii)
will not exercise after the Closing Date any right or power it may have to
terminate, suspend, or amend any Buyer Plan.
(g) Neither Buyer nor any Buyer ERISA Affiliate maintains or has
maintained at any time, or contributes to or has contributed to or is or was
required to contribute to, any (i) Buyer Plan subject to Title IV of ERISA,
including, without limitation, any multi-employer plan (as defined in ERISA
Section 3(37)), within the past five years, or (ii) funded or unfunded
medical, health, accident, or life insurance plan or arrangement for current
or future retirees or terminated employees or their spouses or dependents
(except to the extent required by Code Sections 162(k) or 4980B).
(h) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will constitute a
termination of employment or other event entitling any Person to any
additional or other benefits, or that would otherwise modify benefits or the
vesting of benefits, provided under any Buyer Plan.
(i) No event has occurred which could subject Buyer or any Buyer ERISA
Affiliate to any material liability (i) under any Legal Requirement relating
to any Buyer Plan, or (ii) resulting from any obligation of Buyer or a Buyer
ERISA Affiliate to indemnify any Person against liability incurred with
respect to or in connection with any Buyer Plan.
(j) Each Buyer Plan which is intended to be qualified under Code Section
401 has received, within the last three years, a favorable determination
letter from the IRS. No event has occurred and no facts or circumstances
exist which may cause or result in the loss or revocation of such
determination.
(k) There are not unfunded liabilities with respect to any Buyer Plan,
and each Buyer Plan could be terminated as of the date of the Closing with
no liability to Buyer, the Company or any Buyer ERISA Affiliate.
(l) There are no agreements of Buyer or any of its Subsidiaries which
will or may provide payments to any officer, employee, shareholder, or
highly compensated individual of Buyer or any of its Subsidiaries which will
be "parachute payments" under Code Section 280G that are nondeductible to
Buyer or its Subsidiaries or subject to tax under Code Section 4999 for
which Buyer or any Buyer ERISA Affiliate would have withholding liability.
SECTION 4.09 INCOME AND OTHER TAXES. Except as set forth on Schedule 4.09:
(a) All Tax Returns required to be filed through and including the date
hereof in connection with the operations of Buyer are true, complete and
correct in all respects and have been properly and timely filed. Buyer has
not requested any extension of time within which to file any Tax Return,
which Tax Return has not since been filed. The Company has heretofore been
furnished by Buyer with true, correct and complete copies of each Tax Return
of Buyer with respect to the past three taxable years, and of all reports
of, and communications from, any Governmental Entities relating to such
period. Buyer has disclosed on its Federal income Tax Returns all positions
taken therein that could give rise to a substantial understatement of income
Taxes for federal income tax purposes within the meaning of Code Section
6662.
(b) All Taxes required to be paid or withheld and deposited through and
including the date hereof in connection with the operations of Buyer have
been duly and timely paid or deposited by
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Buyer. Buyer has properly withheld or collected all amounts required by law
for income Taxes, employment Taxes and withholding Taxes relating to its
employees, creditors, independent contractors and other third parties, and
for Taxes on sales, and has properly and timely remitted such withheld or
collected amounts to the appropriate Governmental Entity. Buyer has no
liabilities for any Taxes for any taxable period ending prior to or
coincident with the Closing Date.
(c) Buyer has made adequate provision on its books of account for all
Taxes with respect to its business, properties and operations through the
Buyer Balance Sheet Date, and the accruals for Taxes in the Buyer Balance
Sheet are adequate to cover all liabilities for Taxes of Buyer for all
periods ending on or before the Closing Date.
(d) Buyer has not heretofore (i) had a tax deficiency proposed, asserted
or assessed against it, (ii) executed any waiver of any statute of
limitations on the assessment or collection of any Taxes, or (iii) been
delinquent in the payment of any Taxes.
(e) No Tax Return of Buyer has been audited or the subject of other
Action by any Governmental Entity. Buyer has not received any notice from
any Governmental Entity of any pending examination or any proposed
deficiency, addition, assessment, demand for payment or adjustment relating
to or affecting Buyer or its assets or properties and Buyer has not any
reason to believe that any Governmental Entity may assess (or threaten to
assess) any Taxes for any periods ending on or prior to the Closing Date.
(f) Buyer (i) has not filed any consent or agreement pursuant to Code
Section 341(f), and no such consent or agreement will be filed at any time
on or before the Closing Date; (ii) has not made any payments, is not
obligated to make any payments and is not a party to any agreement that
under certain circumstances could obligate Buyer to make any payments that
will not be deductible under Code Section 280G; (iii) is not a United States
real property holding corporation within the meaning of Code Section
897(c)(2); (iv) is not a party to a tax allocation or sharing agreement; (v)
has never been (or does not have any liability for unpaid Taxes because it
was) a member of an affiliated group with the meaning of Code Section
1504(a); (vi) has never applied for a tax ruling from a Governmental Entity;
(vii) has never filed or been the subject of an election under Code Section
338(g) or Code Section 338(h)(10) or caused or been the subject of a deemed
election under Code Section 338(e); (viii) has not participated in, or
cooperated with, an international boycott within the meaning of Section 999
of the Code; and (ix) has not issued or assumed any acquisition indebtedness
as defined in Section 279(b) of the Code.
(g) Set forth on Schedule 4.09(g) is the amount, as of the most recent
practicable date, of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax or excess charitable
contribution.
SECTION 4.10 HAZARDOUS MATERIALS. Except as set forth on Schedule 4.10:
(a) To Buyer's knowledge, no Hazardous Material (i) has been released,
placed, stored, generated, used, manufactured, treated, deposited, spilled,
discharged, released or disposed of on or under any real property currently
or previously owned or leased by Buyer or any of its Subsidiaries, (ii) is
presently maintained, used, generated, or permitted to remain in place by
Buyer or any of its Subsidiaries in violation of any Environmental Law,
(iii) is required by any Environmental Law to be eliminated, removed,
treated or mitigated by Buyer or any of its Subsidiaries, given the nature
of its present condition, location, nature, material or maintenance, or (iv)
is of a type, location, material, nature or condition which requires special
notification to third parties by Buyer or any of its Subsidiaries under
Environmental Law or common law, in any of such cases which would have a
Material Adverse Effect on Buyer.
(b) No notice, citation, summons or order has been received by Buyer or
any of its Subsidiaries, no notice has been given by Buyer or any of its
Subsidiaries and no complaint has been filed, no
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penalty has been assessed and no investigation or review is pending or, to
Buyer's knowledge, threatened by any Governmental Entity, with respect to
(i) any alleged violation by Buyer or any of its Subsidiaries of any
Environmental Law or (ii) any alleged failure by Buyer or any of its
Subsidiaries to have any environmental permit, certificate, license,
approval, registration or authorization required in connection with its
business or properties, or (iii) any use, possession, generation, treatment,
storage, recycling, transportation, release or disposal by or on behalf of
Buyer or any of its Subsidiaries of any Hazardous Material.
(c) Neither Buyer nor any of its Subsidiaries has received any request
for information, notice of claim, demand or notification that it is or that
indicates that it may be a "potentially responsible party" with respect to
any investigation or remediation of any threatened or actual release of any
Hazardous Material.
(d) No above-ground or underground storage tanks, whether or not in use,
are or have ever been located at any property currently owned or leased by
Buyer or any of its Subsidiaries.
(e) No notice has been received by Buyer or any of its Subsidiaries with
respect to the listing or proposed listing of any property currently or
previously owned, operated or leased by Buyer or any of its Subsidiaries on
the National Priorities List promulgated pursuant to CERCLA, CERCLIS or any
similar state list of sites requiring investigation or cleanup.
(f) There have been no environmental inspections, investigations,
studies, tests, reviews or other analyses conducted in relation to any real
property currently owned or leased by Buyer or any of its Subsidiaries.
(g) Neither Buyer nor any of its Subsidiaries has released, transported,
or arranged for the transportation of any Hazardous Material from any
property currently or previously owned, operated or leased by Buyer or any
of its Subsidiaries.
SECTION 4.11 ACCOUNTS RECEIVABLE. All accounts receivable of Buyer
reflected in the Buyer Balance Sheet and all accounts receivable of Buyer that
have arisen since the Buyer Balance Sheet Date (except such accounts receivable
as have been collected since such dates) are valid and enforceable claims
against the account debtor, and the goods and services sold and delivered that
gave rise to such accounts were sold and delivered in conformity with all
applicable express and implied warranties, purchase orders, agreements and
specifications. Such accounts receivable of Buyer are subject to no valid
defense, offset or counterclaim and are fully collectible in the Ordinary
Course, except to the extent of the allowance for doubtful accounts reflected on
the Buyer Balance Sheet.
SECTION 4.12 MATERIAL CONTRACTS. All material contracts, leases,
agreements and arrangements to which Buyer or any of its Subsidiaries is a party
are legally valid, binding and enforceable in accordance with their terms and in
full force and effect, and Buyer has provided the Company with the opportunity
to review and copy all such documents. Buyer and, to the knowledge of Buyer, all
parties to such contracts, leases, agreements and arrangements have complied
with the provisions of such contracts, leases, agreements and arrangements, and
neither Buyer nor its Subsidiaries is and, to the knowledge of Buyer, no other
party is, in default thereunder, and no event has occurred which, but for the
passage of time or the giving of notice or both, would constitute a default
thereunder. Set forth on Schedule 4.12 is a list of all such material contracts,
leases, agreements and arrangements, including those contracts to which Buyer or
any of its Subsidiaries is a party which cannot be terminated or do not
terminate within 12 months or less without cause or obligate Buyer or any of its
Subsidiaries for amounts in excess of $50,000.00. Except as set forth on
Schedule 4.12, none of such contracts or agreements will, by its terms,
terminate as a result of the transactions contemplated hereby or require any
consent from any obligor thereto in order to remain in full force and effect
immediately after the Effective Time.
SECTION 4.13 NO UNDISCLOSED LIABILITIES. Except (i) to the extent set
forth or provided for in the audited financial statements and unaudited interim
financial statements of Buyer included in the Buyer
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Reports, (ii) as set forth on Schedule 4.13 or (iii) for non-material current
liabilities incurred since December 31, 1997 in the Ordinary Course, as of the
date hereof the Buyer and its Subsidiaries have no liabilities, whether accrued,
absolute, contingent or otherwise, whether due or to become due and whether the
amounts thereof are readily ascertainable or not, or any unrealized or
anticipated losses from any commitments of a contractual nature.
SECTION 4.14 CONSENTS. No consent, approval, authorization, license,
permit or other action by, or filing with, any governmental or regulatory
authority is required in connection with the execution and delivery of this
Agreement by Buyer or the consummation by Buyer of the transactions contemplated
hereby, except for such consents, approvals, authorizations, licenses, permits,
actions or filings as will have been obtained, taken or filed at or prior to the
Closing.
SECTION 4.15 ABSENCE OF CERTAIN CHANGES. Since the Buyer Balance Sheet
Date, neither Buyer nor any of its Subsidiaries has made or suffered any change
in, or condition affecting, their respective condition (financial or otherwise),
properties, profitability, prospects or operations other than changes, events or
conditions in the Ordinary Course, none of which (individually or in the
aggregate) has had, or which Buyer can now reasonably foresee will have, a
Material Adverse Effect on Buyer.
SECTION 4.16 BROKERS' FEES. Except as disclosed on Schedule 4.16, no
broker, finder or similar agent has been employed by or on behalf of Buyer in
connection with this Agreement or the transactions contemplated hereby, and
Buyer has not entered into any agreement or understanding of any kind with any
person or entity for the payment of any brokerage commission, finder's fee or
any similar compensation in connection with this Agreement or the transactions
contemplated hereby.
SECTION 4.17 COMPLIANCE WITH LAW. Buyer is in compliance in all material
respects with all Legal Requirements in connection with the operation of its
business and the ownership and maintenance of its assets and properties. To
Buyer's knowledge, all filings and notices required to be made by Buyer with any
Governmental Entity in connection with the operation of its business or the
ownership and maintenance of its assets or properties have been made or given in
a timely fashion.
SECTION 4.18 CUSTOMERS. Schedule 4.18 lists the 10 largest customers of
Buyer and its Subsidiaries for the 12 months ended December 31, 1997, and sets
forth opposite each name the percentage of total consolidated revenues
attributable to such customer for such year. Except as set forth on Schedule
4.18, no such customer has terminated, or to Buyer's knowledge, threatened to
terminate, its relationship with Buyer or its Subsidiaries, and Buyer believes
its relationship with such customers is good.
SECTION 4.19 SEVERANCE ARRANGEMENTS. Except as set forth on Schedule 4.19,
neither Buyer nor its Subsidiaries is subject to any agreement with any employee
(i) the benefits of which (including severance benefits) are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction of
the nature of that contemplated by this Agreement or the Merger, or (ii)
providing for severance benefits beyond those described in Schedule 4.19, or
which are conditioned upon a change in control of Buyer, after the termination
of employment of such employee regardless of the reason for such termination of
employment, and neither Buyer nor its Subsidiaries is a party to any employment
agreement or compensation guarantee for a period longer than one year from the
date hereof. Schedule 4.19 sets forth all employment agreements and compensation
guarantees, regardless of duration, to which Buyer or any of its Subsidiaries is
a party.
SECTION 4.20 DISCLOSURE. Except as set forth on Schedule 4.20, no
representation or warranty of Buyer in this Agreement and no information
contained in any Schedule or other writing delivered by Buyer pursuant to this
Agreement or at the Closing contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact required to make
the statements herein or therein not misleading. There is no fact that Buyer has
not disclosed to the Company in writing that has had or, insofar as Buyer can
now foresee, may have a material adverse effect on the ability of Buyer to
perform fully this Agreement.
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ARTICLE V
PREPARATION OF PROXY STATEMENT AND
REGISTRATION OF MERGER SHARES
SECTION 5.01 REGISTRATION STATEMENT. The Company and Buyer, as promptly as
practicable, shall prepare, and Buyer shall file with the Commission, a
registration statement under the Securities Act, on Form S-4, registering the
offer and sale of the Merger Shares, the Additional Shares and the Warrant
Shares, which shall include the Proxy Statement/Prospectus (defined below)
relating to the offer and sale of the shares of Buyer Common Stock which
complies in form with applicable Commission requirements (such registration
statement, as the same may be amended or supplemented, being referred to herein
as the "REGISTRATION STATEMENT"), and the Company and Buyer shall use
commercially reasonable efforts to cause the Registration Statement to become
effective as soon as practicable after the receipt of final comments from the
Commission thereon. As soon as practicable after the execution of this
Agreement, Buyer, with the cooperation of the Company, shall prepare a
Prospectus, Notice of Meeting of Stockholders and Proxy Statement (collectively,
the "PROXY STATEMENT/PROSPECTUS") for the shareholders of Buyer and the Company
in connection with their approval of the Merger, the adoption of this Agreement,
the approval of any other matters required to be approved by them in accordance
with the terms of this Agreement, and the issuance of the Merger Shares, the
Additional Shares and the Warrant Shares. The Proxy Statement/Prospectus shall
include a proposal to Buyer's stockholders to amend Buyer's certificate of
incorporation to (i) change its name to a name to be agreed upon by Buyer and
the Company, and (ii) provide for a staggered board of directors consisting of
three classes, with the Class I directors to serve for an initial one-year term,
the Class II directors for an initial two-year term, and the Class III directors
for an initial three-year term, and each director, after his or her initial
term, to serve for successive three-year terms. The Proxy Statement/Prospectus
shall constitute a disclosure document for the offer and sale of the shares of
Buyer Common Stock to be received by the Shareholders pursuant to the Merger.
The Company shall furnish to Buyer all information concerning the Company and
the Shareholders and take such other actions as may be reasonably requested by
Buyer in connection with any action contemplated by this Section 5.01.
Notwithstanding the foregoing, the Proxy Statement/Prospectus may be filed as
preliminary proxy material pursuant to Rule 14a-6 under the Exchange Act until
such time as Buyer and the Company shall have responded to all comments of the
Commission thereon, at which time the Proxy Statement/Prospectus shall be filed
as part of the Registration Statement pursuant to the Securities Act.
SECTION 5.02 PREPARATION OF REGISTRATION STATEMENT.
(a) Each of Buyer and Company agrees to provide promptly to the other
such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its
counsel, may be required or appropriate for inclusion in the Registration
Statement, or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the other party's counsel and
auditors in the preparation of the Registration Statement. Buyer and Company
shall each use their commercially reasonable efforts to cause the
Registration Statement to comply with applicable federal and state
securities laws requirements. The Company will promptly advise Buyer, and
Buyer will promptly advise the Company, in writing if at any time prior to
the Effective Time either the Company or Buyer shall obtain knowledge of any
facts that might make it necessary or appropriate to amend or supplement the
Registration Statement in order to make the statements contained or
incorporated by reference therein not misleading or to comply with
applicable law. The Registration Statement shall contain the recommendation
of the board of directors of Buyer that the shareholders of Buyer approve
the Merger and the adoption of this Agreement and the conclusion of the
board of directors of Buyer, based in part on its reliance on the fairness
opinion referred to in Section 6.02(e), that the terms and conditions of the
Merger are fair and reasonable to the shareholders of Buyer from a financial
point of view.
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(b) None of the information supplied or to be supplied by or on behalf
of the Company, for inclusion in the Registration Statement, will, at the
date such information is supplied and, as thereafter amended or
supplemented, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in light of the circumstances under which they are made, not misleading or,
as thereafter amended or supplemented, will at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(c) None of the information supplied or to be supplied by or on behalf
of Buyer, for inclusion in the Registration Statement, will, at the date
such information is supplied and, as thereafter amended or supplemented,
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or, as
thereafter amended or supplemented, will at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading.
SECTION 5.03 REGISTRATION OF SHARES UNDER STOCK OPTION PLAN. Prior to the
Closing Date, the Board of Directors of Buyer shall adopt a 1998 Stock Option
and Restricted Stock Option Plan and, prior to the Effective Time, shall cause
such plan to be submitted to the stockholders of Buyer for their approval. All
options to purchase shares of Buyer Common Stock issued in exchange for Plan
Options pursuant to Section 2.06(b) shall be issued under such newly adopted
plan. As soon as practicable after the Effective Time, Buyer shall register on a
Form S-8 registration statement under the Securities Act the shares of Buyer
Common Stock which are authorized for issuance under such newly adopted plan, as
contemplated by Section 6.03(i).
ARTICLE VI
CONDITIONS TO CONSUMMATION OF MERGER
SECTION 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. Notwithstanding any
other provision of this Agreement, the obligations of each party hereto to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) The holders of shares of Buyer Common Stock and the Shareholders
each shall have approved the adoption of this Agreement and any other
matters required by be approved by them by requisite vote under applicable
Legal Requirements and Exchange or NASDAQ rules, and in accordance with the
terms of this Agreement.
(b) The number of Dissenters' Shares shall not exceed five percent (5%)
of the aggregate number of issued and outstanding shares of Common Stock as
of the Effective Time.
(c) Any Person required in connection with the transactions contemplated
hereby to file a notification and report form in compliance with the HSR Act
shall have filed such form and the applicable waiting period with respect to
each such form (including any extension thereof by reason of a request for
additional information) shall have expired or been terminated.
(d) No Governmental Entity (including a federal or state court) of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect
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and which prevents or prohibits consummation of the Merger or any material
transaction contemplated by this Agreement; PROVIDED, HOWEVER, that the
parties shall use their reasonable efforts to cause any such order, decree,
judgment, injunction or other order to be vacated or lifted.
(e) Buyer shall have received all material permits and other
authorizations, if any, required under applicable securities laws for the
issuance of the Merger Shares.
(f) The Registration Statement shall have been declared effective in
accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued and remain in effect.
(g) All authorizations, consents, waivers and approvals by or from third
parties required for the consummation of the transactions contemplated
hereby shall have been obtained.
(h) Buyer, the Escrow Agent and the Representative shall have executed
and delivered the Escrow Agreement.
(i) Thayer Equity Investors III, L.P., ITC Services Company, Edward
Blank, The Edward Blank 1995 Grantor Retained Annuity Trust, Codinvest
Limited, Michael G. Santry and Darryl D. Pounds shall have entered into the
Shareholders Agreement.
SECTION 6.02 CONDITIONS TO OBLIGATIONS OF BUYER AND NEWCO. Notwithstanding
any other provision of this Agreement, the obligations of Buyer and Newco to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) The representations and warranties of the Company in this Agreement
shall be true and correct in all material respects on and as of the Closing
Date with the same effect as if made on the Closing Date and the Company
shall have complied with all covenants and agreements and satisfied all
conditions on the Company's part, as applicable, to be performed or
satisfied on or prior to the Closing Date.
(b) Buyer shall have received from Paul, Hastings, Janofsky & Walker
LLP, counsel for the Company, a written opinion dated the Closing Date and
addressed to Buyer and Newco, in substantially the form attached as Annex B
hereto;
(c) Buyer shall have received the following under cover of a certificate
of Secretary of the Company dated the Closing Date in substantially the form
attached as Annex C hereto:
(i) Copies of resolutions of (A) the board of directors of the
Company authorizing and approving the execution, delivery and performance
of this Agreement and all other documents and instruments to be delivered
by the Company pursuant hereto and thereto, and (B) the Shareholders
evidencing the approval of the Merger and the adoption of this Agreement;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred
to in subparagraph (i) above and further certifying that the Certificate
of Incorporation and Bylaws of the Company delivered to Buyer at the time
of, or prior to, the execution of this Agreement have been validly
adopted and have not been amended or modified; and
(iii) Such additional supporting documentation and other information
with respect to the transactions contemplated hereby as Buyer or its
counsel may reasonably request.
(d) Buyer shall have received a certificate of the President of the
Company in substantially the form attached as Annex D hereto.
(e) Buyer shall have received a fairness opinion from CIBC Oppenheimer
Corp., financial advisor to Buyer, addressed to the board of directors of
Buyer to the effect that the Exchange Ratio is
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fair to the shareholders of Buyer from a financial point of view, and such
fairness opinion shall not have been withdrawn prior to the Closing Date.
(f) Buyer shall have received the resignations, effective as of the
Effective Time, of each of the directors of the Company.
(g) No act, event or condition shall have occurred after the date hereof
which Buyer determines has had or could reasonably be expected to have a
Material Adverse Effect on the Company.
(h) Buyer shall have received from Hughes & Luce, L.L.P., counsel for
Buyer, a written opinion, in form and substance reasonably satisfactory to
Buyer, dated as of the Effective Time, substantially to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code and that, accordingly, no gain or loss will be recognized by the
Company, Buyer or Newco as a result of the Merger.
(i) The Company and TC Management L.L.C. shall have terminated that
certain Management and Consulting Agreement between them.
(j) Up to $2.0 million in financial accommodations contemplated by the
Commitment Letter shall have been rendered.
SECTION 6.03 CONDITIONS TO OBLIGATIONS OF THE COMPANY. Notwithstanding any
other provision of this Agreement, the obligations of the Company to consummate
the Merger and the other transactions contemplated hereby shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions:
(a) The representations and warranties of Buyer in this Agreement shall
be true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date, and Buyer shall have
complied with all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied on or prior to the Closing Date.
(b) The Company shall have received from Hughes & Luce, LLP, counsel for
Buyer and Newco, a written opinion dated the Closing Date and addressed to
the Company, in substantially the form attached as Annex E hereto.
(c) The Company shall have received the following under cover of a
certificate of the Secretary of Buyer dated the Closing Date in
substantially the form attached as Annex F hereto:
(i) Copies of resolutions of (A) the Board of Directors of Buyer
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by
Buyer pursuant hereto and thereto, and (B) the stockholders of Buyer
evidencing the approval of the Merger and the adoption of this Agreement;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred
to in subparagraph (i) above and further certifying that the Certificate
of Incorporation and Bylaws of Buyer delivered to the Company at the time
of, or prior to, the execution of this Agreement have been validly
adopted and have not been amended or modified; and
(iii) Such additional supporting documentation and other information
with respect to the transactions contemplated hereby as the Company or
its counsel may reasonably request.
(d) The Company shall have received from Paul, Hastings, Janofsky &
Walker LLP, counsel for the Company, a written opinion, in form and
substance reasonably satisfactory to the Company, dated as of the Effective
Time, substantially to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and that,
accordingly, no gain or loss will be recognized by the Company or the
Shareholders as a result of the Merger.
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(e) The Company shall have received a certificate of the President of
Buyer in substantially the form attached as Annex G hereto.
(f) The Company shall have received the following under cover of a
certificate of the Secretary of Newco dated the Closing Date in
substantially the form attached as Annex H hereto:
(i) Copies of resolutions of (A) the Board of Directors of Newco
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by
Newco pursuant hereto and thereto, and (B) the shareholder of Newco
evidencing the approval of the Merger and the adoption of this Agreement;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred
to in subparagraph (i) above and further certifying that the Certificate
of Incorporation and Bylaws of Newco delivered to the Company at the time
of, or prior to, the execution of this Agreement have been validly
adopted and have not been amended or modified; and
(iii) Such additional supporting documentation and other information
with respect to the transactions contemplated hereby as the Company or
its counsel may reasonably request.
(g) The Company shall have received a certificate of the President of
Newco in substantially the form attached as Annex I hereto.
(h) The Certificate of Incorporation of Buyer shall have been amended to
increase the number of authorized shares of Buyer Common Stock in an amount
sufficient to enable Buyer to consummate the transactions contemplated by
this Agreement, including without limitation the issuance of the Merger
Shares, the Exchanged Option Shares and the Exchanged Warrant Shares.
(i) Buyer shall have adopted a 1998 Stock Option and Restricted Stock
Option Plan with the number of shares of Buyer Common Stock available
thereunder in an amount sufficient to provide for the issuance of the
Exchanged Option Shares.
(j) No act, event or condition shall have occurred after the date hereof
which the Company determines has had or could reasonably be expected to have
a Material Adverse Effect on Buyer.
(k) The Merger Shares shall have been authorized for listing on the
NASDAQ National Market upon official notice of issuance.
(l) Michael G. Santry shall have made a payment of not less than
one-half of the principal, together with all accrued and unpaid interest,
under the terms of that certain promissory note dated September 16, 1997
made by Michael G. Santry in favor or Buyer, as amended by that certain
Letter Agreement dated as of the date hereof.
ARTICLE VII
CONDUCT OF BUSINESS PENDING CLOSING
During the period commencing on the date hereof and continuing through the
Closing Date, each of the Company and Buyer covenants and agrees (except as
expressly contemplated by this Agreement or to the extent that the other party
shall otherwise expressly consent in writing) that:
SECTION 7.01 QUALIFICATION. It and each of its Subsidiaries will use its
commercially reasonable efforts to maintain all qualifications to transact
business and remain in good standing in the foreign jurisdictions in which it
owns or leases any property, or conducts any business, so as to require such
qualification, and in which the failure to be so qualified and be in good
standing would have a Material Adverse Effect.
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SECTION 7.02 ORDINARY COURSE. It and each of its Subsidiaries will use
commercially reasonable efforts to conduct its business in, and only in, the
Ordinary Course and shall preserve intact its current business organizations,
keep available the services of its current officers and employees and preserve
its relationships with customers, suppliers and others having business dealings
with it to the end that its goodwill and going business value shall be
unimpaired at the Closing Date, and it and each of its Subsidiaries will use its
commercially reasonable efforts to maintain its properties and assets in good
condition and repair.
SECTION 7.03 ORGANIC CHANGES. It and each of its Subsidiaries will not (a)
amend its Certificate of Incorporation or Bylaws (or equivalent documents), (b)
acquire by merging or consolidating with, or agreeing to merge or consolidate
with, or purchase substantially all of the stock or assets of, or otherwise
acquire any business or any corporation, partnership, association or other
business organization or division thereof, (c) enter into any partnership or
joint venture, (d) declare, set aside, make or pay any dividend or other
distribution in respect of its capital stock or purchase or redeem, directly or
indirectly, any shares of its capital stock, (e) issue or sell any shares of its
capital stock of any class or any options, warrants, conversion or other rights
to purchase any such shares or any securities convertible into or exchangeable
for such shares except in connection with Ordinary Course option exercises under
existing employee stock option plans, or (f) liquidate or dissolve or obligate
itself to do; PROVIDED, HOWEVER, that Buyer may amend its Certificate of
Incorporation to increase the number of authorized shares of Buyer Common Stock
in order to enable Buyer to consummate the transactions contemplated by this
Agreement.
SECTION 7.04 INDEBTEDNESS. Other than in the Ordinary Course, it and each
of its Subsidiaries will not incur any Indebtedness, sell any debt securities,
lend money to or guarantee the Indebtedness of any Person or restructure or
refinance its existing Indebtedness.
SECTION 7.05 ACCOUNTING. It and each of its Subsidiaries will not make any
change in the accounting principles, methods, records or practices followed by
it or depreciation or amortization policies or rates theretofore adopted by it,
and it and each of its Subsidiaries will maintain its books, records and
accounts in accordance with GAAP.
SECTION 7.06 COMPLIANCE WITH LEGAL REQUIREMENTS. It and each of its
Subsidiaries will comply promptly in all material respects with all requirements
that applicable law may impose upon it and its operations and with respect to
the transactions contemplated by this Agreement, and will cooperate promptly
with, and furnish information to, the other parties in connection with any such
requirements imposed upon such other party, or upon any of its affiliates, in
connection therewith or herewith.
SECTION 7.07 DISPOSITION OF ASSETS. It and each of its Subsidiaries will
not sell, transfer, license, lease or otherwise dispose of, or suffer or cause
the encumbrance by any Lien (other than Permitted Liens) upon any of, its
properties or assets, tangible or intangible, or any interest therein, except in
the Ordinary Course.
SECTION 7.08 COMPENSATION. It and each of its Subsidiaries will not (a)
adopt or amend in any material respect any collective bargaining, bonus,
profit-sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other plan, agreement, trust, fund or arrangement
for the benefit of employees (whether or not legally binding) other than to
comply with any Legal Requirement or (b) pay, or make any accrual or arrangement
for payment of, any increase in compensation, bonuses or special compensation of
any kind, or any severance or termination pay to, or enter into any employment
or loan or loan guarantee agreement with, any of its current or former officers,
directors, employees or consultants.
SECTION 7.09 MODIFICATION OR BREACH OF AGREEMENTS; NEW AGREEMENTS. It and
each of its Subsidiaries will not terminate or modify, or commit or cause or
suffer to be committed any act that will result in breach or violation of any
term of, or (with or without notice or passage of time, or both) constitute a
default under or otherwise give any person a basis for nonperformance under, any
indenture, mortgage,
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deed of trust, loan or credit agreement, lease, license or other material
agreement, instrument, arrangement or understanding, written or oral, and it and
each of its Subsidiaries will refrain from becoming a party to any contract or
commitment other than in the Ordinary Course and will meet all of its
contractual obligations in accordance with their respective terms.
SECTION 7.10 CAPITAL EXPENDITURES. Except for capital expenditures in an
amount of which shall not exceed $3.5 million in the aggregate for the Company
and its Subsidiaries and which shall not exceed $750,000 in the aggregate for
Buyer and its Subsidiaries, it and each of its Subsidiaries will not purchase or
enter into any contract to purchase any capital assets.
SECTION 7.11 MAINTAIN INSURANCE. It will use its commercially reasonable
efforts to maintain its insurance policies and bonds and self insurance
arrangements in full force and effect.
SECTION 7.12 DISCHARGE. It and each of its Subsidiaries will not cancel,
compromise, release or discharge any material claim of such party upon or
against any person or waive any of its rights of material value, and will not
discharge any Lien (other than Permitted Liens) upon any of its material assets
or compromise any of its debts or other obligations to any person other than
Liens, debts or obligations with respect to its current liabilities.
SECTION 7.13 ACTIONS. It and each of its Subsidiaries will not institute,
settle or agree to settle any Action before any Governmental Entity.
SECTION 7.14 PERMITS. It and each of its Subsidiaries will maintain in
full force and effect, and comply with, all franchises, licenses, permits,
certificates, authorizations, rights and other approvals of Governmental
Entities necessary to conduct its business as currently conducted or proposed to
be conducted, the loss of which would have a Material Adverse Effect.
SECTION 7.15 TAX ASSESSMENTS AND AUDITS. It and each of its Subsidiaries
will furnish promptly to each of the other parties a copy of all notices of
proposed assessment or similar notices or reports that are received from any
taxing authority and which relate to its operations for periods ending on or
prior to the Closing Date.
ARTICLE VIII
ADDITIONAL COVENANTS
SECTION 8.01 COVENANTS OF THE COMPANY. During the period commencing on the
date hereof and continuing through the Closing Date, the Company (on behalf of
its and, where applicable, its Subsidiaries) agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and
furnish information to, Buyer in connection with any such requirements
imposed upon Buyer or upon any of its affiliates in connection therewith or
herewith;
(b) use its commercially reasonable efforts to obtain (and to cooperate
with Buyer in obtaining) any consent, authorization or approval of, or
exemption by, any Person required to be obtained or made by the Company in
connection with the transactions contemplated by this Agreement;
(c) use its commercially reasonable efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections
6.01 and 6.02 of this Agreement;
(d) promptly advise Buyer orally and, within three business days
thereafter, in writing of any change in the Company's business or condition
that has had or may have a Material Adverse Effect on the Company; and
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(e) deliver to Buyer prior to the Closing a written statement disclosing
any untrue statement in this Agreement or any Schedule hereto (or supplement
thereto) or document furnished pursuant hereto, or any omission to state any
material fact required to make the statements herein or therein contained
complete and not misleading, promptly upon the discovery of such untrue
statement or omission, accompanied by a written supplement to any Schedule
to this Agreement that may be affected thereby; PROVIDED, HOWEVER, that the
disclosure of such untrue statement or omission shall not prevent Buyer from
terminating this Agreement pursuant to Section 9.01(g) hereof at any time at
or prior to the Closing in respect of any original untrue or misleading
statement.
SECTION 8.02 COVENANTS OF BUYER. During the period commencing on the date
hereof and continuing through the Closing Date, Buyer (on behalf of itself and,
where applicable, its Subsidiaries) agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and
furnish information to, the Company in connection with any such requirements
imposed upon the Company or upon any of the Affiliates of the Company in
connection therewith or herewith;
(b) use its commercially reasonable efforts to obtain (and to cooperate
with the Company in obtaining) any consent, authorization or approval of, or
exemption by, any Person required to be obtained or made by Buyer in
connection with the transactions contemplated by this Agreement;
(c) use its commercially reasonable efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections
6.01 and 6.03 of this Agreement;
(d) promptly advise the Company orally and, within three business days
thereafter, in writing of any change in Buyer's business or condition that
has had or may have a Material Adverse Effect on Buyer; and
(e) deliver to the Company prior to the Closing a written statement
disclosing any untrue statement in this Agreement or any Schedule hereto (or
supplement thereto) or document furnished pursuant hereto, or any omission
to state any material fact required to make the statements herein or therein
contained complete and not misleading, promptly upon the discovery of such
untrue statement or omission, accompanied by a written supplement to any
Schedule to this Agreement that may be affected thereby; provided, however,
that the disclosure of such untrue statement or omission shall not prevent
the Company from terminating this Agreement pursuant to Section 9.01(h)
hereof at any time at or prior to the Closing in respect of any original
untrue or misleading statement.
SECTION 8.03 ACCESS AND INFORMATION; CONFIDENTIALITY.
(a) Between the date hereof and the Closing Date, (i) the Company will
permit, and will cause the Company's officers, directors, key employees and
advisors to permit, Buyer and its representatives and agents reasonable
access to the Company's books and records, facilities, key personnel,
customers, suppliers, independent accountants and attorneys, as requested by
Buyer; and (ii) Buyer will permit, and will cause Buyer's officers,
directors, key employees and advisors to permit, the Company and its
representatives and agents reasonable access to the books and records,
facilities, key personnel, customers, suppliers, independent accountants and
attorneys, as requested by the Company.
(b) The Confidentiality Agreement dated April 30, 1997 and entered into
by the Company and Buyer (the "CONFIDENTIALITY AGREEMENT") shall survive the
execution and delivery of this Agreement.
SECTION 8.04 EXPENSES. Except as otherwise specifically provided herein,
each party to this Agreement shall bear its own direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees and fees of any brokers, finders
or similar agents;
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PROVIDED, HOWEVER, that any fees payable to any Governmental Entity in
connection with the transactions contemplated hereby (including, without
limitation, any fee to be paid by an "acquiring person" under the HSR Act and
any filing fees paid to the Commission in connection with the Proxy
Statement/Prospectus or Registration Statement) shall be paid one-half by the
Company and one-half by Buyer.
SECTION 8.05 CERTAIN NOTIFICATIONS. At all times from the date hereof to
the Closing Date, each party shall promptly notify the others in writing of the
occurrence of any event that will or may (i) render any statement,
representation or warranty of such party in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect or (ii)
constitute or result in the breach by such party of, or a failure to comply
with, any agreement or covenant in this Agreement applicable to such party or
(iii) result in the failure by such party to satisfy any of the conditions
specified in Article VI hereof.
SECTION 8.06 PUBLICITY; EMPLOYEE COMMUNICATIONS. At all times prior to the
Closing Date, each party shall obtain the prior consent of the other parties
hereto prior to making, or permitting its directors, officers, partners,
employees, representatives and agents to make, any public statement or press
release with respect to the transactions contemplated hereby or otherwise
disclose to any person or entity the existence, terms, content or effect of this
Agreement; PROVIDED, HOWEVER, that no party shall be prohibited from supplying
any information to any of its representatives, agents, attorneys, advisors,
financing sources and others to the extent necessary to complete the
transactions contemplated hereby so long as such representatives, agents,
attorneys, advisors, financing sources and others are made aware of and agree to
be bound by the terms of this Section 8.06; provided, further, that if, upon
advice of counsel, a disclosure is required by law, the party required to make
such disclosure shall be permitted to make such disclosure but shall make a good
faith effort to consult with the other parties hereto before making the required
disclosure. Nothing contained in this Agreement shall prevent any party to this
Agreement at any time from furnishing any required information to any
Governmental Entity or authority pursuant to a Legal Requirement or from
complying with its legal or contractual obligations.
SECTION 8.07 FURTHER ASSURANCES.
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable Legal Requirements, to consummate and
make effective the transactions contemplated by this Agreement.
(b) If at any time after the Closing any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers
or directors of the Company, Buyer or Newco, as the case may be, shall take
or cause to be taken all such necessary or convenient action and execute,
and deliver and file, or cause to be executed, delivered and filed, all
necessary or convenient documentation.
SECTION 8.08 COMPETING OFFERS; MERGER OR LIQUIDATION. Each of the Company
and Buyer agrees it will not, and it shall use its best efforts to cause its
Affiliates and each of its officers, directors, employees, representatives and
agents not to, directly or indirectly, (a) encourage or solicit any inquiry
concerning, or initiate any discussions or negotiations with any Person (other
than the Company or Buyer, as the case may be) concerning, any merger,
consolidation, sale of material assets, tender offer, recapitalization, purchase
or accumulation of shares, proxy solicitation or other business combination
involving the Company or Buyer, as the case may be, or any of its divisions (any
of the foregoing, an "ACQUISITION PROPOSAL"), or (b) provide any non-public
information concerning the business, properties or assets of the Company or
Buyer, as the case may be, to any Person (other than the Company or Buyer, as
the case may be) in connection with an Acquisition Proposal; provided however,
that in the event Buyer receives any unsolicited inquiry concerning an
Acquisition Proposal and, after consultation with counsel, is advised by its
counsel that its board of directors has a fiduciary obligation to respond to
such Acquisition Proposal in order for its directors to properly discharge their
fiduciary obligations to the Buyer's stockholders, then the Buyer may respond to
such Acquisition Proposal. In any event, the Company or Buyer, as the case may
be,
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shall immediately notify the other of, and shall disclose all details of, any
Acquisition Proposal. Each of the Company and Buyer further agrees that it will
not engage any broker, financial advisor or other consultant (other than CIBC
Oppenheimer Corp. in the case of Buyer) on a basis which might provide such
broker, financial advisor or consultant with an incentive to initiate or
encourage any Acquisition Proposal.
SECTION 8.09 INCONSISTENT ACTION. The Company shall not take, or suffer to
be taken, any action that would cause any of the representations or warranties
of the Company in this Agreement to be untrue, incorrect, incomplete or
misleading. Buyer shall not take, or suffer to be taken, any action that would
cause any of the representations or warranties of Buyer in this Agreement to be
untrue, incorrect, incomplete or misleading.
SECTION 8.10 HSR ACT. Each of the parties hereto shall promptly file any
Notification and Report Forms and related material that it may be required to
file with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the HSR Act, shall use its reasonable best
efforts to obtain an early termination of the applicable waiting period, and
shall make any further filings or information submissions pursuant thereto that
may be necessary, proper or advisable.
SECTION 8.11 DIRECTORS AND OFFICERS OF BUYER UPON THE EFFECTIVE TIME. The
Proxy Statement/ Prospectus shall include the nomination of a slate of 12
directors for Buyer, five of whom will be proposed by Buyer, five of whom will
be proposed by the Company, and two of whom will be mutually agreed upon (but
one of such two shall be Stephen A. McNeely). Upon the Effective Time, Paul G.
Stern and Michael G. Santry shall be the Co-Chairmen of the Board of Buyer and
Stephen A. McNeely shall be its Chief Executive Officer.
SECTION 8.12 BYLAW AMENDMENT. The parties agree that Buyer will amend its
bylaws, effective upon the Closing, to require the approval of seven of 12
directors before Buyer may: (i) sell, abandon, transfer, lease or otherwise
dispose of all or a material portion of its properties or assets other than in
the ordinary course of business; (ii) make any payment on account of the
purchase, redemption or other retirement of any shares of Buyer Common Stock or
preferred stock, except as required by agreements, charter or bylaw provisions
in effect prior to the date of this Agreement; (iii) merge or consolidate with
or into, or permit any subsidiary to merge or consolidate with or into, any
other corporation or other entity (except as contemplated by this Agreement);
(iv) dissolve, liquidate or wind-up or carry out any partial liquidation or
distribution or transaction in the nature of a partial liquidation or
distribution; (v) purchase or otherwise acquire or permit any Subsidiary to
acquire (whether by purchase or lease of assets or stock or by merger or
consolidation) any tangible or intangible assets having a value of $500,000.00
or more; (vi) in any manner authorize, create, issue or sell any class of
capital stock of Buyer ranking, whether as to payments of dividends, redemptions
or distributions of assets, prior to or on a parity with, the Buyer Common
Stock, or having voting rights superior to or inconsistent with or adverse to
the Buyer Common Stock; (vii) in any manner authorize, create, issue or sell any
debt security or other debt instrument convertible into or exchangeable for any
capital stock of Buyer; (viii) take any action to cause any amendment,
alteration or repeal of any of the provisions of its certificate of
incorporation or bylaws; (ix) enter into any transaction with an Affiliate of
Buyer with a value in excess of $50,000.00; (x) issue, sell or exchange, agree
to issue, sell or exchange, or reserve or set aside for issuance, sale or
exchange, any equity security (or any debt security or other obligation with an
equity feature) of any Subsidiary; (xi) remove or elect a Chief Executive
Officer, President or Chief Financial Officer; (xii) approve compensation
increases for executive officers; (xiii) approve an operating or capital budget,
or capital expenditures exceeding $250,000.00; or (xiv) take any action with
respect to any of the foregoing matters.
SECTION 8.13 COMPANY'S 1997 AUDIT FINANCIAL STATEMENTS. The Company will
complete the audit of its financial statements for its fiscal year ended
December 31, 1997 not later than April 20, 1998 and not later than such date
will deliver a copy thereof to Buyer, together with the opinion thereof of the
Company's independent accountants.
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SECTION 8.14 SANTRY NOTE. Buyer shall not, without the prior written
consent of the Company, amend, renew, supplement, extend or otherwise modify the
terms of that certain Promissory Note dated September 16, 1997 in the original
principal amount of $3,661,505.39 by Michael G. Santry in favor of Buyer, as
amended by that certain Letter Agreement of even date herewith or waive any term
or provision thereof.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual consent of Buyer and the Company;
(b) by the Company or by Buyer, if, upon a vote at a duly held meeting
of stockholders of Buyer or the Company, or any adjournment thereof, any
approval of the holders of Buyer Common Stock, or the Shareholders,
necessary to consummate the Merger and the transactions contemplated hereby
shall not have been obtained;
(c) by the Company, by written notice to Buyer, if, prior to the meeting
of stockholders of Buyer, the board of directors of Buyer, in the exercise
of its fiduciary duties under applicable law (i) withdraws or modifies in
any manner adverse to the Company its approval or recommendation of this
Agreement or the Merger, (ii) approves or recommends any Acquisition
Proposal by a party other than the Company or (iii) resolves to take any of
the actions specified in clauses (i) or (ii);
(d) by Buyer, by written notice to the Company, if the board of
directors of Buyer, in its good faith exercise of its business judgment,
determines (after consultation with, and upon the advice of, its counsel)
that continuing to recommend to the stockholders of Buyer the approval of
this Agreement or the Merger would be reasonably likely to be a breach of
the fiduciary duties of the board of directors of Buyer to the stockholders
of Buyer;
(e) by the Company if there has been a material breach by Buyer of
Section 8.08;
(f) by the Company, on the one hand, or by Buyer, on the other hand, by
written notice to the other party or parties hereto, if the Merger shall not
have been consummated on or before July 31, 1998 (or such later date as
Buyer and the Company may agree), provided that in the case of a termination
under this clause (f), the party or parties terminating this Agreement shall
not then be in material breach of any of its obligations under this
Agreement;
(g) by Buyer if (i) there has been a material misrepresentation, breach
of warranty or breach of covenant by the Company under this Agreement or
(ii) any of the conditions precedent to Closing set forth in Sections 6.01
or 6.02 have not been met on the Closing Date, and, in each case, Buyer is
not then in material default of its obligations hereunder; or
(h) by the Company if (i) there has been a material misrepresentation,
breach of warranty or breach of covenant by Buyer under this Agreement or
(ii) any of the conditions precedent to Closing set forth in Sections 6.01
or 6.03 have not been met on the Closing Date, and, in each case, the
Company is not then in material default of its obligations hereunder.
SECTION 9.02 EFFECT OF TERMINATION.
(a) In the case of any termination of this Agreement, the provisions of
Sections 8.03(b), 8.04 and 8.06 shall remain in full force and effect.
(b) In the event of termination of this Agreement as provided in Section
9.01(a) or 9.01(b) or 9.01(f), this Agreement shall forthwith become void
and there shall be no liability or obligation on the
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part of any party hereto or their respective directors, officers, employees,
agents or other representatives.
(c) In the event of termination of this Agreement as provided in
Sections 9.01(c) or 9.01(d) or 9.01(e) or 9.01(g) or 9.01(h) hereof, subject
to Section 9.05 hereof, such termination shall be without prejudice to any
rights that the terminating party or parties may have against the breaching
party or parties or any other Person under the terms of this Agreement or
otherwise.
SECTION 9.03 AMENDMENT. This Agreement may be amended only by a written
instrument executed by each of the parties hereto. Any amendment effected
pursuant to this Section 9.03 shall be binding upon all parties hereto.
SECTION 9.04 WAIVER. Any term or provision of this Agreement may be waived
in writing at any time by the party or parties entitled to the benefits thereof.
Any waiver effected pursuant to this Section 9.04 shall be binding upon all
parties hereto. No failure to exercise and no delay in exercising any right,
power or privilege shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege preclude the exercise of any
other right, power or privilege. No waiver of any breach of any covenant or
agreement hereunder shall be deemed a waiver of any preceding or subsequent
breach of the same or any other covenant or agreement. The rights and remedies
of each party under this Agreement are in addition to all other rights and
remedies, at law or in equity, that such party may have against the other
parties.
SECTION 9.05 BREAKUP FEE. In the event that this Agreement is terminated
pursuant to Sections 9.01(c), (d) or (e), then Buyer shall promptly pay to the
Company in immediately available funds a breakup fee equal to One Million
Dollars ($1,000,000.00) plus the Company's reasonable out-of-pocket expenses
(including legal, accounting, consulting and investment banking fees) incurred
in connection with this Agreement, the Merger and the transactions contemplated
hereby, up to a maximum of $500,000.00. The parties hereby acknowledge that the
fee payable pursuant to this Section 9.05 in the event of a termination solely
pursuant to Section 9.01(c), (d) or (e) hereof constitutes the sole and
exclusive remedy of the Company for such termination, and as such, represents
the Company's liquidated damages as compensation for such termination of this
Agreement.
ARTICLE X
INDEMNIFICATION AND SURVIVAL
SECTION 10.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) The representations and warranties of the parties hereto contained
in this Agreement or in any certificate delivered pursuant hereto at the
Closing shall survive the execution and delivery of this Agreement and the
Closing and the consummation of the transactions contemplated hereby (and
any examination or investigation by or on behalf of any party hereto) until
the date which is the later of 60 days after completion of the audited
consolidated financial statements of Buyer and the Company for the fiscal
year ending December 31, 1998 or April 30, 1999 (except for claims in
respect thereof pending at such time, which shall survive until finally
resolved or settled). Buyer agrees to promptly deliver a copy of such
audited financial statements to the Representative.
(b) No Action may be commenced with respect to any representation,
warranty, covenant or agreement in this Agreement, or in any writing
delivered pursuant hereto, unless written notice, setting forth in
reasonable detail the claimed breach thereof, shall be delivered to the
Buyer or the Representative, as the case may be, pursuant to Section 11.01
hereof on or before the termination of the survival period specified in
Section 10.01(a).
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SECTION 10.02 INDEMNIFICATION.
(a) The Shareholders covenant and agree to defend, indemnify and hold
harmless Buyer, each person who controls, is controlled by or is under
common control with Buyer within the meaning of the Securities Act, and each
director, officer, employee or agent of Buyer (collectively, "BUYER
INDEMNIFIED PARTIES") from and against any Damages arising out of or
resulting from: (i) any inaccuracy in or breach of any representation,
warranty, covenant or agreement made by the Company in this Agreement or in
any certificate delivered pursuant to this Agreement at the Closing; or (ii)
the failure of the Company to perform or observe fully any covenant,
agreement or provision to be performed or observed by the Company pursuant
to this Agreement.
(b) Buyer covenants and agrees to defend, indemnify and hold harmless
the Shareholders, and each person who controls, is controlled by or is under
common control with any Shareholder within the meaning of the Securities
Act, from and against any Damages arising out of or resulting from: (i) any
inaccuracy in or breach of any representation, warranty, covenant or
agreement made by Buyer in this Agreement or in any certificate delivered
pursuant to this Agreement at the Closing; or (ii) the failure of Buyer to
perform or observe fully any covenant, agreement or provision to be
performed or observed by Buyer pursuant to this Agreement.
(c) The Shareholders' liability under this Section 10.02 shall be
allocated among them pro rata in accordance with the number of Shares owned
by each of them as set forth on Annex A hereto. In the event that the
Shareholders are required to satisfy a claim for indemnification by any
Buyer Indemnified Party, such claim shall be satisfied by delivery of Escrow
Shares (valued, for such purpose, at $1.78125 per share) in accordance with
the terms of the Escrow Agreement. No Shareholder shall have any right of
contribution or equitable indemnification against the Company or the
Surviving Corporation for the Shareholders' obligations under Section
10.02(a).
(d) Notwithstanding anything in this Agreement to the contrary,
including this Article X, the indemnification obligations of the
Shareholders under Section 10.02(a) hereof and the Buyer under Section
10.02(b) hereof (i) shall apply only to the extent that the amount of
Damages suffered by the Buyer Indemnified Parties or the Shareholders,
respectively, exceeds an accumulated total of $500,000.00 in the aggregate,
at which point the obligations of the Shareholders or the Buyer, as the case
may be, shall be to indemnify only for the Damages in excess of such
accumulated total; (ii) shall be limited, in the case of the Shareholders,
to the Escrow Shares, and the Buyer Indemnified Parties shall have no
recourse against the Shareholders pursuant to this Agreement beyond recovery
of the Escrow Shares; and (iii) shall be limited, in the case of Buyer, to
the Additional Shares, and the Shareholders shall have no recourse against
Buyer pursuant to this Agreement beyond recovery of the Additional Shares.
(e) Except as otherwise expressly provided in this Agreement, all claims
by any Buyer Indemnified Party for indemnification from the Shareholders
shall be satisfied in accordance with the terms of the Escrow Agreement.
(f) In the event that Buyer is required to satisfy a claim for
indemnification by the Shareholders, such claim shall be satisfied by
dividing the amount thereof by $1.78125 (the same valuation per share set
forth in the Escrow Agreement) and issuing to the Shareholders, pro rata in
accordance with the number of Shares owned by each of them as set forth on
Annex A, a number of shares of Buyer Common Stock equal to such quotient;
provided however, that Buyer shall not be obligated to issue an aggregate
number of shares of Buyer Common Stock in excess of 1,506,092, a number
equal to the number of Escrow Shares (the "ADDITIONAL SHARES"), in
satisfaction of all its indemnification obligations under this Agreement.
(g) The indemnification provided for in this Article X shall constitute
the exclusive remedies of the Buyer Indemnified Parties, on the one hand,
and the Shareholders, on the other hand, for any post-Closing claims against
the other under this Agreement.
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(h) Notwithstanding anything in this Agreement to the contrary,
including this Article X, the indemnification obligations of the
Shareholders under Section 10.02(a) hereof and the Buyer under Section
10.02(b) hereof shall not apply to any consequential, incidental, exemplary
or punitive Damages, including but not limited to lost profits, suffered by
any Buyer Indemnified Party, on the one hand, or by the Shareholders, on the
other hand.
SECTION 10.03 THIRD PARTY CLAIMS.
(a) If any party entitled to be indemnified pursuant to Section 10.02
(an "INDEMNIFIED PARTY") receives notice of the assertion by any third party
of any claim or of the commencement by any such third party of any Action
(any such claim or Action being referred to herein as an "INDEMNIFIABLE
CLAIM") with respect to which another party hereto (an "INDEMNIFYING PARTY")
is or may be obligated to provide indemnification, the Indemnified Party
shall promptly notify the Indemnifying Party in writing (the "CLAIM NOTICE")
of the Indemnifiable Claim; provided, however, that the failure to provide
such notice shall not relieve or otherwise affect the obligation of the
Indemnifying Party to provide indemnification hereunder, except to the
extent that the Indemnifying Party is materially prejudiced by such failure.
(b) The Indemnifying Party shall have thirty (30) days after receipt of
the Claim Notice to assume defense of the Indemnifiable Claim; PROVIDED,
HOWEVER, that the Indemnifying Party will be required to consult with the
Indemnified Party with respect thereto. If the Indemnifying Party assumes
the defense of such Indemnifiable Claim, it will take all steps necessary to
investigate, defend or settle such claim and will, subject to Section 10.01,
hold the Indemnified Party harmless from and against any and all Damages
caused by or arising out of any settlement approved by the Indemnifying
Party or any judgment in connection with such Indemnifiable Claim. The
Indemnified Party will have the right to employ counsel separate from
counsel employed by the Indemnifying Party in any such action and to
participate in the defense thereof, but the fees and expenses of such
counsel employed by the Indemnified Party will be at the expense of the
Indemnified Party. Without the written consent of the Indemnified Party,
which consent will not be unreasonably withheld, the Indemnifying Party will
not consent to entry of any judgment or enter into any settlement that (a)
provides for non-monetary relief or (b) does not include an unconditional
and complete release of the Indemnified Party by the claimant or plaintiff
making the Indemnifiable Claim. Failure by the Indemnifying Party to notify
the Indemnified Party of its election to assume the defense of any
Indemnifiable Claim within 30 days after its receipt of notice thereof will
be deemed a waiver by the Indemnifying Party of its right to assume the
defense of such Indemnifiable Claim if the Indemnified Party is materially
prejudiced by such failure. In such event, the Indemnified Party may defend
against such Indemnifiable Claim in any manner it deems appropriate and may
settle such Indemnifiable Claim or consent to the entry of any judgment with
respect thereto, provided that it acts reasonably and in good faith.
(c) Buyer shall advance the costs and expenses required to defend any
Indemnifiable Claim. If the Indemnified Party is the Buyer, such costs and
expenses shall constitute Damages recoverable from the Escrow Shares. If the
Indemnified Parties are the Shareholders, such costs and expenses shall
constitute Damages for which Additional Shares shall be issued to the
Shareholders.
(d) If the Indemnifying Party does not notify the Indemnified Party
within thirty (30) days after receipt of the Claim Notice that it elects to
undertake the defense of the Indemnifiable Claim described therein, or if
the Indemnifying Party undertakes such defense but thereafter ceases to
defend such Indemnifiable Claim, the Indemnified Party shall have the right
to contest, settle or compromise the Indemnifiable Claim in the exercise of
its reasonable discretion and acting in good faith and the Indemnified Party
may recover its Damages from the Indemnifying Party, subject to the
limitations, and in the manner, set forth in this Article X; provided,
however, that the Indemnified Party shall notify the Indemnifying Party of
any compromise or settlement of any such Indemnifiable Claim.
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<PAGE>
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01 NOTICES. All notices and other communications under or in
connection with this Agreement shall be in writing and shall be deemed given (a)
if delivered personally, upon delivery, (b) if delivered by registered or
certified mail (return receipt requested), upon the earlier of actual delivery
or three days after being mailed, or (c) if given by telecopy, upon confirmation
of transmission by telecopy, in each case to the parties at the following
addresses:
(a) If to the Company, addressed to:
IQI, Inc.
1645 North Vine Street
Los Angeles, California 90028
Telecopy: (213) 848-5758
Attention: Chief Executive Officer
With copies to:
Thayer Equity Investors III, L.P.
1455 Pennsylvania Avenue, N.W.
Suite 350
Washington, D.C. 20004
Telecopy: (202) 371-0391
Attention: Mr. Rick Rickertsen
Mr. Douglas Gilbert
and to:
Paul, Hastings, Janofsky & Walker LLP
Twenty-Third Floor
555 South Flower Street
Los Angeles, California 90071
Telecopy: (213) 627-0705
Attention: Robert A. Miller, Jr., Esq.
(b) If to Buyer or Newco, addressed to:
ATC Communications Group, Inc.
5950 Berkshire Lane
Suite 1650
Dallas, Texas 75225
Telecopy: (214) 361-9874
Attention: Mr. Michael G. Santry
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Telecopy: (214) 939-5849
Attention: Kenneth G. Hawari, Esq.
A-41
<PAGE>
SECTION 11.02 SEVERABILITY. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable such term or
provision in any other jurisdiction, the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other
than those as to which it is held invalid or enforceable.
SECTION 11.03 ENTIRE AGREEMENT. This Agreement, including the annexes and
schedules attached hereto and other documents referred to herein, and the
Confidentiality Agreement, contain the entire understanding of the parties
hereto in respect of their subject matter and supersede all prior and
contemporaneous agreements and understandings, oral and written, among the
parties with respect to such subject matter, including, without limitation, the
letter of intent dated as of February 24, 1998 between Buyer and the Company.
SECTION 11.04 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns; PROVIDED, HOWEVER, that no party may assign
either this Agreement or any of its rights, interests or obligations hereunder
in whole or in part without the prior written consent of the other parties
hereto (other than to the Surviving Corporation as a result of the Merger), and
any such transfer or assignment without said consent shall be void, AB
INITIO.Subject to the immediately preceding sentence, this Agreement is not
intended to benefit, and shall not run to the benefit of or be enforceable by,
any other person or entity other than the parties hereto and their permitted
successors and assigns.
SECTION 11.05 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Agreement.
SECTION 11.06 SCHEDULES AND ANNEXES. The schedules and annexes to this
Agreement are incorporated herein and, by this reference, made a part hereof as
if fully set forth at length herein.
SECTION 11.07 CONSTRUCTION.
(a) The article, section and subsection headings used herein are
inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
(b) As used in this Agreement, the masculine, feminine or neuter gender,
and the singular or plural, shall be deemed to include the others whenever
and wherever the context so requires.
(c) For the purposes of this Agreement, unless the context clearly
requires, "or" is not exclusive.
SECTION 11.08 ARBITRATION. To the extent that the parties hereto are
unable to resolve their disputes or controversies arising out of or relating to
this Agreement, or the performance, breach, validity, interpretation or
enforcement of this Agreement, through discussion and negotiation, all such
disputes and controversies will be resolved by binding arbitration in accordance
with Title 9 of the U.S. Code (United States Arbitration Act) and the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA"), and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. A party hereto may initiate arbitration by sending
written notice of its intention to arbitrate to the other parties hereto and to
the AAA office located in Dallas, Texas (if initiated by the Company) or Los
Angeles, California (if initiated by Buyer). Such written notice will contain a
description of the dispute and the remedy sought. The arbitration will be
conducted at the offices of the AAA in Dallas, Texas (if initiated by the
Company) and the AAA office located in Los Angeles, California (if initiated by
Buyer) before an independent and impartial arbitrator acceptable to Buyer and
the Company. The party initiating arbitration shall pay the costs and expenses
of the arbitration, unless otherwise determined by the arbitrator. The decision
of the arbitrator will be final and binding on the parties hereto and their
successors and assignees. The parties intend that this agreement to arbitrate be
irrevocable.
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<PAGE>
SECTION 11.09 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the State of New York.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on their behalf as of the day and year first above written.
IQI, INC.
By: ______/s/ Stephen A. McNeely______
Name: _______Stephen A. McNeely_______
Title: ____Chief Executive Officer and
President_____________________________
ATC COMMUNICATIONS GROUP, INC.
By: _______/s/ Michael G. Santry______
Name: ________Michael G. Santry_______
Title: __President and Chief Executive
Officer_______________________________
ATC MERGER SUB, INC.
By: _______/s/ Michael G. Santry______
Name: ________Michael G. Santry_______
Title: __President and Chief Executive
Officer_______________________________
A-43
<PAGE>
APPENDIX B
FAIRNESS OPINION OF CIBC OPPENHEIMER CORP.
<PAGE>
[CIBC OPPENHEIMER LETTERHEAD]
April 7, 1998
The Board of Directors
ATC Communications Group, Inc.
5950 Berkshire Lane
Suite 1650
Dallas, TX 75225
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of shares of common stock, par value $0.01 per share ("ATC
Common Stock"), of ATC Communications Group, Inc., a Delaware corporation
("ATC"), of the ratio of the number of shares of newly-issued ATC Common Stock
to be exchanged for each share of common stock, par value $0.001 per share ("IQI
Common Stock"), of IQI, Inc., a New York corporation ("IQI"), in the proposed
merger (the "Merger Transaction") of a wholly-owned subsidiary of ATC ("Newco"
or "ATC Merger Sub"), with and into IQI pursuant to the Agreement and Plan of
Merger dated as of April 7, 1998 by and among ATC, Newco and IQI (the "Merger
Agreement"). It is our understanding that it is the intention of ATC and IQI
that the Merger Transaction be treated as a tax-free reorganization pursuant to
Section 368(a) of the Internal Revenue Code of 1986, as amended, and that the
Merger Transaction be accounted for under the "reverse purchase" method of
accounting whereby IQI will be treated as the acquiring entity for accounting
purposes. As provided in the Merger Agreement, at the effective time of the
Merger Transaction each outstanding share of IQI Common Stock will be converted
into the right to receive 9.7513 shares of ATC Common Stock (the "Exchange
Ratio"). It is also our understanding that certain shareholders of IQI have
entered into an Irrevocable Proxy Agreement dated April 7, 1998 ("Proxy
Agreement") whereby certain principal holders of the shares of common stock of
IQI (each, a "Principal Shareholder" and collectively, the "Principal
Shareholders") which own approximately 85.0% of such common stock will agree to
grant an irrevocable proxy to representatives of ATC to vote such shares of
common stock in favor of the Merger Transaction. It is also our understanding
that pursuant to a separate agreement, a Principal Shareholder will (i) provide
a credit enhancement instrument with respect to certain indebtedness under ATC's
Loan and Security Agreement and (ii) purchase warrants to acquire 1,100,000
shares of ATC Common Stock. The terms and conditions of the Merger Transaction
and related agreements are more fully set forth in the Merger Agreement and
related agreements, respectively.
In connection with the opinion contained herein we have reviewed, among
other things, the Merger Agreement and related agreements; the Annual Reports on
Form 10-K for the two fiscal years ended June 30, 1997 of ATC; the Audited
Consolidated Financial Statements and Other Financial Information as of and for
the fiscal year ended December 31, 1996 of IQI; unaudited Consolidated Financial
Statements and Other Financial Information as of and for the fiscal year ended
December 31, 1997 of IQI; Quarterly Reports on Form 10-Q of ATC for the fiscal
years 1997 and 1998 to date; certain internal financial statements and other
financial and operating data concerning IQI prepared by the management of IQI;
certain internal financial statements, management reports and other financial
and operating data concerning ATC prepared by the management of ATC; certain
other communications from ATC to its stockholders; and certain internal
financial analyses and forecasts of ATC and IQI prepared by their respective
managements. We have held discussions with members of the managements of ATC and
IQI regarding the past and current business operations and financial condition
and the future prospects of their respective companies as well as the estimates
of the operating savings and other benefits and cost reductions expected by the
respective managements to be realized from the Merger Transaction. We have also
analyzed the
<PAGE>
[CIBC OPPENHEIMER LETTERHEAD]
The Board of Directors
ATC Communications Group, Inc.
April 7, 1998
Page 2
proforma financial impact of the Merger Transaction. We also considered the
strategic rationale for the Merger Transaction as outlined to CIBC Oppenheimer
by the managements of ATC and IQI. In addition, we have reviewed the reported
price and trading activity for the ATC Common Stock and compared certain
financial and stock market information, to the extent applicable, for ATC and
IQI with similar information for other companies whose securities are publicly
traded. We also have reviewed, to the extent publicly available, the financial
terms of certain recent business combinations in the teleservices and call
center-based industries. In addition to the foregoing, we have performed such
other studies and analyses and considered such other financial, economic and
market criteria as we considered necessary to arrive at our opinion.
At the direction of the Board of Directors of ATC, we have relied upon and
assumed the accuracy and completeness of all of the financial and other
information reviewed by us for purposes of this opinion, without assuming
responsibility for the independent verification of such information. In that
regard, we have assumed, at the direction of the Board of Directors of ATC, that
the financial forecasts prepared by the respective managements of ATC and IQI
have been reasonably prepared on a basis reflecting the best currently available
judgments and estimates of the prospects of ATC and IQI. We have not made an
independent evaluation or appraisal of the assets or liabilities of ATC or IQI
or any of their subsidiaries, and we have not been furnished with any such
evaluation or appraisal. We express no opinion as to the likely future trading
range of shares of ATC Common Stock following consummation of the Merger
Transaction nor the likelihood that estimates of the operating savings and other
benefits and cost reductions will be achieved as a result of the Merger
Transaction. The prices at which such shares will trade in the future will
depend on a variety of factors, including the business performance of the
combined company following the Merger Transaction, interest rates, dividend
rates, economic conditions generally and in particular in the markets in which
the combined company will operate, and other market conditions affecting the
securities markets generally. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date of this letter, and we have not been requested, nor have
we undertaken any responsibility, to update our opinion in light of future
developments.
We have further assumed, with your consent, that (i) the representations and
warranties contained in the Merger Agreement are true and correct in all
material respects and (ii) the Merger Transaction will be consummated in
accordance with the terms described in the Merger Agreement and related
agreements, without any amendment thereto (including, among other things, that
the Merger Transaction will qualify as a tax-free reorganization pursuant to
Section 368(a) of the Internal Revenue Code of 1986, as amended, and that the
Merger Transaction will be accounted for under the "reverse purchase" method of
accounting whereby IQI will be treated as the acquiring entity for accounting
purposes), and without waiver by ATC of any of the conditions to its obligation
to close thereunder.
As an investment banking firm, CIBC Oppenheimer Corp. ("CIBC Oppenheimer")
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwriting, distributions of
securities and similar activities. We are familiar with ATC having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the Merger Agreement and related agreements. We have
received fees for services rendered to ATC in connection with this engagement
and will receive from ATC additional fees for our services, a substantial
<PAGE>
[CIBC OPPENHEIMER LETTERHEAD]
The Board of Directors
ATC Communications Group, Inc.
April 7, 1998
Page 3
portion of which is contingent upon the consummation of the Merger Transaction,
including a fee upon delivery of this opinion. In addition, CIBC Oppenheimer's
equity research department provides published research coverage of ATC.
In the ordinary course of our respective securities businesses, CIBC
Oppenheimer and its affiliates actively trade the equity and debt securities of
various corporate issuers, which may from time to time include securities of
ATC. Therefore, we may from time to time hold a long or short position in such
securities.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the Exchange
Ratio is fair, from a financial point of view, to the holders of shares of ATC
Common Stock.
Our advisory services and the opinion expressed herein are for the
information of the Board of Directors of ATC only in its evaluation of the
proposed Merger Transaction and do not constitute a recommendation to any
stockholder of ATC, and our opinion may not be published or otherwise used or
referred to, in whole or in part, nor shall any public reference to CIBC
Oppenheimer be made without our prior written consent.
Very truly yours,
CIBC OPPENHEIMER CORP.
<PAGE>
APPENDIX C
NEW YORK APPRAISAL RIGHTS AND PROCEDURES
<PAGE>
GENERALLY
The rights ("DISSENTERS' RIGHTS") of shareholders of IQI ("DISSENTING
SHAREHOLDERS") who dissent in connection with the Merger are governed by
specific legal provisions contained in Sections 623 and 910 of the New York
Business Corporation Law ("NYBCL"). This description of Dissenters' Rights is
qualified in its entirety by reference to such sections of the NYBCL.
If the Merger is approved by the requisite shareholders of IQI, shareholders
of IQI who have filed with IQI a written objection to the Merger prior to such
approval and who have fully complied with all applicable provisions of the NYBCL
("DISSENTING SHAREHOLDERS"), will have the right to demand payment of the fair
value of their shares and the other rights and benefits provided by Section 910
of the NYBCL if the Merger is consummated. Such fair value of the shares will be
determined as of the close of business on the day prior to the approval of the
Merger by the requisite shareholders. Persons who are beneficial owners of
shares of IQI Common Stock but whose shares are held by another person, such as
a nominee, should instruct the record holder to follow the procedures outlined
below if such persons wish to dissent with respect to all of their shares. A
shareholder may not dissent as to less than all of the shares, as to which he
has a right to dissent, held by him of record or held by him beneficially.
It is a condition to the obligations of each party to the Merger to
consummate the Merger that the aggregate amount of Dissenting Shares not exceed
5% of the outstanding shares of Common Stock at the Effective Time. Thus, it is
currently estimated that if IQI shareholders holding an aggregate of at least
approximately 154,451 shares of Common Stock perfect Dissenters' Rights, the
Merger will not be consummated unless each of the parties to the Merger waives
this condition.
For a Dissenting Shareholder to exercise the right to demand payment of the
fair value of his shares, the procedure to be followed under Section 623 of the
NYBCL includes the following requirements:
(i) Any IQI shareholder electing to demand payment of the fair value of
all of his shares must deliver to IQI a written objection to the Merger,
containing his demand for such payment prior to the approval of the Merger
by the requisite shareholders of IQI.
(ii) Any IQI shareholder making such notice of election to dissent must
deliver to IQI all certificates representing all of his shares within one
month of the filing of such notice of election. For information on how to
make the requisite demand for payment for fair value of shares, see "Demand
for Fair Value Payment" below.
DEMAND FOR FAIR VALUE PAYMENT
A notice of election may be withdrawn by the Dissenting Shareholder at any
time prior to his acceptance in writing of an offer made by IQI, but in no event
later than 60 days from the consummation of the Merger (the "Withdrawal
Deadline"). Within the later of (i) 15 days after the expiration of the
Withdrawal Deadline or (ii) within 15 days after the consummation of the Merger
(but in no event later than 90 days after the date of approval of the Merger by
the requisite shareholders), IQI shall make a written offer by registered mail
to each Dissenting Shareholder.
If IQI fails to make such offer within the applicable 15 day period or if
IQI makes such offer and any Dissenting Shareholder fails to agree with IQI
within 30 days thereafter upon the price to be paid for his shares:
(i) IQI shall, within 20 days after the expiration of the applicable 15
day period discussed above, institute a special proceeding in the supreme
court in the judicial district in which the office of the company is located
to determine the rights of Dissenting Shareholders and to fix the fair value
of their shares.
(ii) If IQI fails to institute such proceeding within such 20 day
period, any Dissenting Shareholder may institute such proceeding for the
same purpose not later than 30 days after the expiration
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of such 20 day period. If such proceeding is not instituted within such 30
day period, all Dissenters' Rights shall be lost.
(iii) All Dissenting Shareholders, except those who have agreed with IQI
upon the price to be paid for their shares, shall be made parties to such
proceeding.
(iv) The court shall determine whether each such Dissenting Shareholder
made party to such proceeding is entitled to receive payment for his shares.
(v) The court shall proceed to fix the value of the shares, which shall
be the fair value as of the close of business on the day prior to the date
of approval of the Merger. In fixing the fair value of the shares, the court
shall consider the nature of the transaction giving rise to the
shareholders' right to receive payment for shares and its effects on IQI and
its shareholders, the concepts and methods customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable circumstances
and all other relevant factors.
(vi) The final order of the court containing the fair value of the
shares shall include an allowance for interest at such rate as the court
finds to be equitable, from the date of consummation of the Merger to the
date of payment. Such final order shall be entered against IQI in favor of
each Dissenting Shareholder who is a party to the proceeding and is entitled
thereto for the value of his shares so determined, and IQI shall make all
payments pursuant to such final order within 60 days thereof.
(vii) Each party to such proceeding shall bear its own costs and
expenses. Notwithstanding, the court may, in its discretion, allocate such
costs among the parties as the court deems equitable in the circumstances.
ANY DEMANDS, NOTICES, CERTIFICATES, OR OTHER DOCUMENTS REQUIRED TO BE
DELIVERED TO IQI MAY BE SENT TO IQI, INC., 1645 NORTH VINE STREET, 7TH FLOOR,
LOS ANGELES, CALIFORNIA 90028, ATTN: ERIC A. CROSON, SECRETARY.
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<PAGE>
APPENDIX D
ATC 1998 STOCK OPTION PLAN
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
1998 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. This Plan shall be known as the ATC Communications
Group, Inc. 1998 Stock Option Plan. The purposes of the Plan are (i) to attract
and retain the best available personnel for positions of substantial
responsibility, (ii) to attract and retain directors and advisory directors with
a high degree of training, experience and ability and (iii) to provide
incentives to such personnel, directors and advisory directors to promote the
success of the business of ATC Communications Group, Inc. and its subsidiaries.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" pursuant to Section 422 of the Internal Revenue Code
of 1986, as amended from time to time, while certain other options granted under
the Plan will constitute nonqualified options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Corporation.
(b) "Common Stock" means the Common Stock, $.01 par value per share, of the
Corporation. Except as otherwise provided herein, all Common Stock issued
pursuant to the Plan shall have the same rights as all other issued and
outstanding shares of Common Stock, including but not limited to voting rights,
the right to dividends, if declared and paid, and the right to pro rata
distributions of the Corporation's assets in the event of liquidation.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(d) "Committee" means the committee described in Section 18(a) that
administers the Plan.
(e) "Corporation" means ATC Communications Group, Inc., a Delaware
corporation.
(f) "Date of Grant" means the date on which an Option is granted pursuant to
this Plan or, if the Committee so determines, the date specified by the
Committee as the date the award is to be effective.
(g) "Director" means any director, advisory director or consultant of the
Corporation or one of its Subsidiaries, but excluding any director, advisory
director or consultant who is also an officer or employee of the Corporation or
one of its Subsidiaries.
(h) "Employee" means any officer or other key employee of the Corporation or
one of its Subsidiaries, including any director who is also an officer or key
employee of the Corporation or one of its Subsidiaries.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Executive" means an Employee who is, or in the judgment of the
Committee may become, the Chief Executive Officer of the Corporation or one of
the other four most highly compensated executive officers of the Corporation.
(k) "Fair Market Value" means the closing sale price (or average of the
quoted closing bid and asked prices if there is no closing sale price reported)
of the Common Stock on the trading day immediately prior to the date specified
as reported by The Nasdaq Stock Market or by the principal national stock
exchange on which the Common Stock is then listed. If there is no reported price
information for the Common Stock, the Fair Market Value will be determined by
the Committee, in its sole discretion. In making such determination, the
Committee may, but shall not be obligated to, commission and rely upon an
independent appraisal of the Common Stock.
(l) "Non-Employee Director" means an individual who is a "non-employee
director" as defined in Rule 16b-3 under the Exchange Act and also an "outside
director" within the meaning of Treasury Regulation Section 1.162-27(e)(3).
D-1
<PAGE>
(m) "Nonqualified Option" means any Option that is not a Qualified Option.
(n) "Option" means a stock option granted pursuant to Section 6 of this
Plan.
(o) "Optionee" means any Employee or Director who receives an Option.
(p) "Participant" means any Employee or Director who receives an Option
pursuant to this Plan.
(q) "Plan" means the ATC Communications Group, Inc. 1998 Stock Option Plan,
as amended from time to time.
(r) "Qualified Option" means any Option that is intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Code.
(s) "Rule 16b-3" means Rule 16b-3 of the rules and regulations under the
Exchange Act, as Rule 16b-3 may be amended from time to time, and any successor
provisions to Rule 16b-3 under the Exchange Act.
(t) "Subsidiary" means any now existing or hereinafter organized or acquired
company of which more than fifty percent (50%) of the issued and outstanding
voting stock is owned or controlled directly or indirectly by the Corporation or
through one or more Subsidiaries of the Corporation.
3. TERM OF PLAN. The Plan has been adopted by the Board effective as of
April 7, 1998. To permit the granting of Qualified Options under the Code, and
to qualify awards of Options hereunder as "performance based" under Section
162(m) of the Code, the Plan will be submitted for approval by the shareholders
of the Corporation by the affirmative votes of the holders of a majority of the
shares of Common Stock then issued and outstanding, for approval no later than
the next annual meeting of shareholders. If the Plan is not so approved by the
shareholders of the Corporation, then any Options previously granted under the
Plan will be Nonqualified Options, regardless of whether the option agreements
relating thereto purport to grant Qualified Options, and any options granted to
Executives will be void. The Plan shall continue in effect until terminated
pursuant to Section 18(a).
4. SHARES SUBJECT TO THE PLAN. Except as otherwise provided in Section 17
hereof, the aggregate number of shares of Common Stock issuable upon the
exercise of Options pursuant to this Plan shall be 7,500,000 shares; provided,
however, that on January 1 of each year (commencing on January 1, 1999), the
aggregate number of shares of Common Stock then issuable upon the exercise of
Options shall be increased by the same percentage that the total number of
issued and outstanding shares of Common Stock increased from the preceding
January 1 to the following December 31 (if such percentage is positive). For
example, if the total number of issued and outstanding shares of Common Stock on
January 1, 1999 were 50,000,000, the total number of issued and outstanding
shares of the Corporation on December 31, 1999 were 55,000,000, and the
aggregate number of shares of Common Stock then issuable upon the exercise of
Options pursuant to this Plan were 2,500,000, the aggregate number of shares of
Common Stock issuable under the Plan effective January 1, 2000 would be
2,750,000 (a 10% increase). Notwithstanding the above, the aggregate number of
shares of Common Stock issuable upon the exercise of Qualified Options pursuant
to this plan shall not exceed 7,500,000 shares. Shares issuable upon the
exercise of Options may either be authorized but unissued shares or treasury
shares. The Corporation shall, during the term of this Plan, reserve and keep
available a number of shares of Common Stock sufficient to satisfy the
requirements of the Plan. If an Option should expire or become unexercisable for
any reason without having been exercised in full, then the shares that were
subject thereto shall, unless the Plan shall have terminated, become immediately
available for the grant of additional Options under this Plan, subject to the
limitations and adjustments set forth above. In addition, for purposes of
calculating the aggregate number of shares that may be issued under this Plan,
only the net shares issued (including the shares, if any, withheld for tax
withholding requirements) shall be counted when shares of Common Stock are used
as full or partial payment for shares issued upon exercise of a Qualified Option
or a Nonqualified
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Stock Option. Shares tendered by a Participant as payment for shares issued upon
such exercise shall be available for reissuance under the Plan.
5. ELIGIBILITY. Qualified Options may be granted under Section 6 of the
Plan to such Employees of the Corporation or its Subsidiaries as may be
determined by the Committee. Nonqualified Options may be granted under Section 6
of the Plan to such Employees or Directors of the Corporation or its
Subsidiaries as may be determined by the Committee. Subject to the limitations
and qualifications set forth in this Plan, the Committee shall also determine
the number of Options to be granted, the number of shares subject to each Option
grant, the exercise price or prices of each Option, the vesting and exercise
period of each Option, whether an Option may be exercised as to less than all of
the Common Stock subject thereto, and such other terms and conditions of each
Option as are consistent with the provisions of this Plan. In connection with
the granting of Qualified Options, the aggregate Fair Market Value (determined
at the Date of Grant of a Qualified Option) of the shares with respect to which
Qualified Options are exercisable for the first time by an Optionee during any
calendar year (under all such plans of the Optionee's employer corporation and
its parent and subsidiary corporations as defined in Section 424(e) and (f) of
the Code, or a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming an Option in a transaction to which Section
424(a) of the Code applies (collectively, such corporations described in this
sentence are hereinafter referred to as "Related Corporations")) shall not
exceed $100,000 or such other amount as from time to time provided in Section
422(d) of the Code or any successor provision. In the event that the
Participant's total Qualified Options exceed the $100,000 limit in any calendar
year (whether due to acceleration of exercisability, miscalculation, error or
otherwise) the amount of Qualified Options that exceed such limit shall be
treated as Nonqualified Options. The Qualified Options granted earliest (whether
under this Plan or any other agreement or plan) shall be applied first to the
$100,000 limit. In the event that only a portion of the Qualified Options
granted at the same time can be applied to the $100,000 limit, the Corporation
shall issue separate share certificates for such number of shares as does not
exceed the $100,000 limit, and shall designate such shares as Qualified Option
stock in its share transfer records.
6. GRANT OF OPTIONS. Except as provided in Section 18(c), the Committee
shall determine the number of shares of Common Stock to be offered from time to
time pursuant to Options granted hereunder and shall grant Options under the
Plan. Notwithstanding the foregoing, each member of the Committee shall be
eligible to receive Options only if the Board unanimously (except for such
Committee member) grants such Option to such member. The grant of Options shall
be evidenced by Option agreements containing such terms and provisions as are
approved by the Committee and executed on behalf of the Corporation by an
appropriate officer. In connection with the granting of any Options under the
Plan, the aggregate number of shares of Common Stock with respect to which
Options may be granted to any single Executive in any one calendar year shall
not exceed 1,500,000. Solely for this purpose, Options that lapse or are
canceled continue to count against such limit.
7. TIME OF GRANT OF OPTIONS. The date of grant of an Option under the Plan
shall be the date on which the Committee awards the Option or, if the Committee
so determines, the date specified by the Committee as the date the award is to
be effective. Notice of the grant shall be given to each Participant to whom an
Option is granted promptly after the date of such grant.
8. PRICE. The exercise price for each share of Common Stock subject to an
Option (the "Exercise Price") granted pursuant to Section 6 of the Plan shall be
determined by the Committee at the Date of Grant; provided, however, that (a)
the Exercise Price for any Option shall not be less than 100% of the Fair Market
Value of the Common Stock at the Date of Grant, and (b) if the Optionee owns on
the Date of Grant more than 10 percent of the total combined voting power of all
classes of stock of the Corporation or its parent or any of its subsidiaries, as
more fully described in Section 422(b)(6) of the Code or any successor provision
(such shareholder is referred to herein as a "10-Percent Shareholder"), the
Exercise Price for any Qualified Option granted to such Optionee shall not be
less than 110% of the Fair Market Value of the Common Stock at the Date of
Grant.
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9. VESTING. Subject to Section 11 of this Plan, each Option award under
the Plan shall vest or be subject to forfeiture in accordance with the
provisions set forth in the applicable Option agreement. The Committee may, but
shall not be required to, permit acceleration of vesting or termination of
forfeiture provisions upon any sale of the Corporation or similar transaction.
Notwithstanding the foregoing, in no event shall the acceleration of any Option
hereunder upon a change of control of the Corporation occur to the extent an
"excess parachute payment" (as defined in Section 280G of the Code) would
result. In the event that the Committee determines that such an excess parachute
payment would result if acceleration occurred (when added to any other payments
or benefits contingent on a change of control under any other agreements,
arrangements or plans) then the number of shares as to which excercisability is
accelerated shall be reduced so that total parachute payments do not exceed 299%
of the Optionee's "base amount," as defined in Section 280G(b)(3) of the Code. A
Participant's Option agreement may contain such additional provisions with
respect to vesting as the Committee may specify.
10. EXERCISE. A Participant may pay the Exercise Price of the shares of
Common Stock as to which an Option is being exercised by the delivery of (a)
cash, (b) check, (c) at the Corporation's option, by the delivery of shares of
Common Stock having a Fair Market Value on the date immediately preceding the
exercise date equal to the Exercise Price and have been held by the Optionee at
least six (6) months prior to the date of exercise, or (d) at the Corporation's
option, any other consideration that the Corporation determines is consistent
with the Plan's purpose and applicable law. If the shares to be purchased are
covered by an effective registration statement under the Securities Act of 1933,
as amended, any Option granted under the Plan may be exercised by a
broker-dealer acting on behalf of an Optionee if (i) the broker-dealer has
received from the Optionee or the Corporation a fully- and duly-endorsed
agreement evidencing such Option, together with instructions signed by the
Optionee requesting the Corporation to deliver the shares of Common Stock
subject to such Option to the broker-dealer on behalf of the Optionee and
specifying the account into which such shares should be deposited, (ii) adequate
provision has been made with respect to the payment of any withholding taxes due
upon such exercise, and (iii) the broker-dealer and the Optionee have otherwise
complied with Section 220.3(e)(4) of Regulation T, 12 CFR Part 220, or any
successor provision.
11. WHEN QUALIFIED OPTIONS MAY BE EXERCISED. No Qualified Option shall be
exercisable at any time after the expiration of ten (10) years from the Date of
Grant; provided, however, that if the Optionee with respect to a Qualified
Option is a 10-Percent Shareholder on the Date of Grant of such Qualified
Option, then such Option shall not be exercisable after the expiration of five
(5) years from its Date of Grant. In addition, if an Optionee of a Qualified
Option ceases to be an employee of the Corporation or any Related Corporation
for any reason, such Optionee's vested Qualified Options shall not be
exercisable after (a) three (3) months following the date such Optionee ceases
to be an employee of the Corporation or any Related Corporation, if such
cessation of service is not due to the death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code) of the Optionee, or (b)
twelve (12) months following the date such Optionee ceases to be an employee of
the Corporation or any Related Corporation, if such cessation of service is due
to the death or permanent and total disability (as defined above) of the
Optionee. Upon the death of an Optionee, any vested Qualified Option exercisable
on the date of death may be exercised by the Optionee's estate or by a person
who acquires the right to exercise such Qualified Option by bequest or
inheritance or by reason of the death of the Optionee, provided that such
exercise occurs within both the remaining option term of the Qualified Option
and twelve (12) months after the date of the Optionee's death. This Section 11
only provides the outer limits of allowable exercise dates with respect to
Qualified Options; the Committee may determine that the exercise period for a
Qualified Option shall have a shorter duration than as specified above.
12. OPTION FINANCING. Upon the exercise of any Option granted under the
Plan, the Corporation may, but shall not be required to, make financing
available to the Participant for the purchase of shares of Common Stock pursuant
to such Option on such terms as the Board or the Committee may specify.
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13. WITHHOLDING OF TAXES. The Committee shall make such provisions and
take such steps as it may deem necessary or appropriate for the withholding of
any taxes that the Corporation is required by any law or regulation of any
governmental authority to withhold in connection with any Option including, but
not limited to, (a) withholding the issuance of all or any portion of the shares
of Common Stock subject to such Option until the Participant reimburses the
Corporation for the amount it is required to withhold with respect to such
taxes, (b) withholding any portion of such issuance in an amount sufficient to
reimburse the Corporation for the amount of taxes it is required to withhold,
(c) allowing the Participant to deliver Common Stock as payment for the amount
the Corporation is required to withhold for taxes or (d) taking any other action
reasonably required to satisfy the Corporation's withholding obligation.
14. CONDITIONS UPON ISSUANCE OF SHARES.
(a) The Corporation shall not be obligated to sell or issue any shares upon
the exercise of any Option granted under the Plan unless the issuance and
delivery of shares comply with all provisions of applicable federal and state
securities laws and the requirements of The Nasdaq Stock Market or any stock
exchange upon which shares of the Common Stock may then be listed.
(b) As a condition to the exercise of an Option, the Corporation may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of applicable federal and state securities laws.
(c) The Corporation shall not be liable for refusing to sell or issue any
shares covered by any Option if the Corporation cannot obtain authority from the
appropriate regulatory bodies deemed by the Corporation to be necessary to sell
or issue such shares in compliance with all applicable federal and state
securities laws and the requirements of The Nasdaq Stock Market or any stock
exchange upon which shares of the Common Stock may then be listed. In addition,
the Corporation shall have no obligation to any Participant, express or implied,
to list, register or otherwise qualify the shares of Common Stock covered by any
Option.
(d) No Participant will be, or will be deemed to be, a holder of any Common
Stock subject to an Option unless and until such Participant has exercised his
or her Option and paid the purchase price for the subject shares of Common
Stock.
15. RESTRICTIONS ON TRANSFER.
(a) Options issued pursuant to the Plan shall be nontransferable except by
will or the laws of descent and distribution, and may only be exercisable during
the Participant's lifetime only by the Participant.
(b) Shares of Common Stock issued pursuant to the Plan may be subject to
restrictions on transfer under applicable federal and state securities laws. The
Committee may impose such additional restrictions on the ownership and transfer
of shares of Common Stock issued pursuant to the Plan as it deems desirable; any
such restrictions shall be set forth in any Option agreement entered into
hereunder.
16. MODIFICATION OF PLAN AND OPTIONS.
(a) The Committee may from time to time and at any time alter, amend,
suspend, discontinue or terminate this Plan; provided, however, that no such
action of the Committee may, without the approval of the shareholders of the
Corporation, alter the provisions of the Plan so as to (i) increase the maximum
number of shares of Common Stock that may be subject to Qualified Options under
this Plan (except as provided in Section 17 of this Plan), (ii) change the class
of employees eligible to receive Qualified Options pursuant to this Plan, or
(iii) change the annual limit on the number of Options granted to an Executive
in Section 6 above.
(b) At any time and from time to time, the Committee may execute an
instrument providing for modification, extension or renewal of any outstanding
Option, provided that no such modification,
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extension or renewal shall impair the Option without the consent of the holder
of the Option. Notwithstanding the foregoing, (i) in the event of such a
modification, substitution, extension or renewal of a Qualified Option, the
Committee may increase the exercise price of such Option if necessary to retain
the qualified status of such Option, and (ii) the Committee may, in its
discretion and without the holder's consent, convert, any Qualified Option into
a Nonqualified Option.
17. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN. In the event that each
of the outstanding shares of Common Stock (other than shares held by dissenting
shareholders) shall be changed into or exchanged for a different number or kind
of shares of stock of the Corporation or of another corporation (whether by
reason of merger, consolidation, recapitalization, reclassification, split-up,
combination of shares or otherwise), or in the event a stock split or stock
dividend occurs, then the Corporation may either (a) substitute for each share
of Common Stock then subject to Options or available for Options the number and
kind of shares of stock into which each outstanding share of Common Stock (other
than shares held by dissenting shareholders) shall be so changed or exchanged,
or the number of shares of Common Stock as is equitably required in the event of
a stock split or stock dividend, together with an appropriate adjustment of the
Exercise Price, or (b) cancel all such Options as of the effective date of any
merger, consolidation, recapitalization, reclassification, split-up or
combination of shares by giving written notice to each holder thereof or his
personal representatives of its intention to do so and by permitting the
exercise of all such Options, without regard to determinations of periods or
installments of exercisability during the thirty (30) day period immediately
preceding such effective date. The Committee may, but shall not be required to,
provide additional anti-dilution protection to a Participant under the terms of
the Participant's Option agreement.
18. ADMINISTRATION.
(a) Notwithstanding anything to the contrary herein, to the extent necessary
to comply with the requirements of Rule 16b-3, the Plan shall be administered by
the Board, if each member is a Non-Employee Director, or by a committee
comprised solely of two or more Non-Employee Directors appointed by the Board
(the group responsible for administering the Plan is referred to as the
"Committee"). Options may be granted under Section 6 only by majority agreement
of the members of the Committee. Option agreements, in the form as approved by
the Committee, and containing such terms and conditions consistent with the
provisions of this Plan as are determined by the Committee, may be executed on
behalf of the Corporation by the Chairman of the Board, the President or any
Vice President of the Corporation. The Committee shall have complete authority
to construe, interpret and administer the provisions of this Plan and the
provisions of the Option agreements granted hereunder; to prescribe, amend and
rescind rules and regulations pertaining to this Plan; to suspend, discontinue
or terminate this Plan; and to make all other determinations necessary or deemed
advisable in the administration of the Plan. The determinations, interpretations
and constructions made by the Committee shall be final and conclusive. No member
of the Committee shall be liable for any action taken, or failed to be taken,
made in good faith relating to the Plan or any award thereunder, and the members
of the Committee shall be entitled to indemnification and reimbursement by the
Corporation in respect of any claim, loss, damage or expense (including
attorneys' fees) arising therefrom to the fullest extent permitted by law.
(b) Members of the Committee shall be specified by the Board, and shall
consist solely of Non-Employee Directors. Non-Employee Directors may not possess
an interest in any transaction for which disclosure is required under Section
404(a) of Regulation S-K under the Exchange Act or be engaged in a business
relationship that must be disclosed under Section 404(a) and must qualify as
'outside directors' as defined in Section 162(m) of the Code and regulations
thereunder.
(c) Although the Committee may suspend, discontinue or terminate the Plan at
any time, all Qualified Options must be granted within ten (10) years from the
effective date of the Plan or the date the Plan is approved by the shareholders
of the Corporation, whichever is earlier.
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19. CONTINUED EMPLOYMENT NOT PRESUMED. Nothing in this Plan or any
document describing it nor the grant of any Option shall give any Participant
the right to continue in the employment of the Corporation or affect the right
of the Corporation to terminate the employment of any such person with or
without cause.
20. LIABILITY OF THE CORPORATION. Neither the Corporation, its directors,
officers or employees or the Committee, nor any Subsidiary which is in existence
or hereafter comes into existence, shall be liable to any Participant or other
person if it is determined for any reason by the Internal Revenue Service or any
court having jurisdiction that any Qualified Option granted hereunder does not
qualify for tax treatment as an incentive stock option under Section 422 of the
Code.
21. GOVERNING LAW. THE PLAN SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF STATE OF DELAWARE AND THE UNITED STATES, AS
APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
22. SEVERABILITY OF PROVISIONS. If any provision of this Plan is
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of the Plan, but
such invalid, illegal or unenforceable provision shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
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ATC COMMUNICATIONS GROUP, INC.
QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT (the "Agreement"), effective as of , is made
and entered into by and between ATC Communications Group, Inc., a Delaware
corporation (the "Corporation"), and (the "Participant").
WITNESSETH:
WHEREAS, the Corporation has implemented the ATC Communications Group, Inc.
1998 Stock Option Plan (the "Plan"), which was adopted by the Corporation's
Board of Directors (the "Board") and approved by the Corporation's shareholders,
and which provides for the grant of qualified stock options to selected officers
and key employees of the Corporation or its Subsidiaries to purchase shares of
Common Stock, $.01 par value, of the Corporation (the "Common Stock");
WHEREAS, the committee that administers the Plan (the "Committee") has
selected the Participant to participate in the Plan and has awarded the
qualified stock option herein described (the "Option") to the Participant; and
WHEREAS, the parties hereto desire to evidence in writing the terms and
conditions of the Option.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements herein contained, and as an inducement to the
Participant to continue as an employee of the Corporation or its Subsidiary and
to promote the success of the business of the Corporation and its Subsidiaries,
the parties hereby agree as follows:
1. GRANT OF OPTION. The Corporation hereby grants to the Participant, upon
the terms and subject to the conditions, limitations and restrictions set forth
in the Plan and in this Agreement, the Option to acquire shares of Common
Stock, at an exercise price per share of $ , effective as of the date of
this Agreement (the "Award Date"). The Participant hereby accepts the Option
from the Corporation.
2. VESTING. The shares of Common Stock subject to the Option shall vest as
follows [describe the vesting schedule]; provided, however, the Option shall
immediately vest in full as to all shares of Common Stock subject hereto upon
any "Sale of the Corporation." A "Sale of the Corporation" shall occur if the
Corporation engages in a merger, consolidation, recapitalization, reorganization
or sale, lease or transfer of all or substantially all of the Corporation's
assets and the Corporation or its shareholders or affiliates immediately before
such transaction beneficially own, immediately after or as a result of such
transaction, equity securities of the surviving or acquiring corporation or such
corporation's parent corporation possessing less than fifty-one percent (51%) of
the voting power of the surviving or acquiring corporation or such corporation's
parent corporation, provided that a Sale of the Corporation shall not be deemed
to occur upon any public offering or series of such offerings of securities of
the Corporation or its affiliates that results in any such change in beneficial
ownership. Notwithstanding the foregoing, in no event shall the acceleration of
any Option hereunder upon a Sale of the Corporation occur to the extent an
"excess parachute payment" (as defined in Section 280G of the Code) would
result. In the event that the Committee determines that such an excess parachute
payment would result if acceleration occurred (when added to any other payments
or benefits contingent on a change of control under any other agreements,
arrangements or plans) then the number of shares as to which excercisability is
accelerated shall be reduced so that total parachute payments do not exceed 299%
of the Optionee's "base amount," as defined in Section 280G(b)(3) of the Code.
3. EXERCISE. In order to exercise the Option with respect to any vested
shares of Common Stock hereunder, the Participant shall provide written notice
to the Corporation at its principal executive office. At the time of exercise,
the Participant shall pay to the Corporation the Option price per share set
forth in Section 1 times the number of vested shares as to which the Option is
being exercised. The Participant shall make such payment by delivering (a) cash,
(b) a check, (c) at the Committee's option, shares of Common
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Stock that the Participant has owned for at least six months, having a Fair
Market Value on the date immediately preceding the exercise date equal to the
aggregate exercise price or (d) at the Committee's option, any other
consideration that the Committee determines is consistent with the Plan and
applicable law. If the Option is exercised in full, the Participant shall
surrender this Agreement to the Corporation for cancellation. If the Option is
exercised in part, the Participant shall surrender this Agreement to the
Corporation so that the Corporation may make appropriate notation hereon or
cancel this Agreement and issue a new agreement representing the unexercised
portion of the Option.
If the shares to be purchased are covered by an effective registration
statement under the Securities Act of 1933, as amended, the Option may be
exercised by a broker-dealer acting on behalf of the Participant if (i) the
broker-dealer has received from the Participant or the Corporation a fully- and
duly-endorsed agreement evidencing such option, together with instructions
signed by the Participant requesting the Corporation to deliver the shares of
Common Stock subject to such option to the broker-dealer on behalf of the
Participant and specifying the account into which such shares should be
deposited, (ii) adequate provision has been made with respect to the payment of
any withholding taxes due upon such exercise, and (iii) the broker-dealer and
the Participant have otherwise complied with Section 220.3(e)(4) of Regulation
T, 12 CFR Part 220, or any successor provision.
4. WHO MAY EXERCISE. The Option shall be exercisable during the lifetime
of the Participant only by the Participant. To the extent exercisable after the
Participant's death, the Option shall be exercised only by the Participant's
representatives, executors, successors or beneficiaries.
5. EXPIRATION OF OPTION. The Option shall expire, and shall not be
exercisable with respect to any vested shares of Common Stock hereunder as to
which the Option has not been exercised, on the first to occur of: (a) the tenth
anniversary of the Award Date; provided however, that if the Participant is a
10-Percent Shareholder on the Award Date, then such Option shall not be
exercisable after the fifth anniversary of the Award Date; or (b) 90 days after
the Participant ceases to be an Employee of the Corporation for any reason other
than death or permanent and total disability; provided, however, that (i) if the
Participant is terminated for dishonesty or other acts detrimental to the
interests of the Corporation or its Subsidiaries, or (ii) if Participant
competes with the Corporation or its Subsidiaries or solicits the Corporation's
or the Subsidiaries' employees to leave the employ of the Corporation or the
Subsidiaries, the Committee may, by written notice to the Participant,
immediately terminate the Option. If a Participant ceases to be an Employee due
to death or permanent and total disability, the Participant's vested qualified
stock option shall not be exercisable after twelve months following the
Participant's cessation of service due to death or disability. The Option shall
expire, and shall not be exercisable, with respect to any unvested shares of
Common Stock hereunder, immediately upon the cessation of the Participant being
an Employee of the Corporation for any reason, including death.
6. TAX WITHHOLDING. Any provision of this Agreement to the contrary
notwithstanding, the Corporation may take such steps as it deems necessary or
desirable for the withholding of any taxes that it is required by law or
regulation of any governmental authority, federal, state or local, domestic or
foreign, to withhold in connection with any of the shares of Common Stock
subject hereto.
7. DILUTION. The number of shares of Common Stock subject to the Option
and the Option price therefor set forth in Section 1 shall be subject to
adjustment for any Dilutive Event. A "Dilutive Event" shall include any of the
following events that results in dilution to the shares of Common Stock acquired
or acquirable upon exercise of the Option: any increase or decrease in the
shares of Common Stock or any other capital stock of the Corporation or any
change or exchange of any such securities for a different number or kind of
securities, any of which results from one or more stock splits, reverse stock
splits, stock dividends, recapitalizations, reorganizations or other corporate
actions with a similar effect. A "Dilutive Event" shall not include, however,
among other things: (a) the issuance or exercise of options granted pursuant to
the Plan; or (b) any issuance of capital stock by the Corporation for fair
market value or any
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<PAGE>
issuance or grant to any person or entity of any right to subscribe for or to
purchase any capital stock or securities convertible into any capital stock of
the Corporation for fair market value.
8. TRANSFER OF OPTION. The Participant shall not, directly or indirectly,
sell, transfer, pledge, encumber or hypothecate ("Transfer") the Option or the
rights and privileges pertaining thereto other than by will or the laws of
descent and distribution. Any permitted transferee to whom the Participant shall
Transfer the Option pursuant to this Section 8 shall agree to be bound by this
Agreement. The Option is not liable for or subject to, in whole or in part, the
debts, contracts, liabilities or torts of the Participant, nor shall it be
subject to garnishment, attachment, execution, levy or other legal or equitable
process.
9. CERTAIN LEGAL RESTRICTIONS. The Corporation shall not be obligated to
sell or issue any shares of Common Stock upon the exercise of the Option or
otherwise unless the issuance and delivery of such shares shall comply with all
relevant provisions of law and other legal requirements including, without
limitation, any applicable federal or state securities laws and the requirements
of any stock exchange upon which shares of the Common Stock may then be listed.
As a condition to the exercise of the Option or the sale by the Corporation of
any additional shares of Common Stock to the Participant, the Corporation may
require the Participant to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of applicable federal or state securities laws. The Corporation
shall not be liable for refusing to sell or issue any shares if the Corporation
cannot obtain authority from the appropriate regulatory bodies deemed by the
Corporation to be necessary to lawfully sell or issue such shares. In addition,
the Corporation shall have no obligation to the Participant, express or implied,
to list, register or otherwise qualify any of the Participant's shares of Common
Stock. The shares of Common Stock issued upon the exercise of the Option may not
be transferred except in accordance with applicable federal or state securities
laws. At the Corporation's option, the certificate evidencing shares of Common
Stock issued to the Participant may be legended as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE WITH THE
REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE
OR OTHER JURISDICTION.
10. PLAN INCORPORATED. The Participant accepts the Option herein subject
to all the provisions of the Plan, which are incorporated herein, including the
provisions that authorize the Committee to administer and interpret the Plan and
that provide that the Committee's decisions, determinations and interpretations
with respect to the Plan are final and conclusive on all persons affected
thereby. Except as otherwise set forth in this Agreement, terms defined in the
Plan have the same meanings herein.
11. MISCELLANEOUS.
(a) The Option is intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Code. In order to receive the
favorable tax treatment afforded incentive stock options, the Participant
must meet certain holding period requirements with respect to the shares of
Common Stock issued upon exercise of the Option. Neither the Corporation nor
any member of the Board or member of the Committee shall be liable to the
Participant or any other person if the Internal Revenue Service or any court
having jurisdiction determines for any reason that the Option does not
qualify as an incentive stock option.
(b) The granting of the Option herein shall impose no obligation upon
the Participant to exercise the Option or any part thereof. Nothing herein
contained shall affect the right of the Corporation to terminate the
Participant at any time, with or without cause, or shall be deemed to create
any rights to employment on the part of the Participant.
D-10
<PAGE>
(c) The rights and obligations arising under this Agreement are not
intended to and do not affect the relationship that otherwise exists between
the Corporation and the Participant as an Employee. Moreover, this Agreement
is not intended to and does not amend any existing contract between the
Corporation and the Participant relating to the Participant's position as an
Employee; to the extent there is a conflict between this Agreement and such
a contract, such contract shall govern and take priority.
(d) Neither the Participant nor any person claiming under or through the
Participant shall be or shall have any of the rights or privileges of a
shareholder of the Corporation in respect of any of the shares issuable upon
the exercise of the Option herein unless and until certificates representing
such shares shall have been issued and delivered to the Participant or such
Participant's agent.
(e) Any notice to be given to the Corporation under the terms of this
Agreement or any delivery of the Option herein to the Corporation shall be
addressed to the Corporation at its principal executive offices, and any
notice to be given to the Participant shall be addressed to the Participant
at the address set forth beneath his or her signature hereto, or at such
other address for a party as such party may hereafter designate in writing
to the other. Any such notice shall be deemed to have been duly given if
mailed, postage prepaid, addressed as aforesaid.
(f) Subject to the limitations herein on the transferability by the
Participant of the Option and any shares of Common Stock, this Agreement
shall be binding upon and inure to the benefit of the representatives,
executors, successors or beneficiaries of the parties hereto.
(g) THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE AND THE UNITED
STATES, AS APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
(h) If any provision of this Agreement is declared or found to be
illegal, unenforceable or void, in whole or in part, then the parties shall
be relieved of all obligations arising under such provision, but only to the
extent that it is illegal, unenforceable or void, it being the intent and
agreement of the parties that this Agreement shall be deemed amended by
modifying such provision to the extent necessary to make it legal and
enforceable while preserving its intent or, if that is not possible, by
substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
(i) All section titles and captions in this Agreement are for
convenience only, shall not be deemed part of this Agreement, and in no way
shall define, limit, extend or describe the scope or intent of any
provisions of this Agreement.
(j) The parties shall execute all documents, provide all information,
and take or refrain from taking all actions as may be necessary or
appropriate to achieve the purposes of this Agreement.
(k) This Agreement constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
(l) No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
(m) This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or
the same counterpart.
(n) At any time and from time to time the Committee may execute an
instrument providing for modification, extension, or renewal of any
outstanding option, provided that no such modification, extension or renewal
shall (i) impair the option in any respect without the consent of the holder
of the
D-11
<PAGE>
option or (ii) conflict with the provisions of Rule 16b-3. Any such changes
may result in loss of "incentive stock option" status. Except as provided in
the preceding sentence, no supplement, modification or amendment of this
Agreement or waiver of any provision of this Agreement shall be binding
unless executed in writing by all parties to this Agreement. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provision of this Agreement (regardless of whether
similar), nor shall any such waiver constitute a continuing waiver unless
otherwise expressly provided.
(o) In addition to all other rights or remedies available at law or in
equity, the Corporation shall be entitled to injunctive and other equitable
relief to prevent or enjoin any violation of the provisions of this
Agreement.
(p) The Participant's spouse joins this Agreement for the purpose of
agreeing to and accepting the terms of this Agreement and to bind any
community property interest he or she has or may have in the Option, any
vested portion or any unvested portion of the Option, any shares of Common
Stock acquired upon exercise of the Option and any other shares of Common
Stock held by the Participant.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CORPORATION:
ATC Communications Group, Inc.
By:
--------------------------------------
Name:
-------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
PARTICIPANT:
--------------------------------------
Name:
-------------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------------
PARTICIPANT'S SPOUSE:
--------------------------------------
Name:
-------------------------------------------------------------------------------
D-12
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT (the "Agreement"), effective as of , is made
and entered into by and between ATC Communications Group, Inc., a Delaware
corporation (the "Corporation"), and (the "Participant").
WITNESSETH:
WHEREAS, the Corporation has implemented the ATC Communications Group, Inc.
1998 Stock Option Plan (the "Plan"), which was adopted by the Corporation's
Board of Directors (the "Board") and approved by the Corporation's shareholders,
and which provides for the grant of stock options to selected officers, key
employees, directors, advisory directors and consultants of the Corporation or
its Subsidiaries to purchase shares of Common Stock, $.01 par value, of the
Corporation (the "Common Stock");
WHEREAS, the committee that administers the Plan (the "Committee") has
selected the Participant to participate in the Plan and has awarded the
non-qualified stock option herein described (the "Option") to the Participant;
and
WHEREAS, the parties hereto desire to evidence in writing the terms and
conditions of the Option.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements herein contained, and as an inducement to the
Participant to continue as an employee of the Corporation or its Subsidiary
and/or to promote the success of the business of the Corporation and its
Subsidiaries, the parties hereby agree as follows:
1. GRANT OF OPTION. The Corporation hereby grants to the Participant, upon
the terms and subject to the conditions, limitations and restrictions set forth
in the Plan and in this Agreement, the Option to acquire shares of Common
Stock, at an exercise price per share of $ , effective as of the date of
this Agreement (the "Award Date"). The Participant hereby accepts the Option
from the Corporation.
2. VESTING. The shares of Common Stock subject to the Option shall vest as
follows [describe the vesting schedule]; provided, however, the Option shall
immediately vest in full as to all shares of Common Stock subject hereto upon
any "Sale of the Corporation." A "Sale of the Corporation" shall occur if the
Corporation engages in a merger, consolidation, recapitalization, reorganization
or sale, lease or transfer of all or substantially all of the Corporation's
assets and the Corporation or its shareholders or affiliates immediately before
such transaction beneficially own, immediately after or as a result of such
transaction, equity securities of the surviving or acquiring corporation or such
corporation's parent corporation possessing less than fifty-one percent (51%) of
the voting power of the surviving or acquiring corporation or such corporation's
parent corporation, provided that a Sale of the Corporation shall not be deemed
to occur upon any public offering or series of such offerings of securities of
the Corporation or its affiliates that results in any such change in beneficial
ownership. Notwithstanding the foregoing, in no event shall the acceleration of
any Option hereunder upon a Sale of the Corporation occur to the extent an
"excess parachute payment" (as defined in Section 280G of the Code) would
result. In the event that the Committee determines that such an excess parachute
payment would result if acceleration occurred (when added to any other payments
or benefits contingent on a change of control under any other agreements,
arrangements or plans) then the number of shares as to which excercisability is
accelerated shall be reduced so that total parachute payments do not exceed 299%
of the Optionee's "base amount," as defined in Section 280G(b)(3) of the Code.
3. EXERCISE. In order to exercise the Option with respect to any vested
shares of Common Stock hereunder, the Participant shall provide written notice
to the Corporation at its principal executive office. At the time of exercise,
the Participant shall pay to the Corporation the Option price per share set
forth in Section 1 times the number of vested shares as to which the Option is
being exercised. The Participant shall make such payment by delivering (a) cash,
(b) a check, (c) at the Committee's option, shares of Common
D-13
<PAGE>
Stock that the Participant has owned for at least six months having a Fair
Market Value on the date immediately preceding the exercise date equal to the
aggregate exercise price or (d) at the Committee's option, any other
consideration that the Committee determines is consistent with the Plan and
applicable law. If the Option is exercised in full, the Participant shall
surrender this Agreement to the Corporation for cancellation. If the Option is
exercised in part, the Participant shall surrender this Agreement to the
Corporation so that the Corporation may make appropriate notation hereon or
cancel this Agreement and issue a new agreement representing the unexercised
portion of the Option.
If the shares to be purchased are covered by an effective registration
statement under the Securities Act of 1933, as amended, the Option may be
exercised by a broker-dealer acting on behalf of the Participant if (i) the
broker-dealer has received from the Participant or the Corporation a fully- and
duly-endorsed agreement evidencing such option, together with instructions
signed by the Participant requesting the Corporation to deliver the shares of
Common Stock subject to such option to the broker-dealer on behalf of the
Participant and specifying the account into which such shares should be
deposited, (ii) adequate provision has been made with respect to the payment of
any withholding taxes due upon such exercise, and (iii) the broker-dealer and
the Participant have otherwise complied with Section 220.3(e)(4) of Regulation
T, 12 CFR Part 220, or any successor provision.
4. WHO MAY EXERCISE. The Option shall be exercisable during the lifetime
of the Participant only by the Participant. To the extent exercisable after the
Participant's death, the Option shall be exercised only by the Participant's
representatives, executors, successors or beneficiaries.
5. EXPIRATION OF OPTION. The Option shall expire, and shall not be
exercisable with respect to any vested shares of Common Stock hereunder as to
which the Option has not been exercised, on the first to occur of: (a) the
anniversary of the Award Date; or (b) days after the Participant ceases to be
an Employee or Director of the Corporation for any reason other than death (or
within twelve months after any such death); provided, however, that (i) if the
Participant is terminated for dishonesty or other acts detrimental to the
interests of the Corporation or its Subsidiaries, or (ii) if Participant
competes with the Corporation or its Subsidiaries or solicits the Corporation's
or the Subsidiaries' employees to leave the employ of the Corporation or the
Subsidiaries, the Committee may, by written notice to the Participant,
immediately terminate the Option. The Option shall expire, and shall not be
exercisable, with respect to any unvested shares of Common Stock hereunder,
immediately upon the termination of the Participant's employment with the
Corporation for any reason or when the Participant ceases to be a Director of
the Corporation for any reason, including death.
6. TAX WITHHOLDING. Any provision of this Agreement to the contrary
notwithstanding, the Corporation may take such steps as it deems necessary or
desirable for the withholding of any taxes that it is required by law or
regulation of any governmental authority, federal, state or local, domestic or
foreign, to withhold in connection with any of the shares of Common Stock
subject hereto.
7. DILUTION. The number of shares of Common Stock subject to the Option
and the Option price therefor set forth in Section 1 shall be subject to
adjustment for any Dilutive Event. A "Dilutive Event" shall include any of the
following events that results in dilution to the shares of Common Stock acquired
or acquirable upon exercise of the Option: any increase or decrease in the
shares of Common Stock or any other capital stock of the Corporation or any
change or exchange of any such securities for a different number or kind of
securities, any of which results from one or more stock splits, reverse stock
splits, stock dividends, recapitalizations, reorganizations or other corporate
actions with a similar effect. A "Dilutive Event" shall not include, however,
among other things: (a) the issuance or exercise of options granted pursuant to
the Plan; or (b) any issuance of capital stock by the Corporation for fair
market value or any issuance or grant to any person or entity of any right to
subscribe for or to purchase any capital stock or securities convertible into
any capital stock of the Corporation for fair market value.
8. TRANSFER OF OPTION. The Participant shall not, directly or indirectly,
sell, transfer, pledge, encumber or hypothecate ("Transfer") the Option or the
rights and privileges pertaining thereto other than by
D-14
<PAGE>
will or the laws of descent and distribution. Any permitted transferee to whom
the Participant shall Transfer the Option pursuant to this Section 8 shall agree
to be bound by this Agreement. The Option is not liable for or subject to, in
whole or in part, the debts, contracts, liabilities or torts of the Participant,
nor shall it be subject to garnishment, attachment, execution, levy or other
legal or equitable process.
9. CERTAIN LEGAL RESTRICTIONS. The Corporation shall not be obligated to
sell or issue any shares of Common Stock upon the exercise of the Option or
otherwise unless the issuance and delivery of such shares shall comply with all
relevant provisions of law and other legal requirements including, without
limitation, any applicable federal or state securities laws and the requirements
of any stock exchange upon which shares of the Common Stock may then be listed.
As a condition to the exercise of the Option or the sale by the Corporation of
any additional shares of Common Stock to the Participant, the Corporation may
require the Participant to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of applicable federal or state securities laws. The Corporation
shall not be liable for refusing to sell or issue any shares if the Corporation
cannot obtain authority from the appropriate regulatory bodies deemed by the
Corporation to be necessary to lawfully sell or issue such shares. In addition,
the Corporation shall have no obligation to the Participant, express or implied,
to list, register or otherwise qualify any of the Participant's shares of Common
Stock. The shares of Common Stock issued upon the exercise of the Option may not
be transferred except in accordance with applicable federal or state securities
laws. At the Corporation's option, the certificate evidencing shares of Common
Stock issued to the Participant may be legended as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE WITH THE
REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE
OR OTHER JURISDICTION.
10. PLAN INCORPORATED. The Participant accepts the Option herein subject
to all the provisions of the Plan, which are incorporated herein, including the
provisions that authorize the Committee to administer and interpret the Plan and
that provide that the Committee's decisions, determinations and interpretations
with respect to the Plan are final and conclusive on all persons affected
thereby. Except as otherwise set forth in this Agreement, terms defined in the
Plan have the same meanings herein.
11. MISCELLANEOUS.
(a) The Option herein is intended to be a non-qualified stock option
under applicable tax laws, and it is not to be characterized or treated as
an incentive stock option under such laws.
(b) The granting of the Option herein shall impose no obligation upon
the Participant to exercise the Option or any part thereof. Nothing herein
contained shall affect the right of the Corporation to terminate the
Participant at any time, with or without cause, or shall be deemed to create
any rights to employment or continuance as a Director on the part of the
Participant.
(c) The rights and obligations arising under this Agreement are not
intended to and do not affect the employment relationship or other
relationship that otherwise exists between the Corporation and the
Participant, whether such employment relationship is at will or defined by
an employment contract, or otherwise. Moreover, this Agreement is not
intended to and does not amend any existing employment contract between the
Corporation and the Participant; to the extent there is a conflict between
this Agreement and such an employment contract, the employment contract
shall govern and take priority.
(d) Neither the Participant nor any person claiming under or through the
Participant shall be or shall have any of the rights or privileges of a
shareholder of the Corporation in respect of any of the
D-15
<PAGE>
shares issuable upon the exercise of the Option herein unless and until
certificates representing such shares shall have been issued and delivered
to the Participant or such Participant's agent.
(e) Any notice to be given to the Corporation under the terms of this
Agreement or any delivery of the Option herein to the Corporation shall be
addressed to the Corporation at its principal executive offices, and any
notice to be given to the Participant shall be addressed to the Participant
at the address set forth beneath his or her signature hereto, or at such
other address for a party as such party may hereafter designate in writing
to the other. Any such notice shall be deemed to have been duly given if
mailed, postage prepaid, addressed as aforesaid.
(f) Subject to the limitations herein on the transferability by the
Participant of the Option and any shares of Common Stock, this Agreement
shall be binding upon and inure to the benefit of the representatives,
executors, successors or beneficiaries of the parties hereto.
(g) THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE AND THE UNITED
STATES, AS APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
(h) If any provision of this Agreement is declared or found to be
illegal, unenforceable or void, in whole or in part, then the parties shall
be relieved of all obligations arising under such provision, but only to the
extent that it is illegal, unenforceable or void, it being the intent and
agreement of the parties that this Agreement shall be deemed amended by
modifying such provision to the extent necessary to make it legal and
enforceable while preserving its intent or, if that is not possible, by
substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
(i) All section titles and captions in this Agreement are for
convenience only, shall not be deemed part of this Agreement, and in no way
shall define, limit, extend or describe the scope or intent of any
provisions of this Agreement.
(j) The parties shall execute all documents, provide all information,
and take or refrain from taking all actions as may be necessary or
appropriate to achieve the purposes of this Agreement.
(k) This Agreement constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
(l) No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
(m) This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or
the same counterpart.
(n) At any time and from time to time the Committee may execute an
instrument providing for modification, extension, or renewal of any
outstanding option, provided that no such modification, extension or renewal
shall (i) impair the option in any respect without the consent of the holder
of the option or (ii) conflict with the provisions of Rule 16b-3. Except as
provided in the preceding sentence, no supplement, modification or amendment
of this Agreement or waiver of any provision of this Agreement shall be
binding unless executed in writing by all parties to this Agreement. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement (regardless of
whether similar), nor shall any such waiver constitute a continuing waiver
unless otherwise expressly provided.
D-16
<PAGE>
(o) In addition to all other rights or remedies available at law or in
equity, the Corporation shall be entitled to injunctive and other equitable
relief to prevent or enjoin any violation of the provisions of this
Agreement.
(p) The Participant's spouse joins this Agreement for the purpose of
agreeing to and accepting the terms of this Agreement and to bind any
community property interest he or she has or may have in the Option, any
vested portion or any unvested portion of the Option, any shares of Common
Stock acquired upon exercise of the Option and any other shares of Common
Stock held by the Participant.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CORPORATION:
ATC Communications Group, Inc.
By: __________________________________
Name: ________________________________
Title: _______________________________
PARTICIPANT:
______________________________________
By: __________________________________
Name: ________________________________
Title: _______________________________
PARTICIPANT'S SPOUSE:
______________________________________
Name: ________________________________
D-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ATC's Charter provides that ATC shall indemnify any director, officer or
employee, or former director, officer or employee, of ATC, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement to
the fullest extent permitted by DGCL Section 145. DGCL Section 145 provides,
among other things, that ATC may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of ATC) by reason of
the fact that he is or was a director, officer, agent or employee of ATC or who
serves or served at ATC's request as a director, officer, agent, employee,
partner or trustee of another corporation or of a partnership, joint venture,
trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding. The power to indemnify
applies (a) if such person is successful on the merits or otherwise in defense
of any action, suit or proceeding, or (b) if such person acted in good faith and
in a manner he or she reasonably believed to be in the best interests, or not
opposed to the best interests, of ATC, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
power to indemnify applies to actions brought by or in the right of ATC as well,
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of a judgment or settlement of the claim itself, and with
the further limitation that in such actions no indemnification shall be made in
the event of any adjudication of negligence or misconduct in the performance of
his duties to ATC, unless the court believes that in light of all the
circumstances indemnification should apply.
ATC's Bylaws further provide that a determination of the minimum standard
required for indemnification may be made by either (a) a majority of the
directors of ATC (whether or not a quorum) who were not parties to the action,
(b) independent legal counsel in a written opinion, or (c) ATC's stockholders.
ATC may advance expenses to the potential indemnitee only if the ATC Board so
authorizes and if the potential indemnitee undertakes in writing to repay the
expenses if it is subsequently determined that he is not entitled to
indemnification. The indemnification provisions contained in the ATC Charter and
the ATC Bylaws are not exclusive of any other rights to which a person may be
entitled by law, agreement, vote of stockholders or disinterested directors or
otherwise.
Insofar as indemnification by ATC for liabilities arising under the
Securities Act, may be permitted to directors, officers or persons controlling
ATC pursuant to the foregoing provisions, ATC has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND SCHEDULES
(a) Exhibits:
See the Exhibit Index, beginning on page II-5.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts of ATC Communications
Group, Inc. for the years ended June 30, 1997, 1996 and 1995
Schedule II--Valuation and Qualifying Accounts of IQI, Inc. for the five
months ended December 31, 1996 and for the year ended December 31, 1997
II-1
<PAGE>
Schedules other than those referred to above have been omitted because
they are not applicable or not required or because the information is
included elsewhere in the Financial Statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereto) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant
to section 13 or section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(5) To respond to any request for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request;
(6) To deliver or cause to be delivered with the prospectus, to each person
to whom the prospectus is sent or given, the latest annual report to
securityholders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Exchange Act; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
(7) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an
II-2
<PAGE>
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form;
(8) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on May 28, 1998.
<TABLE>
<S> <C> <C>
ATC COMMUNICATIONS GROUP, INC.
By: /s/ MICHAEL G. SANTRY
-----------------------------------------
Michael G. Santry
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN
</TABLE>
POWER OF ATTORNEY
We, the undersigned officers and directors of ATC Communications Group,
Inc., hereby severally constitute and appoint Michael G. Santry and Jerry L.
Sims, Jr., and each of them, our true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for each of us in our name,
place and stead, in any and all capacities, to sign ATC Communication Group,
Inc.'s Registration Statement on Form S-4, and any other Registration Statement
relating to the same offering, and any and all amendments thereto (including
post-effective amendments), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grant to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as each
of us might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or his or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL G. SANTRY Chairman of the Board,
- ------------------------------ President and Chief May 28, 1998
Michael G. Santry Executive Officer
/s/ MATTHEW S. WALLER
- ------------------------------ Chief Financial Officer May 28, 1998
Matthew S. Waller and Director
/s/ PATRICK V. STARK
- ------------------------------ Director May 28, 1998
Patrick V. Stark
/s/ JERRY L. SIMS, JR.
- ------------------------------ Controller, Secretary and May 28, 1998
Jerry L. Sims, Jr. Director
/s/ DARRYL D. POUNDS
- ------------------------------ Director May 28, 1998
Darryl D. Pounds
/s/ J. MICHAEL ALLRED
- ------------------------------ Director May 28, 1998
J. Michael Allred
/s/ J. FRANK MERMOUD
- ------------------------------ Director May 28, 1998
J. Frank Mermoud
II-4
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CHARGED TO
EARNINGS--
BALANCE AT GENERAL AND BALANCE AT
BEGINNING OF ADMINISTRATIVE NET END OF
DESCRIPTION YEAR EXPENSES WRITE-OFF 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>
S-1
<PAGE>
IQI, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FIVE MONTHS ENDED DECEMBER 31, 1996 AND
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE,
BEGINNING BALANCE, END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Five months ended December 31, 1996
Trade receivable allowance................................... -- 102 -- 102
Deferred tax asset valuation allowance....................... -- -- -- --
Year ended December 31, 1997
Trade receivable allowance................................... 102 486 (38) 550
Deferred tax asset valuation allowance....................... -- 103 -- 103
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated as of April 7, 1998 by and among ATC Communications Group, Inc.,
ATC Merger Sub, Inc. and IQI, Inc. (Incorporated by reference from ATC's Form 10-Q for the quarterly
period ended March 31, 1998)
3.1 -- Certificate of Incorporation of Kenneth Resources, Inc. (Incorporated by reference from the 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 the 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 the 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 the 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 the Company's Amendment
No. 1 to Form S-1 Registration Statement--File No. 33-6268).
3.7 -- Form of Amendment to Amended and Restated Certificate of Incorporation of ATC Communications Group,
Inc.
4.1 -- Specimen of Share Certificate of the Company's Common Stock (Incorporated by reference from the
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)
5.1 -- Opinion of Hughes & Luce, L.L.P.
8.1 -- Opinion of Hughes & Luce, L.L.P. re tax matters.
10.8 -- Lease Agreement dated January 1, 1991 by and between Royal Tech Properties, Ltd. and Advanced
Telemarketing Corporation. (Incorporated by reference from ATC's Form 10-K Annual Report for the
year ended June 30, 1991).
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 ATC'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 ATC's Form 8-K
Current Report dated August 13, 1993).
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
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 ATC'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 ATC'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 ATC'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 ATC'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 ATC'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 ATC'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.
(Incorporated by reference from ATC's Form 10-K Annual Report for the year ended June 30, 1997).
10.20 -- Stock Pledge Agreement dated September 16, 1997 among Codinvest Limited and ATC Communications Group,
Inc. (Incorporated by reference from ATC's Form 10-K Annual Report for the year ended June 30,
1997).
10.21 -- Release and Separation Agreement by and among Advanced Telemarketing Corporation, ATC Communications
Group, Inc. and Arthur Chavoya, (Incorporated by reference from ATC's Form 10-Q for the quarterly
period ended December 31, 1997).
10.22 -- Subordination and Intercreditor Agreement between Thayer Equity Investors III, L.P. and Bank One,
Texas, N.A. dated May 4, 1998, (Incorporated by reference from ATC's Form 10-Q for the quarterly
period ended March 31, 1998).
10.23 -- Promissory Note between Advanced Telemarketing Corporation and Bank One, Texas, N.A. dated May 4,
1998, (Incorporated by reference from ATC's Form 10-Q for the quarterly period ended March 31,
1998).
10.24 -- First Amendment to Pledge Agreement between ATC Communications Group, Inc., Bank One, Texas, N.A., and
Bank One Leasing Corp. dated May 4, 1998, (Incorporated by reference from ATC's Form 10-Q for the
quarterly period ended March 31, 1998).
10.25 -- Reimbursement and Indemnification Agreement by and among Advanced Telemarketing Corporation, ATC
Communications Group, Inc., and Thayer Equity Investors III, L.P. dated May 4, 1998, (Incorporated
by reference from ATC's Form 10-Q for the quarterly period ended March 31, 1998).
10.26 -- Promissory Note by and among Advanced Telemarketing Corporation, ATC Communications Group, Inc., and
Thayer Equity Investors III, L.P. dated May 4, 1998 (Incorporated by reference from ATC's Form 10-Q
for the quarterly period ended March 31, 1998).
10.27 -- Security Agreement between Advanced Telemarketing Corporation and Thayer Equity Investors III, L.P.
dated May 4, 1998, (Incorporated by reference from ATC's Form 10-Q for the quarterly period ended
March 31, 1998).
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
10.28 -- Pledge Agreement between ATC Communications Group, Inc. and Thayer Equity Investors III, L.P. dated
May 4, 1998, (Incorporated by reference from ATC's Form 10-Q for the quarterly period ended March
31, 1998).
10.29 -- Second Warrant to Purchase Shares of Common Stock of ATC Communications Group, Inc. dated May 4, 1998,
(Incorporated by reference from ATC's Form 10-Q for the quarterly period ended March 31, 1998).
10.30 -- Registration Rights Agreement between ATC Communications Group, Inc. and Thayer Equity Investors III,
L.P. dated May 4, 1998, (Incorporated by reference from ATC's Form 10-Q for the quarterly period
ended March 31, 1998).
21.1 -- Subsidiaries of ATC Communications Group, Inc. (Incorporated by reference from ATC's Form 10-K for the
year ended June 30, 1997).
23.1 -- Consent of Hughes & Luce, L.L.P. (contained in Exhibit 5.1 and Exhibit 8.1)
23.2 -- Consent of Price Waterhouse LLP
23.3 -- Consent of Ernst & Young, LLP
23.4 -- Consent of Arthur Andersen LLP
23.5 -- Consent of Arthur Andersen LLP
23.6 -- Consent of CIBC Oppenheimer Corp.
24.1 -- Power of Attorney (contained in the signature pages hereto).
99.1 -- Form of ATC Communications Group, Inc. Proxy Card
</TABLE>
<PAGE>
EXHIBIT 3.7
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
ATC COMMUNICATIONS GROUP, INC.
ATC Communications Group, Inc., a corporation organized and existing
under the Delaware General Corporation Law (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: that the Board of Directors of the Corporation at a special
meeting of the Board of Directors called for such purpose, duly adopted
resolutions setting forth a proposed amendment to the Certificate of
Incorporation of said corporation, declaring said amendment to be advisable,
and directing that said amendment be submitted to the stockholders of said
corporation for their consideration. The resolutions setting forth the
proposed amendment are as follows:
RESOLVED, that the Board of Directors of the Corporation
hereby adopts, approves, and declares advisable a proposal to amend
the Certificate of Incorporation of the Corporation, which proposed
amendment would strike, in its entirety, Article I of the
Certificate of Incorporation of the Corporation and insert in its
place a new first paragraph of Article I, as follows:
"FIRST. The name of the Corporation is Aegis
Communications Group, Inc."
RESOLVED, that the Board of Directors of the Corporation
hereby adopts, approves, and declares advisable a proposal to amend
the Certificate of Incorporation of the Corporation, which proposed
amendment would strike in its entirety the first paragraph of
Article IV of the Certificate of Incorporation of the Corporation
and insert in its place a new first paragraph of Article IV, as
follows:
"FOURTH. The total number of shares of all classes of
capital stock that the Corporation shall have the authority
to issue is 101,000,000 shares, consisting of (a)100,000,000
shares of Common Stock, par value $0.01 per share, and (b)
1,000,000 shares of Preferred Stock, par value $.01 per share."
RESOLVED, that the Board of Directors of the Corporation
hereby adopts, approves, and declares advisable a proposal to amend
the Certificate of Incorporation of the Corporation, which proposed
amendment would strike in its entirety the first paragraph of
Article VII of the Certificate of Incorporation of the Corporation
and insert in its place a new first paragraph of Article VII, as
follows:
"SEVENTH. NUMBER, ELECTION, AND TERMS OF
DIRECTORS. Subject to the rights, if any, of
the holders of any series of Preferred Stock to
elect additional directors under circumstances
specified in a
<PAGE>
Preferred Stock designation, the number of the
directors of the Company will not be less than
two nor more than twelve and will be fixed from
time to time in the manner described in the
bylaws of the Company. The directors will be
divided into three classes designated as Class
I, Class II, and Class III. Each Class of
directors will stand for election at the 1998
annual stockholders' meeting for the following
terms: Class I directors will be elected for a
three-year term; Class II directors will be
elected for a two-year term; and Class III
directors will be elected for a one-year term.
At each following annual stockholders' meeting,
commencing with the 1999 annual stockholders'
meeting, each of the successors to the
directors of the Class whose term will expire
at such annual meeting will be elected for a
term running until the third annual meeting
succeeding his or her election and until his or
her successor has been duly elected and
qualified."
SECOND: that thereafter, stockholders of said corporation, which hold
the necessary number of shares as required by statute, duly adopted and
approved said amendment at the annual meeting of the stockholders of the
Company pursuant to Section 222 of the Delaware General Corporation Law.
THIRD: that said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Certificate of Amendment to be signed by Michael G. Santry, its Chairman
and Chief Executive Officer, as of June 30, 1998.
ATC COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By:
-------------------------------------
Michael G. Santry
President, Chairman of the Board
and Chief Executive Officer
2
<PAGE>
EXHIBIT 5.1
EXHIBIT 23.1
[Hughes & Luce, L.L.P. Letterhead]
May 28, 1998
ATC Communications Group, Inc.
5950 Berkshire Lane; Suite 1650
Dallas, Texas 75225
Ladies and Gentlemen:
We have acted as counsel to ATC Communications Group, Inc., a Delaware
corporation (the "COMPANY"), in connection with the registration under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), of up to 33,500,000
shares (the "SHARES") of the Company's common stock, par value $.01 per share
(the "COMMON STOCK"), to be issued by the Company pursuant to that certain
Agreement and Plan of Merger (the "AGREEMENT") dated as of April 7, 1998 by and
among the Company, IQI, Inc., a New York corporation ("IQI"), and ATC Merger
Sub, Inc., a New York corporation and wholly-owned subsidiary of the Company
("SUB"), as described in the Registration Statement of the Company on Form S-4
(the "REGISTRATION STATEMENT") filed with the Securities and Exchange
Commission. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Agreement.
In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records, and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity to
originals and completeness of all documents submitted to us as photostatic,
conformed, notarized, or certified copies.
Based on the foregoing, we are of the opinion that the Shares will be, if
and when issued in exchange for shares of IQI Common Stock pursuant to the terms
and conditions of the Agreement, validly issued, fully paid and nonassessable,
assuming that (i) the stockholders of the Company approve the amendment to the
Company's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 27,500,000 to 100,000,000, and
such amendment is filed with and is declared effective by the Secretary of State
of Delaware prior to any such issuance, and (ii) the Company maintains an
adequate number of authorized but unissued shares of Common Stock available for
such issuance.
<PAGE>
This opinion may be filed as an exhibit to the Registration Statement. We
also consent to the reference to this firm as having passed on the validity of
such shares of Common Stock under the caption "Legal Matters" in the prospectus
that constitutes a part of the Registration Statement. In giving this consent,
we do not admit that we are included in the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
<PAGE>
EXHIBIT 8.1
EXHIBIT 23.1
[Hughes and Luce, L.L.P. Letterhead]
May 28, 1998
ATC Communications Group, Inc.
5950 Berkshire Lane; Suite 1650
Dallas, Texas 75225
Ladies and Gentlemen:
We have acted as counsel for ATC Communications Group, Inc., a Delaware
corporation ("PARENT"), and this opinion is being delivered to you pursuant
to Section 6.02(h) of the Agreement and Plan of Merger (the "AGREEMENT"),
dated as of April 7, 1998, among Parent, IQI, Inc., a New York corporation
(the "COMPANY") and ATC Merger Sub, Inc., a New York corporation and
wholly-owned subsidiary of Parent ("SUB"). Pursuant to the Agreement, Sub
will merge with and into the Company (the "MERGER") and the Company will
become a wholly-owned subsidiary of Parent. All capitalized terms not
otherwise defined herein shall have the meanings assigned to them in the
Agreement.
In rendering this opinion, we have examined executed originals,
counterparts or copies identified to our satisfaction as being true copies of
the Agreement, the Joint Proxy Statement/Prospectus of Parent and Company
filed pursuant to Section 14(a) of the Securities Exchange Act of 1934 (the
"PROXY STATEMENT/PROSPECTUS"), and each of the other documents and agreements
specifically referenced in both the Agreement and the Proxy
Statement/Prospectus (collectively, the "REORGANIZATION DOCUMENTS"). In
addition, we have relied upon certain representations made by officers and
employees of Parent and of Company, including those contained in the Merger
Agreement and in letters to us by Parent and Company. Where such
representations are made to the best knowledge and belief of the person
making such representations, we have assumed the facts to be as so
represented. Our opinion is conditioned on the initial and continuing
accuracy of the statements, representations, and covenants contained in the
documents referred to above, and we have not independently verified the
accuracy or completeness of such statements, representations, and covenants.
Based upon the foregoing and subject to the assumptions, qualifications
and limitations set forth herein, we are of the opinion that for U.S. Federal
income tax purposes, the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE") and that, accordingly, no gain or loss will be recognized by the
Company, Parent or Sub as a result of the Merger.
<PAGE>
The foregoing opinions are subject to the following additional
assumptions, qualifications, and limitations:
(a) We have assumed: (i) that each transaction contemplated by the
Reorganization Documents will be closed in accordance with the terms of such
Reorganization Documents without modification or waiver; (ii) that the
Reorganization Documents constitute the only Reorganization Documents containing
the substantive terms of such transactions; and (iii) that the Reorganization
Documents have been duly authorized, executed and delivered by all the parties
thereto and are valid and legally enforceable obligations of each of the parties
thereto.
(b) This opinion is based upon present Federal income tax law, including
relevant statutes, regulations, and interpretations thereof by the Internal
Revenue Service and relevant courts, all of which are subject to change at any
time with retroactive effect.
(c) This opinion letter is solely for your information and benefit and is
not to be quoted or referred to in whole or in part by any other person without
our prior written consent.
(d) This opinion letter is limited to the matters stated herein as of the
date hereof and does not address any other tax consequences that may result from
the Merger or any transaction undertaken in connection with the Merger. We
disavow any obligation to update this opinion letter or advise you of any
changes in our opinions in the event of changes in applicable law or facts
becoming effective after the date hereof or of any additional or newly
discovered information that is brought to our attention.
We hereby consent to the filing of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm in the "The Proposed
Merger -- Certain Federal Income Tax Consequences" and "Legal Matters" sections
of the Proxy Statement/Prospectus.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of our report dated September
29, 1997, except as to Notes 7, 12 and 15, which are as of April 24, 1998,
relating to the financial statements of ATC Communications Group, Inc., which
appears in such Proxy Statement/Prospectus. We also consent to the reference to
us under the heading "Experts" in such Proxy Statement/Prospectus.
/s/ Price Waterhouse LLP
Dallas, Texas
May 27, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 17, 1998, with respect to the consolidated
financial statements of IQI, Inc. and our report dated January 16, 1998, with
respect to the financial statements of InterServ Services Corporation, included
in the Registration Statement and related Prospectus of ATC Communications
Group, Inc.
Our audits also included the financial statement schedule of IQI, Inc.
listed in Item 21(b). This schedule is the responsibility of IQI's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 27, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated January 19, 1998 and March 6, 1997 on the financial statements of
InterServ Services Corporation as of July 11, 1997 and December 31, 1996 and
1995, respectively, and to all references to our Firm included in or made a part
of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 27, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the consolidated financial statements of Lexi International, Inc. as
of September 30, 1996, 1995 and 1994, and for the fiscal years then ended, and
the reference to our report on the consolidated financial statements of Lexi
International, Inc. as of December 31, 1996, and for the six weeks then ended
(not included herein), and to all references to our Firm included in or made a
part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
May 27, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF CIBC OPPENHEIMER CORP.
We hereby consent to the use of our name, to the summarization of our
opinion dated April 7, 1998 and to the other references to us in the Joint Proxy
Statement/Prospectus of ATC Communications Group, Inc. and IQI, Inc. and the
filing of such opinion as an exhibit to this Registration Statement on Form S-4
of ATC Communications Group, Inc. By giving such consent, we do not thereby
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "expert" as used in the Securities Act
of 1993, as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, or are within the class of persons whose
consent is required thereunder.
/s/ CIBC OPPENHEIMER CORP.
New York, New York
May 28, 1998
<PAGE>
Exhibit 99.1
<PAGE>
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
ATC COMMUNICATIONS GROUP, INC.
PROXY PROXY
BOARD OF DIRECTORS PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS AT
10:00 A.M., TUESDAY, JUNE 30, 1998
THE OFFICES OF PAUL, HASTINGS, JANOFSKY & WALKER LLP
399 PARK AVENUE, 31ST FLOOR, NEW YORK, NY 10022
The undersigned stockholder of ATC Communications Group, Inc. (the "Company")
hereby appoints Michael G. Santry and Jerry L. Sims, Jr., or either of them,
as proxies, each with full powers of substitution, to vote the shares of the
undersigned at the above-stated Annual Meeting and at any adjournment(s)
thereof:
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED
IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A CHOICE
IS NOT INDICATED WITH RESPECT TO ITEMS (1) through (7), THIS PROXY WILL BE
VOTED "FOR" SUCH ITEMS. THE PROXIES WILL USE THEIR DISCRETION WITH RESPECT TO
ANY MATTER REFERRED TO IN ITEM (8). THIS PROXY IS REVOCABLE AT ANY TIME
BEFORE IT IS EXERCISED.
Receipt herewith of the Company's Annual Report and Notice of
Meeting and Proxy Statement, dated June 1, 1998, is hereby acknowledged.
(PLEASE SIGN ON THE REVERSE SIDE)
<PAGE>
ATC COMMUNICATIONS GROUP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
[ ]
<TABLE>
<S> <C> <C> <C>
(1) Election of Directors: FOR all nominees listed WITHHOLD AUTHORITY
William G. Moore (Class I), Darryl D. Pounds (Class I), Peter V. below (except as provided to vote for all
Ueberroth (Class I), Drew Lewis (Class I), Michael G. Santry (Class to the contrary below) nominees listed below
II), Matthew S. Waller (Class II), Frederic V. Malek (Class II), Paul G. / / / /
Stern (Class II), David L. Malcolm (Class III), Daniel H. Chapman
(Class III), Stephen A. McNeely (Class III), Edward Blank (Class III)
(INSTRUCTION: To withhold authority to vote for any individual
nominee(s), write that nominee's name on the space provided below):
- -----------------------------------------------------------------------
(2) Approval of the Merger of ATC Merger Sub, Inc. with and into IQI, Inc.: FOR AGAINST ABSTAIN
/ / / / / /
(3) Approval of an amendment to the ATC Amended and Restated Certificate of FOR AGAINST ABSTAIN
Incorporation to increase the number of authorized shares of ATC common / / / / / /
stock, $.01 par value, from 27,500,000 to 100,000,000:
(4) Approval of an amendment to the ATC Amended and Restated Certificate of FOR AGAINST ABSTAIN
Incorporation to change the name of the Company to "Aegis Communications / / / / / /
Group, Inc.":
(5) Approval of an amendment to the ATC Amended and Restated Certificate of FOR AGAINST ABSTAIN
Incorporation classifying the board of directors into three classes of / / / / / /
four directors each:
(6) Approval of the ATC 1998 Stock Option Plan: FOR AGAINST ABSTAIN
/ / / / / /
(7) Ratification of Price Waterhouse LLP, independent public FOR AGAINST ABSTAIN
accountants, to serve as the Company's independent / / / / / /
auditors.
(8) On any other business that may properly come before the meeting; hereby
revoking any proxy or proxies heretofore given by the undersigned.
Dated , 1998
---------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
(Signature of Stockholder(s))
(Joint owners must EACH sign. Please sign EXACTLY as your name(s) appear(s) on this card.
When signing as attorney, trustee, executor, administrator, guardian or corporate officer,
please give your FULL title.)
PLEASE SIGN, DATE AND MAIL TODAY.
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