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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) for the fiscal year ended June
30, 1998.
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period
from ______________ to _______________
Commission file number: 0-14315
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AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
7880 BENT BRANCH DRIVE, SUITE 150, IRVING, TEXAS 75063
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(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (972) 830-1800
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes /X/ No / /
----- -----
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 18, 1998 was approximately $64.6 million.
As of September 18, 1998, 52,287,398 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Item 2 of this report.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Aegis Communications Group, Inc. (hereinafter referred to as "Aegis" or
the "Company") is a leading provider of outsourced telecommunications-based
marketing, customer service and call center management services in the United
States. The Company specializes in the execution and management of large
volume call handling requirements for major U.S. corporations in a variety of
industries. Aegis' operations are technology driven through its advanced
data and communications systems which permit real-time interface with
clients' host systems. The Company believes it competes on the basis of, and
derives its competitive advantage from, four primary differentiators: (i)
providing consistent and superior service; (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.
The Company was incorporated in Delaware on August 2, 1985 under the
name of Kenneth Resources, Inc. and was known as National Reference
Publishing, Inc. until it changed its name to NRP, Inc. in July 1988; from
July 1988 until April 1996, the Company was known as NRP, Inc.; and from
April 1996 until July 1998, the Company was known as ATC Communications
Group, Inc. The Company's headquarters are located at 7880 Bent Branch
Drive, Suite 150, Irving, Texas 75063, and its telephone number is (972)
830-1800. Unless the context requires otherwise, references to the Company
herein include its consolidated subsidiaries.
THE MERGER
On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC"), completed the acquisition of IQI, Inc., a New York corporation
("IQI"). The acquisition was effected through the merger (the "Merger") of
ATC Merger Sub, Inc., a New York corporation and wholly-owned subsidiary of
the ATC ("Sub"), with and into IQI pursuant to an Agreement and Plan of
Merger dated as of April 7, 1998 (the "Merger Agreement") by and between ATC,
Sub and IQI.
Pursuant to the Merger Agreement, each former holder of common stock,
$.001 par value, of IQI ("IQI Common Stock") received, in exchange for each
such share, 9.7513 shares of the common stock, par value $0.01 per share, of
the Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of IQI Common Stock and IQI stock options and warrants
in a tax-free exchange. The acquisition has been accounted for as a reverse
purchase, meaning that for accounting purposes, IQI is the surviving
corporation and is treated as having acquired ATC in a purchase accounting
transaction. Effective upon the Merger, the Company formally changed its name
to Aegis Communications Group, Inc. and its Nasdaq National Market System
symbol to "AGIS".
At the Company's annual meeting of stockholders held on July 9, 1998,
the stockholders elected a new board of directors comprised of six nominees
of ATC and six nominees of IQI, with Michael G. Santry of ATC and Paul G.
Stern of IQI as Co-Chairmen of the board. Effective with the Merger, the
Company also amended its bylaws to require the approval of seven directors
for certain transactions. Although management expects that the board of
directors of Aegis 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. See "Outlook and Uncertainties -
New Management."
2
Certain stockholders who, in the aggregate, own more than a majority of
the voting stock of Aegis 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 Aegis capital stock in
favor of the nominees to the board of directors of Aegis selected by the
representative of the other party's stockholder group.
ADDITIONAL INFORMATION CONCERNING IQI AND THE MERGER IS SET FORTH IN THE
ATC/IQI JOINT PROXY STATEMENT/PROSPECTUS (THE "PROXY STATEMENT") DATED JUNE
1, 1998. FOR A DISCUSSION OF IQI'S BUSINESS, PLEASE REFER TO PAGES 117
THROUGH 125 OF THE PROXY STATEMENT.
Unless otherwise noted or required by the context, the following is a
discussion of ATC's historical business.
SERVICES AND STRATEGY
The Company designs, manages and conducts large-scale
telecommunications-based, outbound and inbound marketing and customer service
programs. These programs feature live, knowledgeable operators provided on
an outsourced basis to large U.S. corporations in a wide variety of
industries. Additionally, the Company manages both inbound and outbound call
center facilities for clients under multi-year contracts. Such call center
management applications usually require the development and licensing of
proprietary software systems. Aegis does not engage in any form of outbound
calling that uses computerized voice presentations or requires unsolicited
financial requests, nor is Aegis engaged in the "900" number business.
Aegis 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, Aegis can enhance and add value to its clients' existing
marketing and customer service programs.
Aegis' 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, Aegis offers outbound services as
well. For the fiscal year ended June 30, 1998, approximately 75% of ATC's
revenues were generated from inbound teleservices, while the remaining 25%
were generated by outbound teleservices. On a pro forma basis accounting for
the Merger as if it had occurred on January 1, 1998, Aegis' revenue mix for
the six months ended June 30, 1998 was approximately 34% inbound
teleservices, 54% outbound teleservices and 12% marketing research.
OPERATIONS
As of June 30, 1998, preceding the Merger, ATC operated or managed six
fully-automated client service centers comprising approximately 3,245
production workstations located in the Dallas metropolitan area, Chicago and
Joplin, Missouri. At September 18, 1998, following the Merger, Aegis had
over 6,000 production workstations in its 26 client service centers and 10
marketing research facilities.
Seven Rockwell Galaxy GVS 3000 Automatic Call Distributors interfaced
with multiple Data General System microprocessors are utilized to operate
Aegis' call centers. The data system itself is based on an open architecture
UNIX operating protocol supported by a sophisticated database
3
manager. This advanced data system allows the Company to interface real-time
and seamlessly with the client's host systems and provides the flexibility
that enables Aegis to deliver solutions rapidly 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. Aegis
also maintains a substantial staff of software engineers that creates
customized software applications for its clients and responds quickly to
changing client needs. Aegis' operations are further enhanced by the use of
universal workstations that can automatically handle either inbound or
outbound call activity. Such technology permits Aegis to offer productivity
enhancements associated with "call blending".
The Company 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, Aegis places a
heavy emphasis on the training and quality control processes. System-wide,
Aegis has dedicated in excess of 30,000 square feet to these functions.
These areas are equipped with workstations for live role playing by training
classes. Currently, the Company employs a large staff of trainers dedicated
to teaching the details of client programs to Aegis' 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 Aegis' philosophy and
culture. Aegis conducts both primary and recurrent training for all
representatives which, depending on the complexity of the client program, can
require up to six weeks to complete. The Company's training curriculum is
developed by professional experts in adult learning methodologies and
includes a "hands-on" PC lab experience. This attentiveness to training
enables the Company to perform an assortment of duties when handling inbound
and outbound calling programs. Quality control is measured both
quantitatively and qualitatively through multiple processes with different
reporting lines in the Company. The Company and its clients monitor the
Company's marketing and service representatives for strict compliance with
the client's standards and to maintain quality and efficiency. In many
instances, quality is evaluated and communicated on a daily basis.
INDUSTRY AND COMPETITION
The telecommunications-based marketing, customer service and call center
management services industry is highly fragmented and is comprised of a large
number of in-house and independent organizations. The domestic 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 $85 billion in 1996. 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 an
approximately 16% compound annual growth rate through 2003. With the
proliferation of toll-free "800" and "888" numbers, the telephone is becoming
the principal means of contact between companies and their customers;
however, historically only a small percentage of these expenditures have been
outsourced. The Company believes that large corporations will increasingly
outsource their telecommunications-based marketing and customer service
activities in order to concentrate their internal resources on their core
competencies and to access the quality and cost effectiveness available from
outsourced service providers. The market includes many non-captive outsourced
services providers and is very competitive and highly fragmented.
Competitors range in size from very small firms offering specialized
applications to large, full-service companies with multiple, high volume call
centers, including APAC Teleservices, Inc., Convergys Corp., ICT Group, Inc.,
National TechTeam, Inc., Precision Response Corp., RMH Teleservices, Inc.,
Sitel Corp., Sykes Enterprises, Inc., TeleSpectrum Worldwide, Inc., TeleTech
Holdings, Inc. and West TeleServices, Inc. The Company also competes against
the inhouse call center operations of clients and prospective clients. The
Company believes the principal competitive factors differentiating outsourced
service providers are: (i) a reputation for quality results; (ii) price
competitiveness; (iii) technological expertise; and (iv) flexibility in
responding rapidly to the client's sales, marketing and customer service
needs.
4
MARKETING OF SERVICES
Aegis seeks to differentiate itself from its competitors through its
emphasis on quality and service to the client, its technological capabilities
and its flexibility to meet and enhance the client's changing requirements.
The Company seeks to develop and maintain long-term relationships with its
clients and targets its marketing efforts towards large corporations in
selected industries that utilize telecommunications as an integral, ongoing
element in their core marketing and/or customer service strategy. The
Company believes such corporations possess the greatest potential for
recurring revenue growth and their call handling requirements demand the
sophistication, volume and quality requirements to capitalize effectively on
Aegis' technology and client support infrastructure. The Company seeks new
business by responding to requests for proposals, client and consultant
referrals and by targeting potential new clients. Additionally, new business
is obtained by identifying additional needs of existing clients and
cross-selling the Company's services to meet those needs.
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. The Company can not 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 Aegis 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 Aegis or their respective clients in the future or significantly
increase the cost of regulatory compliance.
5
REVENUES AND SEASONAL NATURE OF BUSINESS
The Company's revenues are affected by the timing and magnitude of its
clients' marketing programs and the commencement of new programs.
Additionally, expenses incurred to support client programs are affected by
such timing; thus, the Company experiences and expects to continue to
experience quarterly variations in revenues and operating results. Although
the business is not seasonal in nature, historically, Aegis 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.
PERSONNEL AND TRAINING
The Company believes a key component of its success is the quality of
its employees. Therefore, the Company is continually refining its systematic
approach to hiring, training and managing qualified personnel. The Company
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. The Company
believes that its relatively high proportion of full-time employees provides
a more stable work force and reduces the Company's recruiting and training
expenditures. At each call center, the Company utilizes a management
structure designed to ensure that its telephone service representatives are
properly supervised, managed and developed.
RELIANCE ON MAJOR CLIENTS
A significant portion of ATC's historic revenues has been derived from
relatively few clients. In fiscal 1998, approximately 26.6% of the Company's
revenues originated from American Express, 18.8% from U S West
Communications, 18.5% from AT&T and 11.7% from Universal Card. In fiscal
1997, the Company's four largest clients, AT&T, American Express, U S West
Communications and Universal Card accounted for approximately 43.9%, 19.0%,
8.6% and 6.1% of revenues, respectively. As a result of the reorganization
of its telemarketing efforts, the Company's historically largest client
negotiated a price reduction in certain of its programs and significantly
reduced its service volumes during the fiscal year ended June 30, 1998.
QUALITY ASSURANCE
Because the Company's services involve direct contact with its client's
customers and sale prospects, its reputation for quality service is critical
in acquiring and retaining clients. Therefore, the Company and its clients
monitor the Company's client service representatives for strict compliance
with the client's script and to maintain quality and efficiency. The Company
also regularly measures the quality of its services by benchmarking such
factors as sales per hour and level of customer complaints. The Company's
information systems enable it 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 the Company's clients to modify or enhance an ongoing campaign to
improve its effectiveness.
Since the Company's client service representatives deal directly with
its clients' customers and sales prospects, the Company places a heavy
emphasis on its training and quality control process. The Company has a
training staff at each facility dedicated to conducting both primary and
recurrent training for all client service representatives. The Company
employs a quality control staff at each facility that measures quality on
both a quantitative and qualitative basis. This attentiveness to training and
customer
6
service enables the Company's client service representatives to perform a
variety of highly complex and proprietary functions for its clients.
EMPLOYEES
As of June 30, 1998, ATC employed approximately 4,128 persons including
3,679 client service representatives. As of August 31, 1998, following the
Merger, the Company employed approximately 9,400 people including more than
8,300 client service representatives. The Company believes its relationship
with its employees is good.
ITEM 2. PROPERTIES
The Company's principal executive offices and operational and
administrative headquarters are located in a 23,333 square foot building in
Irving, Texas that is leased by the Company. This lease expires on December
31, 2003. The Company also maintains office space in Dallas, Texas containing
approximately 4,170 square feet that is occupied pursuant to a lease expiring
November 30, 2001. All of the Company's facilities are occupied pursuant to
various lease arrangements, except the Chicago facility, which is owned by
the client and is occupied by the Company at the client's expense. As of
June 30, 1998, the Company performed its services in the facilities listed
below:
CLIENT SERVICE CENTERS
LEASE SQUARE PRODUCTION
LOCATION EXPIRATION DATE FOOTAGE WORKSTATIONS
- ------------------------------------- --------------- ------- ------------
Addison (Dallas), Texas June 30, 1999 90,000 1,214
Chicago, Illinois owned by client n/a 69
Garland (Dallas), Texas December 31, 1998 12,963 236
Irving (Dallas), Texas (2 facilities) December 31, 2003 83,825 1,390
Joplin, Missouri February 1, 2008 33,055 336
------- -----
219,843 3,245
------- -----
------- -----
The Company believes it can extend the leases at these locations or
relocate the facilities at terms comparable with its current lease
obligations. While the Company's current capacity is sufficient to handle its
current production demands, as the Company's growth continues, additional
call center facilities may be needed.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its businesses, and
as discussed below, neither the Company nor its subsidiaries are parties to,
nor are their properties the subject of, any material pending legal
proceedings. From time to time, the Company is involved in litigation
incidental to its business. The Company believes that such litigation,
individually or in the aggregate, is not likely to have a material adverse
effect on the Company'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
7
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 in the Merger was 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. The Company and
its board have determined that the case is without merit, and each intends to
defend itself against the claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on July 9, 1998, at
which there were 16,601,867 shares present or represented by proxy, which was
equal to approximately 75.9% of the shares entitled to vote. At such
meeting, the following matters were approved by the requisite vote:
1. The Merger of Sub with and into IQI, pursuant to the terms and subject
to the conditions of the Merger Agreement, which resulted in IQI
becoming a wholly-owned subsidiary of ATC, was approved by the
affirmative vote of 5,593,576 shares, with 145,451 shares voting
against, 42,155 shares abstaining and 10,820,685 broker non-votes;
2. 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 was approved
by the affirmative vote of 15,916,448 shares, with 587,867 shares
voting against, 97,522 shares abstaining and no broker non-votes;
3. An amendment to the ATC Charter changing the name of the company from
ATC Communications Group, Inc. to "Aegis Communications Group, Inc."
was approved by the affirmative vote of 16,267,433 shares, with
251,827 shares voting against, 82,607 shares abstaining and no broker
non-votes;
4. The ATC 1998 Stock Option Plan was approved by the affirmative vote of
4,510,023 shares, with 1,106,253 shares voting against, 164,906 shares
abstaining and 10,820,685 broker non-votes;
5. The selection of PricewaterhouseCoopers, LLP to serve as ATC's
independent auditors for the 1998 fiscal year was ratified by the
affirmative vote of 16,459,883 shares, with 65,256 shares voting
against, 76,728 shares abstaining and no broker non-votes; and
6. The following board of directors of the Company were elected to serve
until each of their respective successors shall have been duly elected
and qualified. The number of votes cast for and withheld for each
director were as follows:
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VOTES CAST
------------------------
NOMINEE FOR WITHHELD
- ----------------- ---------- --------
Michael G. Santry 16,293,071 308,796
Paul G. Stern 16,325,067 276,800
Stephen A. McNeely 16,325,067 276,800
Matthew S. Waller 16,325,067 276,800
Edward Blank 16,325,067 276,800
Daniel H. Chapman 16,325,067 276,800
Drew Lewis 16,325,067 276,800
David L. Malcolm 16,325,067 276,800
Frederic V. Malek 16,325,067 276,800
William G. Moore, Jr. 16,325,067 276,800
Darryl D. Pounds 16,293,071 308,796
Peter V. Ueberroth 16,325,067 276,800
In addition, at the annual meeting, the proposed amendment to the ATC
Charter to classify the board of directors into three classes of four
directors each failed, with 5,039,983 shares voting for, 785,785 shares
voting against, 113,251 shares abstaining and 10,662,848 broker non-votes.
Such matter required a majority vote of all shares eligible to vote at the
annual meeting rather than a simple majority of votes cast.
9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock, $.01 par value per share (the "Common
Stock"), trades on the Nasdaq National Market System ("Nasdaq NMS") under the
symbol "AGIS". Until July 13, 1998, the Common Stock traded under the symbol
"ATCT". As of September 18, 1998, there were approximately 52,287,398 shares
of Common Stock outstanding held by approximately 796 holders of record.
The table below lists the range of high and low closing prices for the
Company's Common Stock as reported by the Nasdaq NMS for the two-year period
ended June 30, 1998 and the subsequent interim period.
Fiscal Year Ended June 30, 1997 High Low
- ------------------------------- ---- ---
First Quarter 19 3/4 11 1/4
Second Quarter 26 1/4 11 3/8
Third Quarter 15 5
Fourth Quarter 6 5/8 2 9/16
Fiscal Year Ended June 30, 1998 High Low
- ------------------------------- ---- ---
First Quarter 5 9/16 4
Second Quarter 4 1/8 1 9/32
Third Quarter 2 3/4 1 3/8
Fourth Quarter 3 3/16 1 19/32
Interim Period from July 1, 1998 High Low
- -------------------------------- ---- ---
through September 18, 1998 3 1 7/8
The above quotations represent prices between dealers and do not include
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
DIVIDENDS
To date, the Company has not declared a cash dividend on its Common
Stock. The Company intends to retain any earnings for use in the operation
and expansion of its business, and therefore does not anticipate declaring a
cash dividend in the foreseeable future. The Company has accrued an annual
dividend of $0.36 per share on its 29,778 outstanding shares of Series B
Preferred Stock. Under the Credit Agreement, the Company and its subsidiaries
are prohibited from paying dividends on their capital stock until all the
bank's commitments have terminated and all the Company's and its
subsidiaries' obligations under the Credit Agreement have been satisfied.
10
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth certain selected consolidated historical
financial data for ATC and its subsidiaries for the last five years. This
information should be read in conjunction with Item 7. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes included elsewhere
herein.
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------ -----
(In thousands except per share and operating data)
STATEMENTS OF OPERATIONS DATA
Revenues (1) $37,447 $61,354 $94,314 $97,629 $91,585
Gross profit 10,586 18,239 31,150 29,347 23,743
SG&A expenses 8,134 13,246 18,035 22,847 24,102
Depreciation and amortization 1,113 2,238 2,938 3,618 4,276
Operating income (loss) 1,339 2,755 10,177 2,882 (4,635)
Interest expense, net 819 858 759 498 889
Litigation settlement - - - - 1,900
Income (loss) from continuing operations before
income taxes 520 1,897 9,418 2,384 (7,424)
Net income (loss) from continuing operations (2) 340 1,445 5,850 1,429 (4,861)
Net income (loss) (3) 2,996 1,335 5,850 1,429 (4,861)
Diluted earnings (loss) from continuing
operations per share (2) $ 0.02 $ 0.06 $ 0.25 $ 0.06 $ (0.23)
Diluted earnings (loss) per share (2) $ 0.21 $ 0.05 $ 0.25 $ 0.06 $ (0.23)
Weighted average number of common and
common equivalent shares outstanding 13,685 18,441 21,177 22,150 21,483
OPERATING DATA
EBITDA (4) $ 2,451 $ 4,992 $13,114 $ 6,500 $ (359)
Net cash provided by (used in) operating
activities (192) 5,279 732 4,067 (3,558)
Net cash provided by (used in) investing
activities 1,589 (4,456) (2,521) (3,248) (3,091)
Net cash provided by (used in) financing
activities 1,878 (3,508) 1,031 (1,909) 6,312
Client service center facilities at end of
period 5 6 6 6 6
Production workstations at end of period 1,472 2,946 3,275 3,238 3,245
AS OF JUNE 30,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------ -----
(In thousands)
BALANCE SHEET DATA
Working capital $ 5,436 $ 2,638 $ 9,383 $15,080 $ 5,444
Total assets 24,261 25,357 37,780 41,223 48,338
Long-term obligations, less current maturities 3,142 3,579 2,455 4,754 3,471
Total liabilities 13,249 13,120 18,338 12,602 25,495
Shareholders' equity 11,012 12,237 19,442 28,621 22,843
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
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(1) Includes revenues generated by the teleservices subsidiary only; sales of
discontinued operations are omitted.
(2) Includes a $1,900 litigation settlement in fiscal 1998.
(3) Includes (i) in fiscal 1994 and 1995, income (loss) from operations of
discontinued business segments of $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) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization and litigation settlement
reserve. 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.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a percentage of
revenues for the periods indicated:
YEAR ENDED JUNE 30,
---------------------------------
1996 1997 1998
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of services 67.0% 69.9% 74.1%
----- ----- -----
Gross margin 33.0% 30.1% 25.9%
Selling, general and administrative expenses 19.1% 23.4% 26.3%
Depreciation and amortization 3.1% 3.7% 4.7%
----- ----- -----
Total expenses 22.2% 27.1% 31.0%
----- ----- -----
Operating income (loss) 10.8% 3.0% (5.1%)
Interest expense 0.9% 0.6% 1.1%
Interest and other income 0.1% 0.1% 0.2%
Litigation settlement - - 2.1%
----- ----- -----
Income (loss) before income taxes 10.0% 2.5% (8.1%)
Income tax expense (benefit) 3.8% 1.0% (2.8%)
----- ----- -----
Net income (loss) 6.2% 1.5% (5.3%)
----- ----- -----
----- ----- -----
FISCAL 1998 VS. FISCAL 1997
The Company experienced a net loss of $4.9 million, or 5.3% of revenues of
$91.6 million, for the fiscal year ended June 30, 1998, versus net income of
$1.4 million, or 1.5% of revenues of $97.6 million, earned in fiscal 1997.
Excluding a $1.9 million litigation settlement ($1.254 million, net of taxes),
net loss was $3.6 million, or 3.9% of revenues, for fiscal 1998 as compared to
net income of $1.4 million, or 1.5% of revenues, in fiscal 1997.
Revenues decreased $6.0 million, or 6.1%, during the fiscal year ended June
30, 1998 as compared to revenues generated in fiscal 1997. This decrease in
revenues was due primarily to a price reduction and decreases in service volumes
from the Company's historically largest client. Revenue from this client
declined approximately $25.9 million, or 60.4%, for the fiscal year ended June
30, 1998 versus the comparable prior year period.
Approximately 18.5% of the Company's revenues during the fiscal year ended
June 30, 1998 were generated by the Company's historically largest client as
compared to 43.9% in the fiscal year ended June 30, 1997. Excluding this
client, revenues increased approximately $19.8 million, or 36.2%, in the fiscal
year ended June 30, 1998 versus the prior year period. The Company's three
largest clients accounted for approximately 63.9% of the Company's revenues
during the fiscal year ended June 30, 1998 as compared to approximately 71.5% in
the prior year period.
13
During the fiscal year ended June 30, 1998, the Company signed a contract
extension with one of its large telecommunications clients, signed a long-term
renewal of its existing agreement with Western Union Financial Services and
entered into the third extension of the Company's long-standing relationship
with the Chicago Regional Transit Authority ("RTA"). The Company also was
awarded a renewal of its agreement with Integrion Financial Network, a provider
of interactive banking and electronic commerce services to financial
institutions in the United States and Canada owned equally by 18 banks, Visa
U.S.A. and IBM Corp.
During the first quarter of fiscal 1998, the Company began providing
services to a new Internet customer and four new telecommunications clients.
During the quarter ended December 31, 1997, the Company entered into new
business agreements with two regional Bell operating companies ("RBOCs"), the
Interconnect division of U S West Communications Group and an RBOC in the
Northeast. The Company did not provide services to the northeastern RBOC in
fiscal 1998 although the Company began providing services to U S West's
Interconnect division. In addition, the Company signed an agreement with and
began providing customer acquisition, customer care and activation services to
Omnipoint Communications, a leading provider of digital PCS communications
services in the New York and Philadelphia metropolitan areas. During the
quarter ended March 31, 1998, the Company entered into a new contract with and
began providing customer acquisition services to America Online, Inc., a world
leader in branded interactive services and content. During the quarter ended
June 30, 1998, the Company signed an agreement to provide outbound customer
acquisition services to a large diversified financial services company that
provides consumer finance, commercial leasing and finance, credit cards and
related services. The Company also entered into a new contract with and began
providing inbound customer services to a leading provider of rentable home
entertainment. In addition, the Company has been chosen by VHA, Inc., a
national healthcare alliance based in Irving, Texas, to provide inbound customer
service support for an 800 number which consumers will call to access healthcare
information.
During fiscal 1998, Pacific Bell ended its relationship with the Company as
a result of Pacific Bell's acquisition by SBC Communications Inc., an RBOC that
performs its teleservices in-house. Pacific Bell represented approximately 2.4%
of the Company's revenues in fiscal 1998.
The Company is continuing its strategy of endeavoring to secure recurring
revenues from long-term relationships with targeted, large corporate clients
that utilize telecommunications strategies as an integral, ongoing element in
their marketing and customer service programs. In addition to providing
services on an outsourcing basis, in which the Company provides all or a
substantial portion of a client's telemarketing needs, the Company also
continues to perform project-based services for certain customers.
Project-based services, however, are frequently short-term and there can be no
assurance that these clients will continue existing projects or provide new
ones.
For the fiscal year ended June 30, 1998, gross profit earned on revenues
decreased $5.6 million, or 19.1%, from fiscal 1997. For fiscal 1998, gross
margin as a percentage of revenues was 25.9% versus 30.1% for fiscal 1997. Both
the decrease in gross profit and in gross margin as a percentage of revenues for
the fiscal year ended June 30, 1998 as compared with the comparable prior year
period were due to lower capacity utilization resulting from significant
decreases in service volumes from the Company's historically largest client, a
price reduction from this client, and increased training expenses and labor
rates in the markets in which the Company has traditionally operated.
Management is continuing its efforts to improve operating efficiencies while
maintaining the Company's high quality standards.
Selling, general and administrative ("SG&A") expenses increased
approximately $1.3 million, or 5.5%, in the year ended June 30, 1998 as compared
to fiscal 1997 as a result of the recording of severance expense and other
non-recurring charges of approximately $633,000 in the Company's first fiscal
quarter, and increases in recruiting and administrative costs compared to the
prior year period.
14
SG&A expenses as a percentage of revenues increased to 26.3% in fiscal 1998
from 23.4% in fiscal 1997. Excluding the impact of non-recurring charges,
SG&A expenses were 25.6% of revenues in fiscal 1998. SG&A decreased
approximately $1.0 million, or 13.2%, in the quarter ended June 30, 1998
versus the prior year quarter. The decrease in SG&A expense in the current
year quarter was primarily the result of a reduction-in-force in operations
management and administrative which was implemented in the Company's third
quarter of fiscal 1998.
On July 29, 1998, the Company announced that it will record, in the quarter
ending September 30, 1998, a pre-tax restructuring reserve of $13.0 million in
connection with the Merger. Aegis has formulated a comprehensive restructuring
plan to integrate each of ATC's and IQI's best practices and leverage existing
infrastructure in order to achieve efficiencies and improve capacity
utilization. As such, the Company will record a restructuring reserve primarily
related to transitional costs and write-offs associated with the consolidation
of ATC's and IQI's operational and information technology infrastructures. The
charge consists of one-time write-offs of redundant hardware and software; costs
of conversion to common accounting, reporting and information technology
platforms; and consolidation of certain functions including costs to relocate
administrative offices and employees, costs to migrate certain locations,
severance and other associated expenses.
The increase in depreciation and amortization expense of $0.7 million, or
18.2%, for fiscal 1998 over fiscal 1997 is primarily the result of expansion in
the Company's operating capacity including the build-out and opening of a new
call center in Joplin, Missouri during the fiscal year ended June 30, 1998. As
a percentage of revenues, depreciation and amortization expense for fiscal 1998
was 4.7% versus 3.7% for fiscal 1997.
For the fiscal year ended June 30, 1998, net interest expense increased
$0.4 million, or 78.7%, as compared to fiscal 1997 due primarily to an increase
in interest expense related to increased utilization of the Company's working
capital line of credit.
For the 1998 fiscal year, the Company's effective tax benefit rate was
approximately 34.5%. In fiscal 1997, the Company's effective tax expense rate
was 40.1%. The decrease in the Company's effective tax rate was primarily due
to a decrease in the impact of income-based state taxes on the total income tax
rate.
FISCAL 1997 VS. FISCAL 1996
The Company earned net income from continuing operations of $1.4 million,
or 1.5% of revenues of $97.6 million, for the fiscal year ended June 30, 1997,
versus net income from continuing operations of $5.9, or 6.2% of revenues of
$94.3 million, earned in fiscal 1996.
Revenues increased $3.3 million, or 3.5%, during the fiscal year ended June
30, 1997 over revenues generated in fiscal 1996. This revenue growth was the
result of the addition of new clients and was partially offset by decreases in
the volume of services provided to certain of the Company's existing clients.
Approximately 44% of the revenues earned by the Company during fiscal 1997 and
fiscal 1996 originated from one of the Company's existing clients. During the
fourth quarter of fiscal 1997, the percentage of the Company's revenue derived
from this client declined to approximately 31% as a result of reduced volumes
and delays in certain of the client's programs while the client reevaluated and
reorganized the management of its teleservices efforts.
For the fiscal year ended June 30, 1997, gross profit earned on revenues
decreased $1.8 million, 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 the Company's largest client and a change in
business mix
15
which resulted in decreased operating efficiencies. Management continued its
efforts to improve operating efficiencies while maintaining the Company's
high quality standards. For fiscal 1997, gross margin as a percentage of
revenues was 30.1% versus 33.0% for fiscal 1996.
Selling, general and administrative ("SG&A") expenses increased $4.8
million, 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, the Company initiated an aggressive expense
reduction program, in the fourth quarter of fiscal 1997, to match expenses with
future expected revenue levels. The increase in SG&A expenses was also due in
part to approximately $1.2 million 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 $0.7 million, or
23.2%, for fiscal 1997 over fiscal 1996 was primarily the result of expansion in
the Company's operating capacity and new internal systems in fiscal 1997.
Despite the increase in whole dollars, the impact of the expansion on
depreciation and amortization expense was mitigated somewhat by the increase in
revenues. As a percentage of revenues, depreciation and amortization expense
for fiscal 1997 was 3.7% versus 3.1% for fiscal 1996.
For the fiscal year ended June 30, 1997, net interest expense decreased
$0.3 million, 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 $0.2 million in unamortized fees associated with the Company's
previous banking relationship and lower utilization of the Company's working
line of credit.
For the 1997 fiscal year, the Company's effective tax rate was
approximately 40.0%. In fiscal 1996, the Company's effective tax rate was
37.9%. The increase in the Company's effective tax rate was primarily due to
additional income-based state taxes paid.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information from the Company's
statements of cash flows for the periods indicated:
YEAR ENDED JUNE 30,
----------------------------------
1996 1997 1998
------- ------- -------
Net cash provided by (used in) operating activities $ 732 $ 4,066 $(3,558)
Net cash used in investing activities (2,521) (3,248) (3,091)
Net cash provided by (used in) financing activities 1,031 (1,909) 6,312
------- ------- -------
Net decrease in cash and cash equivalents $ (757) $(1,091) $ (337)
------- ------- -------
------- ------- -------
The Company has historically utilized cash flow from operations and
available borrowing capacity under credit facilities to meet its liquidity
needs. Despite experiencing negative cash flow from operating activities in the
fiscal year ended June 30, 1998, management believes the Company currently has
the liquidity and access to working capital to meet its near-term cash flow
demands through operating income and borrowings under the Credit Agreement.
16
During fiscal 1998, net cash provided by operating activities decreased
$7.6 million, or 187.5%, from fiscal 1997, primarily due to a pre-tax
operating loss of $4.6 million in fiscal 1998 as compared to a pre-tax
operating profit of $2.9 million in fiscal 1997 as well as a $1.9 million
litigation settlement payment incurred in the fourth quarter of fiscal 1998.
The decline in operating income was due to a $5.6 million decrease in gross
profit, a $1.3 million increase in SG&A expenses, a $0.7 million increase in
depreciation and amortization expense and a $0.5 million increase in interest
expense.
Cash used in investing activities during fiscal 1998 totaled $3.1
million, representing a 4.8% decrease from fiscal 1997. These expenditures
primarily consisted of new telecommunications equipment and information
technology hardware required in the maintenance, upgrade and expansion of the
Company's operations including the build-out of a new client service center
in Joplin, Missouri and the upgrade or replacement of workstations in the
Company's existing facilities. Capital expenditures during the last three
fiscal years totaled $9.1 million and have been funded with proceeds from
bank borrowings and excess cash from operations.
During fiscal 1998, financing activities included borrowing activity
under the Company's credit facilities, bridge financing guaranteed by Thayer
Equity Investors III, L.P. ("Thayer") and the securing of capital lease
obligations.
On June 25, 1998, a summary judgment of approximately $2.4 million,
including prejudgment interest and costs, was entered against ATC in a breach
of contract case filed by an ATC option holder in the United States District
Court, District of Kansas. At such time, the Company accrued an anticipated
settlement payment amount (the "Kansas Litigation Settlement") of $1.9
million for the quarter ending June 30, 1998. Subsequent to the end of the
1998 fiscal year, the Company settled the lawsuit for a cash payment of $1.9
million. As part of the settlement, the plaintiff also agreed to exercise its
option (granted on December 21, 1994) to acquire 225,000 shares of the
Company's common stock for $1.00 per share by September 15, 1998. In
addition, the Company obtained a full release and waiver of the plaintiff's
claims in connection with the Kansas matter.
In connection with the Merger, IQI entered into a Second Amended and
Restated Credit Agreement dated as of July 9, 1998 (the "Credit Agreement")
with The Bank of Nova Scotia ("Scotiabank") and Credit Suisse First Boston
("CSFB") whereby Scotiabank and CSFB rolled over and continued their loan
commitments to IQI aggregating $53.0 million and Scotiabank committed to
provide IQI an additional $12.0 million in revolving loans, resulting in a
total facility of $65.0 million. The proceeds of the additional loan were
used to refinance the bank indebtedness of Advanced Telemarketing
Corporation, a wholly-owned subsidiary of ATC ("Advanced"), to pay
transaction expenses, and for general corporate and working capital needs of
IQI and Advanced. As part of the amendment of the Credit Agreement, the
Company and Advanced agreed to guarantee the IQI indebtedness and grant
blanket security interests in their assets to secure repayment of the banks'
loans. The Company also pledged its shares of Advanced common stock to the
banks to secure repayment of the banks' loans.
The Credit Agreement contains various covenants that limit, among other
things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the Company and requires the operating
subsidiaries to meet certain financial covenants. Similarly, under the terms
of the Company's guaranty of its operating subsidiaries' obligations, the
Company is subject to certain covenants limiting, among other things, its
ability to incur indebtedness, enter into guaranties, and acquire other
companies. The Credit Agreement is secured by liens on the operating
subsidiaries' accounts receivable, furniture and equipment, and is guaranteed
by the Company.
17
In connection with the Merger, Thayer provided $6.8 million in
subordinated indebtedness (the "Subordinated Indebtedness") as well as a
guarantee for $2.0 million in bridge financing to assist in funding the
Company's working capital needs. In connection with the guarantee, and for
additional consideration of $110,000, the Company issued to Thayer warrants
to purchase 1,100,000 shares of the Company's Common Stock at an exercise
price 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).
On July 6, 1998, the Company received an additional financing commitment
from Thayer and certain other shareholders of IQI. Under the commitment, the
Thayer-led group agreed to lend the Company, at its election, up to an
additional $4.0 million in subordinated indebtedness at any time within 90
days after the Merger. In connection with this commitment and effective upon
the Merger, the Company issued the Thayer-led group additional warrants to
purchase up to 350,000 shares of the Company's Common Stock at an exercise
price of $2.375 per share and provided certain anti-dilution protection. The
Thayer-led group's obligation to fund the debt and the Company's obligation
to issue the warrants are subject to customary conditions. The additional
indebtedness, when and if drawn, is convertible into the Company's Common
Stock at a conversion price of $2.375 per share, the closing price of such
stock on July 2, 1998, the date the Thayer-led group agreed to the
commitment. Such debt would be in addition to, and on the same basic terms
as, the subordinated debt that Thayer had previously committed to lend to the
Company. As of September 18, 1998, the Company had drawn $1.9 million of
this commitment in connection with the payment of the Kansas Litigation
Settlement.
The Merger Agreement also contains a provision extending the maturity
date of one-half of the principal amount of the promissory note payable to
the Company by Michael G. Santry, the Company's Co-Chairman, to March 31,
1999. At August 31, 1998, the principal and accrued but unpaid interest on
the note totaled approximately $1.8 million.
The Company operates in a fast-growing, highly competitive industry. As
such, the Company 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 the Company has
traditionally operated, by opening a new 336-station client service 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 the Company's existing facilities.
Management anticipates opening new centers comparable to the Joplin facility
later in calendar 1998 and in 1999. To that end, on August 18, 1998, the
Company announced plans to open a client service center in Elkins, West
Virginia in November 1998.
In addition to traditional growth strategies, management has been
pursuing opportunities for growth through acquisition of other teleservices
companies. The Company believes that the Merger evidences management's
commitment to the Company's strategy of growth through acquisition. In its
decision to enter into the Merger Agreement, the ATC Board considered a
variety of factors, which it will also consider when evaluating future
business combinations. The factors considered included the following: (i)
the Merger should 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
18
the reduction of operational and management redundancies that should help the
Company 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; and (vi) the Merger and the cash investment
in the Company by Thayer pursuant to the Subordinated Indebtedness, which was
conditioned on the execution of the Merger Agreement, provided interim
financial support required by the Company for its working capital needs.
Due to the known risk of computational errors with respect to computer
systems utilizing dates after December 31, 1999, the Company 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 the
Company has yet to finalize its estimate of the total costs needed for Year 2000
compliance, it does not expect that these costs will have a material impact on
its results of operations and financial position. Although Aegis 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.
Although no assurances can be made in this regard, management anticipates
that, based on the Company's ability to secure such financing to date, the
Company should be able to secure debt or equity funding for its future working
capital needs, the capital equipment requirements of future call center
facilities and potential acquisition opportunities.
Management knows of no trends or uncertainties other than those mentioned
above which are expected to have a material favorable or unfavorable impact on
operating results.
OUTLOOK AND UNCERTAINTIES
Certain information in this Form 10-K may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance and any statement
of assumptions underlying any of the foregoing. Terms such as "anticipates",
"believes", "estimates", "expects", "plans", "predicts", "may", "should",
"will", the negative thereof and similar expressions are intended to identify
forward-looking statements. Such statements are by nature subject to
uncertainties and risks, including but not limited to those summarized below:
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, Aegis 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 back-office operations. In addition, each company's customers will need to
be reassured that their services will continue uninterrupted. Moreover, Aegis
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 Aegis' financial and management resources, and there can
be no assurance that such demands will not adversely affect Aegis' future
financial performance or that Aegis 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 Aegis. Implementation of Aegis'
strategy could also be affected by a number of factors beyond Aegis' control,
such as loss of personnel, the response of competitors and regulatory
developments. There can be no assurance that Aegis will be able to implement
successfully the strategies that it intends to pursue and achieve profitable
operations in the near and long term.
19
NEW MANAGEMENT
Aegis' future success depends, to a large extent, on the efforts and
abilities of the members of its management team. The Chief Executive Officer of
Aegis is Stephen A. McNeely (the former President and Chief Executive Officer of
IQI) and the Chief Financial Officer of Aegis is Matthew S. Waller (the former
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 Aegis. The need for Aegis' 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 Aegis.
In addition, at the Company's annual meeting of stockholders held on July
9, 1998, the stockholders elected a new board of directors comprised of six
nominees of ATC and six nominees of IQI, with Michael G. Santry of ATC and Paul
G. Stern of IQI as Co-Chairmen of the board. Effective with the Merger, the
Company also amended its bylaws to require the approval of seven directors for
certain transactions. Although management expects that the board of directors
of Aegis 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. See "Outlook and Uncertainties - New
Management."
Certain stockholders who, in the aggregate, own more than a majority of the
voting stock of Aegis 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 Aegis capital stock in favor of the nominees to
the board of directors of Aegis selected by the representative of the other
party's stockholder group.
INCREASED LEVERAGE; FUTURE CAPITAL REQUIREMENTS
Following consummation of the Merger, Aegis has substantially higher debt
than historical ATC. On a pro forma basis as of June 30, 1998, Aegis had
approximately $59.7 million in principal amount of senior debt outstanding and
$9.9 million in subordinated indebtedness, which results in a total debt to
total capitalization ratio of approximately 48%. Aegis' tangible net book value
on the same pro forma basis was approximately $6.4 million. The degree to which
Aegis will be leveraged could adversely affect Aegis' ability to obtain
additional financing for working capital, acquisitions or other purposes and
could make it more vulnerable to economic downturns and competitive pressures.
Aegis' 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 Credit Agreement, Subordinated
Indebtedness and cash flows from operations are insufficient to meet current or
planned operating requirements, Aegis 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 the Company's stockholders and the terms of
any debt financings are likely to contain restrictive covenants that limit
Aegis' ability to pursue certain courses of action. In addition, the terms of
the Credit Agreement will limit the Company'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, Aegis 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 Aegis' business,
financial condition and results of operations.
FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH
Aegis 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 Aegis of new and
existing clients and markets. Future growth will also depend on a
20
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 Aegis will be able to
manage expanding operations effectively or maintain or accelerate growth.
CONTROL BY PRINCIPAL SHAREHOLDER
Thayer and its affiliates beneficially own approximately 38% of the voting
stock of Aegis. As a result, Thayer will be able to exercise significant
control over the outcome of substantially all matters requiring action by Aegis'
shareholders. Such voting concentration may have the effect of discouraging,
delaying or preventing a change in control of Aegis. Moreover, stockholders
owning more than a majority of the voting stock of Aegis (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 Aegis capital stock in favor of the nominees to the board of directors
of Aegis selected by the representative of the other party's stockholder group.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of Aegis Common Stock has been, and in the future could
be, subject to significant fluctuations in response to variations in quarterly
operating results of Aegis, the depth and liquidity of the market for Aegis
Common Stock, investor perception of Aegis 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 Aegis 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 Aegis Common
Stock. From October 1, 1996 through September 18, 1998, the market price per
share of Aegis Common Stock as reported on Nasdaq National Market System reached
a high of $26 1/4 and a low of $1 3/16.
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 Aegis Common Stock prevailing
from time to time. Sales of substantial amounts of Aegis 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 Aegis
Common Stock. Although Thayer, Edward Blank and other affiliates of Aegis are
restricted from reselling their respective shares of Aegis common stock under
Rule 144 and Rule 145 of the Securities Act, certain former IQI stockholders
have the right to nominate half of the directors to the Aegis 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
Aegis 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 Aegis' revenue mix among its various service offerings. In
connection with certain contracts, Aegis could incur costs in periods prior to
recognizing revenue under those contracts. In addition, the Company must plan
its operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecast in any quarter would likely materially and adversely affect
Aegis'
21
operating results for that quarter. Historically, revenue growth has tended
to minimize significant quarterly fluctuations in the Company's business.
However, Aegis' business tends to be slower in the first and third quarters
due to client marketing programs which are typically slower in the
post-holiday and summer months.
DEPENDENCE ON KEY PERSONNEL
The success of Aegis depends in large part upon the abilities and continued
service of its executive officers and other key employees. There can be no
assurance that Aegis will be able to retain the services of such officers and
employees. The loss of key personnel could have a material adverse effect on
Aegis. In order to support its growth, Aegis 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 historic revenues has been derived from
relatively few clients. In fiscal 1998, approximately 26.6% of the Company's
revenues originated from American Express, 18.8% from U S West Communications,
18.5% from AT&T and 11.7% from Universal Card. In fiscal 1997, the Company's
four largest clients, AT&T, American Express, U S West Communications and
Universal Card accounted for approximately 43.9%, 19.0%, 8.6% and 6.1% of
revenues, respectively. As a result of the reorganization of its telemarketing
efforts, the Company's historically largest client negotiated a price reduction
in certain of its programs and significantly reduced its service volumes during
the fiscal year ended June 30, 1998. 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 Aegis'
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 Aegis' business. Although Aegis 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 Aegis.
RISKS ASSOCIATED WITH AEGIS' CONTRACTS
Aegis' 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 the
Company 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 Aegis will be able to
collect such amount or that such amount, if received, will sufficiently
compensate Aegis for its investment in the canceled program or for the revenues
it may lose as a result of early termination.
22
DEPENDENCE ON OUTSOURCING TREND AND INDUSTRIES SERVED
The Company's growth is dependent in part on continued demand for its
services prompted by the trend toward outsourcing, as well as continued demand
from the industries served by Aegis. If the interest in outsourcing wanes or
there is a significant downturn in the telecommunications, financial services,
insurance, entertainment or other industries, Aegis 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. The Company can not 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 Aegis 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
Aegis or their respective clients in the future or significantly increase the
cost of regulatory compliance.
DEPENDENCE ON LABOR FORCE
The Company's business is very labor intensive and characterized by high
personnel turnover. Although by industry standards Aegis 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 Aegis'
employees would increase Aegis' recruiting and training costs and decrease
operating efficiencies and productivity. Some of Aegis' operations, such as
insurance product sales, require specially trained employees. Growth in the
Company's business will require Aegis to recruit and train qualified personnel
at an accelerated rate from time to time. There can be no assurance that Aegis
will be able to continue to hire, train and retain a sufficient labor force of
qualified employees. A significant portion of Aegis' costs consists of wages
paid to hourly workers. An increase in hourly wages, costs of employee benefits
or employment taxes could materially adversely affect Aegis.
23
COMPETITION
The telecommunications-based marketing, customer service and call center
management services industry in which Aegis is 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, Aegis'.
Some of the Company's services also compete with direct mail, television, radio
and other advertising media. There can be no assurance that, as the
teleservices industry continues to evolve, additional competitors with greater
resources than Aegis will not enter the industry (or particular segments of the
industry) or that the Company'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 Aegis' 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 Aegis' 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 the Company attempts to monitor industry trends and respond
accordingly, there can be no assurance that Aegis will be able to anticipate and
successfully respond to such trends in a timely manner.
RELIANCE ON TECHNOLOGY; COMPUTER SYSTEMS
The Company 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.
Aegis 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. Aegis' future success will also depend in part on
its ability to continue to develop information technology solutions that keep
pace with evolving industry standards and changing client demands. In addition,
the Company'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 Aegis' business.
Telephone Service Dependence
The Company'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 Aegis' services, or any significant interruption in telephone
services, could have a materially adverse impact on Aegis.
RISK OF BUSINESS INTERRUPTION
The Company'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 Aegis experiences a temporary or permanent
interruption at one or more of its call centers, through casualty, operating
malfunction or otherwise, Aegis' business could be materially adversely affected
and Aegis may be required to pay contractual damages to some clients or allow
some clients to terminate or renegotiate their contracts with Aegis. The
Company maintains property and business interruption insurance; however, such
insurance may not adequately compensate Aegis for any losses it may incur.
24
REVENUES AND SEASONAL NATURE OF BUSINESS
The Company's revenues are affected by the timing and magnitude of its
clients' marketing programs and the commencement of new programs. Additionally,
expenses incurred to support client programs are affected by such timing; thus,
the Company experiences and expects to continue to experience quarterly
variations in revenues and operating results. Although the business is not
seasonal in nature, historically, Aegis 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.
YEAR 2000 COMPLIANCE
Due to the known risk of computational errors with respect to computer
systems utilizing dates after December 31, 1999, the Company 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 the
Company has yet to finalize its estimate of the total costs needed for Year 2000
compliance, it does not expect that these costs will have a material impact on
its results of operations and financial position. Although Aegis 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, Aegis' business or operations could be
adversely affected.
OTHER UNCERTAINTIES
Other operating, financial or legal risks or uncertainties are discussed in
the Company's Joint Proxy Statement/Prospectus or in ATC's other filings with
the Commission from time to time in specific contexts. Aegis would be subject to
general economic risks, the risk of loss of a major customer and other risks and
uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-32 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of all directors and
executive officers of the Company as of September 18, 1998, as well as all
positions and offices held by each such person and his term in each such
position or office.
Position with the Company Held
Name Age or Subsidiary Position Since
- ------------------------ ---- ---------------------------- ----------------
Michael G. Santry 50 Co-Chairman of the Board February 1986
Paul G. Stern 59 Co-Chairman of the Board July 1998
Stephen A. McNeely 51 President and Chief
Executive Officer July 1998
Director July 1998
Matthew S. Waller 35 Chief Financial Officer March 1997
Director October 1997
William F. Bergeron, Jr. 37 Chief Technology Officer December 1996
Jerry L. Sims, Jr. 37 Secretary February 1994
Senior Vice President - September 1991
Controller
Edward Blank 63 Director July 1998
Daniel H. Chapman 53 Director July 1998
Drew Lewis 66 Director July 1998
David L. Malcolm 44 Director July 1998
Frederic V. Malek 61 Director July 1998
William G. Moore, Jr. 59 Director July 1998
Darryl D. Pounds 48 Director March 1996
Peter V. Ueberroth 60 Director July 1998
MICHAEL G. SANTRY has been a director of the Company since February 1986
and Chairman of the Board since September 1996. Mr. Santry previously held
the positions of President and Chief Executive Officer of the Company from
February 1986 through September 1996 and October 1997 through July 1998, and
was Chief Financial Officer of the Company 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
26
and a director of Lakewood Financial Consultants, Inc., a privately held
corporation providing financial consulting services.
PAUL G. STERN served as Chairman of IQI from November 1996 through July
1998 and 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.
STEPHEN A. MCNEELY has been President and Chief Executive Officer of the
Company since July 1998. Prior to the Merger, he was President and CEO of
IQI from August 1997 to July 1998. 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 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.
MATTHEW S. WALLER joined the Company 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. Prior to joining
Principal, he was Chief Financial Officer of Cox Sterile Products from 1992
to 1993.
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.
JERRY L. SIMS, JR. has been Secretary of the Company since February
1994, Senior Vice President and Controller of the Company since September
1991, and was a director of the Company from November 1993 through July 1998.
EDWARD BLANK, former Vice Chairman and founder of IQI, is one of the
pioneers of the telemarketing industry. He founded IQI's predecessor company
in 1968, and, under his direction, IQI grew 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.
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.
DREW LEWIS served as Chairman and Chief Executive Officer of Union
Pacific Corporation from 1987 to 1997. Prior to that time, Mr. Lewis served
as President and Chief Operating Officer of Union Pacific Railroad from 1986
to 1987. Prior to his career with Union Pacific, Mr. Lewis served as
Chairman and Chief Executive Officer of Warner Amex Cable Communications and
served as U.S.
27
Secretary of Transportation in President Reagan's cabinet from 1981 through
1983. Mr. Lewis is a director of American Express Company, FPL Group, Inc.,
Gannett Co., Inc., Gulfstream Aerospace Corporation, Lucent Technologies and
Union Pacific Resources Group Inc. Mr. Lewis also has served as past
Chairman of The Business Roundtable.
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, Mr.
Malcolm served on the California Commission for Judicial Performance, and
from 1984 to 1995, on the California Coastal Commission.
FREDERIC V. 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, FPL Group, Northwest Airlines, CB Richard
Ellis, various PaineWebber mutual funds, Global Vacation Group, Inc. and
Choice Hotels Corp.
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).
DARRYL D. POUNDS has been a director of the Company since March 1996 and
has been a Partner 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.
PETER V. UEBERROTH IS a private investor and managing director of the
Contrarian Group, Inc. 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 Richard Ellis, Promus Hotels
Corporation and Transamerica Corporation.
Each director serves until the next annual meeting of the Company'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 the
Company.
28
CONFIDENTIAL DRAFT 09/27/98 7:30 PM
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
Furnished below is a table containing individual compensation
information on persons serving as Chief Executive Officer of the Company
during the fiscal year ended June 30, 1998 and the four other most highly
paid executive officers of the Company and its operating subsidiary whose
total annual salary and bonus amounts totaled $100,000 or more for services
rendered in all capacities during the fiscal year ended June 30, 1998.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation ----------------------
---------------------------- Awards
Other ----------------------
Annual Restricted Options/
Name and Fiscal Salary Bonus Compen- Stock SARs
Principal Position Year $ $ sation Awards (1)
- ------------------------ ---- ------- ----- ------- ---------- --------
MICHAEL G. SANTRY 1998 350,000 - - - -
Co-Chairman, Former 1997 -(2) - - - -
CEO and PResident 1996 293,750 - - - 1,000,000
ARTHUR CHAVOYA 1998 400,000 65,000 - - -
Former Chief Executive 1997 292,564(3) - - - 600,000
Officer and President 1996 - - - - -
ROBERT B. ALLEN 1998 220,000 44,000 - - -
Former Chief 1997 100,833(4) - - - 300,000
Operating Officer 1996 - - - - -
MATTHEW S. WALLER 1998 225,000 33,650 - - -
Chief Financial 1997 52,067(5) - - - 300,000
Officer 1996 - - - - -
JERRY L. SIMS, JR. 1998 130,208 18,750 - - -
Senior Vice 1997 114,792 - - - -
President-Controller 1996 90,000 - - - -
WILLIAM F. BERGERON, JR. 1998 130,000 48,625 - - -
Chief Technology 1997 112,007 25,000 - - 100,000
Officer of Advanced 1996 85,926 20,000 - - -
- ----------------------------------------------------------------------------------------
(1) In February 1993, the Company's shareholders approved the Company's 1992
Stock Option Plan (the "1992 Plan") to grant options to purchase up to
3,000,000 shares of Common Stock to key employees, officers and directors
of the Company 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, the Company's
Board of Directors approved the Company'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 Common Stock to key
employees, officers and directors of the Company and its subsidiaries.
In fiscal 1997, Mr. Chavoya, Mr. Allen, Mr. Waller and Mr.
29
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 Board of Directors set Mr. Santry's
annual base salary at $350,000. Mr. Santry is also entitled to receive
bonus compensation of up to $125,000 annually. Effective with the
Merger, Mr. Santry relinquished the roles of President and CEO and
assumed the role of Co-Chairman of the Board of the Company.
(3) The amount indicated is the salary paid to Mr. Chavoya from the
commencement of his employment with the Company, on September 5, 1996,
through June 30, 1997. Mr. Chavoya's employment agreement with the
Company 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 Agreements and Termination
of Employment Agreements."
(4) Mr. Allen joined the Company 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 the Company through June 30, 1997.
Mr. Allen's employment agreement with the Company specifies an annual
base salary of $220,000. See "Employment Agreements and Termination of
Employment Agreements."
(5) Mr. Waller joined the Company 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 the Company through June 30, 1997.
Mr. Waller's employment agreement with the Company specifies an annual
base salary of $225,000. See "Employment Agreements and Termination of
Employment Agreements."
OPTION GRANTS
On April 7, 1998, in connection with the ATC Board's approval of the
Merger and to be effective upon completion 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 were contingent upon consummation of the Merger; and (ii) J. Frank
Mermoud, a 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 were deemed vested on the closing date of the Merger and all of which
were 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 vested on the date of grant and
one-third vest on the first anniversary of the Effective Date. The options
granted to Mr. Santry vest one-third on the first, second, and third
anniversaries of the Effective Date, respectively.
The Company has no plans that provide for the granting of stock
appreciation rights.
30
COMPENSATION OF DIRECTORS
Directors of the Company receive no fees for serving on the Board of
Directors. Upon election to the Board of Directors, non-employee directors
are automatically granted non-qualified stock options to purchase 135,000
shares of Common Stock at the market price of the Common Stock on the date of
grant. All directors are entitled to reimbursement for expenses incurred for
attendance at each meeting.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
ARTHUR CHAVOYA entered into an employment agreement effective September
5, 1996, pursuant to which he served as Chief Executive Officer and
President of the Company. 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 the Company. 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 the Company 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 the Company. 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 the Company.
Mr. Chavoya relinquished the offices of Chief Executive Officer and
President of the Company, effective October 1, 1997, and subsequently entered
into a release and separation agreement with the Company which called 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 at $16.19 per
share to options to purchase, at $4.00 per share, 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 the
Company. 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 the Company. The employment agreement provides for
the payment to Mr. Allen of nine (9) months of compensation if the Company
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 the Company. Mr. Allen's options
vest immediately in the event of a change in control (as defined in the
employment agreement) of the Company. Effective with the Merger, Mr. Allen
assumed the role of Senior Vice President - General Manager for the Company's
Central Region Operations.
MATTHEW S. WALLER entered into an employment agreement effective March
24, 1997, pursuant to which he serves as Chief Financial Officer of the
Company. 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 the Company. The employment agreement provides for
the payment to Mr. Waller of one times his annual compensation if the Company
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 the Company. Mr.
Waller's options vest immediately in the event of a change in control (as
defined in the employment agreement) of the Company.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
J. Michael Allred and Darryl D. Pounds served on Aegis' compensation
committee during the fiscal year ended June 30, 1998. Neither Mr. Allred nor
Mr. Pounds is a current officer or employee of Aegis.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of September 18, 1998, certain
information with respect to the beneficial ownership of Common Stock by (i)
each person known by the Company to be a beneficial owner of five percent
(5%) or more of the Company's Common Stock, (ii) each director and each of
the five executive officers listed in the Summary Compensation Table above
who beneficially own Common Stock of the Company, and (iii) all officers and
directors who beneficially own Common Stock as a group:
Amount
Name and and Nature
Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)(2)
- -------------------------------------- ------------- ------------
Thayer Equity Investors III, L.P. 19,224,493 37.02%
1445 Pennsylvania Ave., NW, Suite 350
Washington, DC 20004
Codinvest Limited 4,200,000 8.09%
Road Town
Tortola, British Virgin Islands
William H. Scott, III (3) 3,009,759 5.80%
1990 Lakeside Parkway, Suite 240
Tucker, GA 30084
Paul G. Stern (4)(5) 19,377,852 37.32%
1445 Pennsylvania Ave., NW, Suite 350
Washington, DC 20004
Frederic V. Malek (4)(5) 19,377,852 37.32%
1445 Pennsylvania Ave., NW, Suite 350
Washington, DC 20004
Edward Blank (4)(6) 4,003,007 7.66%
71 W. 23rd Street, 8th Floor
New York, NY 10010
Michael G. Santry (4)(7) 1,109,840 2.10%
5950 Berkshire Lane, #1650
Dallas, TX 75225
Matthew S. Waller (4)(8) 504,324 0.96%
7880 Bent Branch Dr., Suite 150
Irving, TX 75063
32
Amount
Name and and Nature
Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)(2)
- -------------------------------------- ------------- ------------
Robert B. Allen (8) 339,600 0.65%
7880 Bent Branch Dr., Suite 150
Irving, TX 75063
Jerry L. Sims, Jr. (9) 300,000 0.57%
7880 Bent Branch Dr., Suite 150
Irving, TX 75063
Stephen A. McNeely (4)(10) 280,484 0.54%
1645 N. Vine Street, Suite 700
Los Angeles, CA 90028
Arthur Chavoya (11) 215,444 0.41%
7 Southern Hills Court
Frisco, TX 75034
Darryl D. Pounds (4)(12) 120,000 0.23%
5950 Berkshire Lane, #1650
Dallas, TX 75225
William F. Bergeron, Jr. (13) 112,700 0.22%
8001 Bent Branch Drive
Irving, TX 75063
Drew Lewis (4)(14) 39,884 0.08%
P.O. Box 70
Lederach, PA 19450
Peter V. Ueberroth (4)(14) 15,954 0.03%
500 Newport Center Drive, Suite 900
Newport Beach, CA 92660
All directors and officers as a 26,203,645 47.76%
group (12 persons) (15)
- -------------------------------------------------------------------------------
(1) Reported in accordance with the beneficial ownership rules of the
Securities and Exchange 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 51,926,398 shares of Common Stock outstanding at September 18,
1998. This number excludes 361,000 unretired treasury shares held by the
Company. Each owner's percentage is
33
calculated by dividing the number of shares beneficially held by the
sum of 51,926,398 and the number of shares such owner has the right to
acquire within 60 days.
(3) Includes 2,835,123 shares owned by ITC Service Company, for which
William H. Scott, III serves as President. Also includes 174,636
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.
(4) Director.
(5) Includes 19,224,493 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 153,359 shares 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.
(6) Includes (a) 306,347 shares subject to warrants exercisable within
60 days and (b) 590,247 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.
(7) 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 1,000,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1992
Plan.
(8) Includes beneficial ownership of 300,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1996
Plan and 200,000 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the 1998 Plan.
(9) Includes beneficial ownership of 300,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1992
Plan.
(10) Includes 280,484 shares subject to options exercisable within 60 days.
(11) Includes beneficial ownership of 200,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1996
Plan.
(12) Includes beneficial ownership of 120,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1992
Plan.
(13) Includes beneficial ownership of 100,000 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1996
Plan.
(14) Includes 15,954 shares subject to options exercisable within 60 days.
(15) Includes beneficial ownership of 2,938,739 shares subject to warrants
or options exercisable within 60 days as set forth in footnotes (5),
(7), (8), (9), (10), (11), (12), (13) and (14) above.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At June 30, 1998 and August 30, 1998, Michael G. Santry, the Co-Chairman
of the Company, had outstanding borrowings and accrued interest of
approximately $3.8 million and $1.8 million, respectively. The borrowing
bears 6% annual interest, is due in full on March 31, 1999. At June 30,
1998, the borrowing was secured by collateral pledged by Codinvest Limited, a
shareholder of the Company. In connection with the Merger, Mr. Santry paid
one-half of the principal amount of the note. The remaining balance on the
note is secured by shares of the Company's Common Stock and options to
purchase shares of the Company's Common Stock held by Mr. Santry. Interest
income from the receivable amounted to approximately $222,546 for the fiscal
year ended June 30, 1998.
At June 30, 1998, FEM Inc., a company controlled by a shareholder of the
Company, had outstanding borrowings and accrued interest of $296,172 pursuant
to a note receivable to the Company. The note bears 6% annual interest and
is due in full on December 31, 1998.
During the fiscal years ended June 30, 1996, 1997 and 1998, the Company
paid J. Frank Mermoud, a former director of the Company, $80,000 per year in
monthly installments of approximately $6,700, in consideration for consulting
services performed.
In connection with the Merger, Thayer provided $6.8 million in
subordinated indebtedness (the "Subordinated Indebtedness") as well as a
guarantee for $2.0 million in bridge financing to assist in funding the
Company's working capital needs. In connection with the guarantee and for the
additional consideration of $110,000, the Company issued to Thayer warrants
to purchase 1,100,000 shares of the Company's Common Stock at an exercise
price 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).
On July 6, 1998, the Company received an additional financing commitment
from Thayer and certain other shareholders of IQI. Under the commitment, the
Thayer-led group agreed to lend the Company, at its election, up to an
additional $4.0 million in subordinated indebtedness at any time within 90
days after the Merger. In connection with this commitment and effective upon
the Merger, the Company issued the Thayer-led group additional warrants to
purchase up to 350,000 shares of the Company's Common Stock at an exercise
price of $2.375 per share and provided certain anti-dilution protection. The
Thayer-led group's obligation to fund the debt and the Company's obligation
to issue the warrants are subject to customary conditions. The additional
indebtedness, when and if drawn, is convertible into the Company's Common
Stock at a conversion price of $2.375 per share, the closing price of ATC
stock on July 2, 1998, the date the Thayer-led group agreed to the
commitment. Such debt would be in addition to, and on the same basic terms
as, the subordinated debt that Thayer had previously committed to lend to the
combined company, as disclosed in the Proxy Statement. As of September 18,
1998, the Company had drawn $1.9 million of this commitment in connection
with the payment of the Kansas Litigation Settlement.
Paul G. Stern, Drew Lewis, Frederic V. Malek and Peter V. Ueberroth,
each directors of the Company, are partners in and/or advisors to Thayer.
Thayer, ITC Services Company, Edward Blank and The Edward Blank 1995
Grantor Retained Annuity Trust (the "IQI Parties") and Michael G. Santry,
Darryl D. Pounds and Codinvest Limited (the "ATC Parties"), are parties to a
Stockholders' Agreement with the Company whereby, for a period of two years
from the date of the Merger Agreement, each such stockholder has agreed to
vote its shares of Company Common Stock in favor of the nominees to the board
of directors selected by the other party's stockholder group. Messrs.
Stern, Lewis, Malek and Ueberroth, by virtue of their positions with Thayer,
may be viewed as indirect beneficiaries of this voting arrangement, and
Messrs. Santry and Pounds may be viewed as direct beneficiaries of this
voting arrangement.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" included on page F-1 of
this Annual Report on Form 10-K for a listing of the financial statements and
schedules filed as a part of this Annual Report on Form 10-K.
The following exhibits are filed as a part of this Form 10-K Annual
Report:
2.1 Agreement and Plan of Merger dated April 7, 1998 between ATC
Communications Group, Inc., ATC Merger Sub, Inc., and IQI, Inc.
(incorporated by reference from Exhibit 2.1 of the Company's Form 10-Q
for the quarterly period ended March 31, 1998).
3.1 Amended and Restated Certificate of Incorporation (filed herewith).
3.2 Amended and Restated Bylaws (filed herewith).
4.1 Specimen of Share Certificate of Company's Common Stock (filed herewith).
4.2 Form of Series B Preferred Stock certificate, as amended.
(Incorporated by reference from Company's Form 10-K Annual Report for
the year ended June 30, 1994).
4.3 Form of 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 Stock Option Plan as amended (Incorporated by reference from
Company's Form S-8 Registration Statement - File No. 333-01131)
4.5 1996 Stock Option Plan as amended (Incorporated by reference from
Company's Form S-8 Registration Statement - File No. 333-01131)
4.6 1998 Stock Option Plan (Incorporated by reference from Company's Form
S-4 Registration Statement - File No. 333-53887 -- Appendix D to
the Joint Proxy/Prospectus)
10.1 Second Amended and Restated Credit Agreement dated as of July 9, 1998
by and among IQI, Inc., Aegis Communications Group, Inc. as guarantor,
the various financial institutions parties thereto, the Bank of Nova
Scotia, as documentation agent and administrative agent for the
lenders, and Credit Suisse First Boston, as syndication agent for the
lenders (Incorporated by reference from Company's Form 8-K Current
Report dated July 24, 1998).
10.2 Securities Purchase and Registration Rights Agreement by and between
ATC Communications Group, Inc. and Thayer Equity Investors III, L.P.
dated April 7, 1998 (Incorporated by reference from Company's Form
10-Q for the quarter ended March 31, 1998)
10.3 Warrant to Purchase Shares of Common Stock of ATC Communications
Group, Inc. issued to Thayer Equity Investors III, L.P. dated April 7,
1998 (Incorporated by reference from Company's Form 10-Q for the
quarter ended March 31, 1998)
36
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 Stockholders Agreement dated July 9, 1998 by and among ATC
Communications Group, Inc., 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 (filed herewith).
10.11 Escrow Agreement dated July 9, 1998 between ATC Communications Group,
Inc., the representative of the shareholders of IQI, Inc., and Harris
Trust and Savings Bank (filed herewith).
10.12 Loan and Security Agreement dated February 8, 1996 among Advanced
Telemarketing Corporation and Bank One, Texas, N.A. (Incorporated by
reference from the Company's Form 10-K Annual Report for the year
ended June 30, 1996).
10.13 Lease Agreement dated January 1, 1991 by and between Royal Tech
Properties, Ltd. and Advanced Telemarketing Corporation. (Incorporated
by reference from Company's Form 10-K Annual Report for the year ended
June 30, 1991).
10.14 Investment Letter dated June 16, 1994 by Codinvest Limited.
(Incorporated by reference from Company's Form 8-K Current Report
dated June 16, 1994).
10.15 Promissory Note dated September 16, 1997 among Michael G. Santry and
ATC Communications Group, Inc. (Incorporated by reference from
Company's Form 10-K Annual Report for the year ended June 30, 1997).
10.16 Stock Pledge Agreement dated September 16, 1997 among Codinvest
Limited and ATC Communications Group, Inc (Incorporated by reference
from Company's Form 10-K Annual Report for the year ended June 30,
1997).
37
10.17 Letter of Amendment, dated April 7, 1998, of Promissory Note by
Michael G. Santry in favor of ATC Communications Group, Inc.
(Incorporated by reference from ATC's Form 10-Q for the quarterly
period ended March 31, 1998).
10.18 Stock Pledge Agreement between Michael G. Santry and ATC Communications
Group, Inc., dated April 7, 1998 (Incorporated by reference from
ATC's Form 10-Q for the quarterly period ended March 31, 1998).
10.19 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).
21.1 Subsidiaries of the Registrant (filed herewith).
27.1 Financial Data Schedule (filed herewith).
Copies of the above Exhibits are available to stockholders of record at a
charge of $.50 per page, minimum of $5.00 each. Direct requests to:
Aegis Communications Group, Inc.
Attention: Secretary
7880 Bent Branch Drive, Suite 150
Irving, Texas 75063
38
REPORTS ON FORM 8-K
On April 9, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", a definitive agreement for a stock-for-stock
merger of ATC and IQI. See "Item 1. - Business - The Merger."
On June 29, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", that a summary judgment was entered against
ATC on June 25, 1998 in a breach of contract case filed by an ATC option
holder in the United States District Court, District of Kansas. See "Notes
to Consolidated Financial Statements - 14. Subsequent Events."
On July 6, 1998, the Company filed a report on Form 8-K reporting, under
"Item 5. - Other Events", that it had received an additional financing
commitment from Thayer Equity Investors III, L.P., a private investment fund
and majority shareholder of ATC's proposed merger partner, IQI, Inc., and
certain other shareholders of IQI. Under the commitment, the Thayer-led
group agreed to lend the combined company, at its election, up to an
additional $4.0 million in subordinated indebtedness at any time within 90
days after the merger. See "Notes to Consolidated Financial Statements - 14.
Subsequent Events."
On July 24, 1998, the Company filed a report on Form 8-K reporting: (i)
under "Item 2. - Acquisition or Disposition of Assets", that on July 9, 1998,
ATC completed the acquisition of IQI; (ii) under "Item 5. - Other Events",
that in connection with the consummation of the Merger, the Company changed
its corporate name to Aegis Communications Group, Inc., which became
effective with the filing of its Amended and Restated Certificate of
Incorporation on July 9, 1998. In addition, the Company changed its Nasdaq
National Market System ticker symbol to "AGIS," effective July 13, 1998; and
(iii) under "Item 5. -- Other Events", that in connection with the Merger,
IQI entered into a Second Amended and Restated Credit Agreement dated as of
July 9, 1998 with The Bank of Nova Scotia and Credit Suisse First Boston.
See "Item 1. - Business - The Merger", "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and " Notes to Consolidated Financial Statements - 14.
Subsequent Events."
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AEGIS COMMUNICATIONS GROUP, INC.
(The Registrant)
Dated: September 28, 1998 By: /s/ Stephen A. McNeely
---------------------------------------
Stephen A. McNeely
President and Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Dated: September 28, 1998 By: /s/ Michael G. Santry
---------------------------------------
Michael G. Santry, Co-Chairman, Director
Dated: September 28, 1998 By: /s/ Paul G. Stern
---------------------------------------
Paul G. Stern, Co-Chairman, Director
Dated: September 28, 1998 By: /s/ Matthew S. Waller
---------------------------------------
Matthew S. Waller, Chief Financial
Officer, Director
Dated: September 28, 1998 By: /s/ Edward Blank
---------------------------------------
Edward Blank, Director
Dated: September 28, 1998 By: /s/ Daniel H. Chapman
---------------------------------------
Daniel H. Chapman, Director
Dated: September 28, 1998 By: /s/ Drew Lewis
---------------------------------------
Drew Lewis, Director
Dated: September 28, 1998 By: /s/ David L. Malcom
---------------------------------------
David L. Malcolm, Director
Dated: September 28, 1998 By: /s/ Frederic V. Malek
---------------------------------------
Frederic V. Malek, Director
Dated: September 28, 1998 By: /s/ William G. Moore, Jr.
---------------------------------------
William G. Moore, Jr., Director
Dated: September 28, 1998 By: /s/ Darryl D. Pounds
---------------------------------------
Darryl D. Pounds, Director
Dated: September 28, 1998 By: /s/ Peter V. Ueberroth
---------------------------------------
Peter V. Ueberroth, Director
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE (ITEM 14(A))
Page
----
Report of Independent Accountants F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997, and 1998 F-3
Consolidated Balance Sheets at June 30, 1997 and 1998 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1996, 1997, and 1998 F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997, and 1998 F-7
Notes to Consolidated Financial Statements F-8
Unaudited Pro Forma Condensed Combined Statements of Operations
for the Year Ended December 31, 1997 F-23
Unaudited Pro Forma Condensed Combined Statements of Operations
for the Six Months Ended June 30, 1998 F-24
Notes to Unaudited Pro Forma Condensed Combined Statements of
Operations F-25
Unaudited Pro Forma Condensed Combined Balance Sheets at June 30, 1998 F-27
Notes to Unaudited Pro Forma Condensed Combined Balance Sheets F-28
Schedule II - Valuation and Qualifying Accounts for the Years Ended
June 30, 1996, 1997, and 1998 F-30
All other schedules are omitted since the required information is not
applicable or is not material or because the information required is included
in the consolidated financial statements and notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aegis Communications Group, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Aegis Communications Group, Inc. (formerly ATC Communications
Group, Inc.) and its subsidiaries at June 30, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998, 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 audits 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.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
September 23, 1998
F-2
AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997 1998
------- ------- -------
Revenues $94,314 $97,629 $91,585
Cost of services, excluding depreciation and
amortization shown below 63,164 68,282 67,842
------- ------- -------
Gross margin 31,150 29,347 23,743
Selling, general and administrative expenses 18,035 22,847 24,102
Depreciation and amortization 2,938 3,618 4,276
------- ------- -------
Total expenses 20,973 26,465 28,378
------- ------- -------
Operating income (loss) 10,177 2,882 (4,635)
Interest expense (Notes 3, 4, and 5) 853 617 1,117
Interest and other income (Note 8) 94 119 228
Litigation settlement (Note 14) - - 1,900
------- ------- -------
Income (loss) before income taxes 9,418 2,384 (7,424)
Income tax expense (benefit) (Note 9) 3,568 955 (2,563)
------- ------- -------
Net income (loss) $ 5,850 $ 1,429 $(4,861)
------- ------- -------
------- ------- -------
Basic earnings (loss) per common and common
equivalent share (Note 7): $ 0.40 $ 0.07 $ (0.23)
------- ------- -------
------- ------- -------
Diluted earnings (loss) per common and common
equivalent share (Note 7): $ 0.25 $ 0.06 $ (0.23)
------- ------- -------
------- ------- -------
Weighted average common and common
equivalent shares outstanding (Note 7):
Basic 13,891 18,076 21,483
Diluted 21,177 22,150 21,483
See accompanying notes.
F-3
AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 633 $ 296
Accounts receivable - trade, less allowance for doubtful
accounts of $74 in 1997 and $344 in 1998. 14,527 21,728
Notes receivable:
Related parties (Note 8) 3,810 4,172
Other 158 160
Current deferred tax asset (Note 9) 3,037 340
Other current assets 763 772
----------- -----------
Total current assets 22,928 27,468
Property and equipment (Notes 2 and 5):
Equipment 16,154,352 18,324,937
Furniture and fixtures 5,205,110 5,982,830
Purchased software 1,299,546 1,564,769
----------- -----------
22,659,008 25,872,536
Accumulated depreciation 8,211,046 12,299,207
----------- -----------
14,447,962 13,573,329
Cost in excess of net assets acquired, net of accumulated
amortization of $1,046 in 1997 and $1,144 in 1998
(Notes 1 and 2) 1,723 1,638
Deferred tax assets (Note 9) 1,999 5,273
Other assets 125 386
----------- -----------
$41,223 $48,338
----------- -----------
----------- -----------
See accompanying notes.
F-4
AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1998
------- -------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit (Note 3) $ - $ 8,623
Current portion of long-term obligations 1,395 1,413
Accounts payable - trade 821 2,868
Unearned revenues and customer deposits 574 121
Accrued compensation expense 1,525 2,710
Accrued telephone expense 660 1,112
Other accrued liabilities 2,873 5,177
------- -------
Total current liabilities 7,848 22,024
Long-term obligations, net of current portions (Note 4) 4,754 3,471
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 aggregate liquidation preference) issued and
outstanding in 1997 and 1998 0 0
Common stock, $.01 par value, 27,500,000 shares authorized;
21,793,122 and 21,839,625 shares issued and
outstanding in 1997 and 1998, respectively 218 218
Treasury stock (421) (1,421)
Additional paid-in capital 18,205 18,309
Retained earnings 10,619 5,737
------- -------
Total shareholders' equity 28,621 22,843
------- -------
$41,223 $48,338
------- -------
------- -------
See accompanying notes.
F-5
AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock
--------------------------------
Series B Series C Common Stock Total
-------------- --------------- ------------------ Additional Share-
Par Par Par Treasury Paid-In Retained holders'
Shares Value Shares Value Shares Value Stock Capital Earnings Equity
------ ----- ------- ----- ---------- ----- -------- ---------- -------- --------
BALANCE AT
JUNE 30, 1995 29,778 $ 0 840,000 $ 8 13,563,361 $ 136 $ (7) $ 8,657 $ 3,443 $12,237
Cash dividend
paid on
preferred stock - - - - - - - - (103) (103)
Net income - - - - - - - - 5,850 5,850
Exercise of
stock options - - - - 1,468,800 15 - 483 - 497
Tax benefit of
stock options
exercised - - - - - - - 961 - 961
------ ----- -------- ----- ---------- ----- ------ ------- ------- -------
BALANCE AT
JUNE 30, 1996 29,778 0 840,000 8 15,032,161 150 (7) 10,100 9,190 19,442
Conversion of
preferred stock - - (840,000) (8) 4,200,000 42 - (34) - 0
Net income - - - - - - - - 1,429 1,429
Purchase of
subsidiary
minority interest - - - - 526,032 5 - 541 - 546
Exercise of
stock options - - - - 2,034,929 21 - 2,134 - 2,155
Treasury stock
purchased - - - - - - (414) - - (414)
Tax benefit of
stock options
exercised - - - - - - - 5,463 - 5,463
------ ----- -------- ----- ---------- ----- ------ ------- ------- -------
BALANCE AT
JUNE 30, 1997 29,778 $ 0 - $ - 21,793,122 $ 218 $ (421) $18,205 $10,619 $28,621
Cash dividend
paid on
preferred stock - - - - - - - - (21) (21)
Net income (loss) - - - - - - - - (4,861) (4,861)
Purchase of
subsidiary
minority interest - - - - 26,734 0 - 15 - 15
Stock grants - - - - 19,769 0 - 89 - 89
Treasury stock
purchased - - - - - - (1,000) - - (1,000)
------ ----- -------- ----- ---------- ----- ------ ------- ------- -------
BALANCE AT
JUNE 30, 1998 29,778 $ 0 - $ - 21,839,625 $ 218 $(1,421) $18,309 $ 5,737 $22,843
------ ----- -------- ----- ---------- ----- ------ ------- ------- -------
------ ----- -------- ----- ---------- ----- ------ ------- ------- -------
See accompanying notes.
F-6
AEGIS COMMUNICATIONS GROUP, INC.
(FORMERLY KNOWN AS ATC COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS)
1996 1997 1998
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,850 $ 1,429 $(4,861)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,938 3,618 4,276
Other (61) 18 1
Changes in operating assets and liabilities:
Accounts and notes receivable -- related parties 327 (3,129) (362)
Accounts and notes receivable -- other (13,799) 7,159 (7,204)
Other current assets (38) (471) (9)
Deferred taxes 191 715 (577)
Other assets 150 400 (336)
Accounts payable (448) (1,755) 2,046
Unearned revenues 73 (499) (453)
Accrued liabilities 5,601 (3,420) 3,921
Accrued interest (51) - -
-------- ------- -------
Net cash provided by (used in) operating activities 732 4,066 (3,558)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,696) (3,248) (3,126)
Proceeds from disposition of assets 175 - 35
-------- ------- -------
Net cash used in investing activities (2,521) (3,248) (3,091)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments on) from line of credit, net 2,383 (2,383) 8,623
Proceeds from issuance of common stock - - 92
Payments on long-term debt (1,148) (333) (333)
Payments on capital lease obligations (701) (935) (1,070)
Proceeds from exercise of stock options 497 2,155 -
Purchases of treasury stock - (413) (1,000)
-------- ------- -------
Net cash provided by (used in) financing activities 1,031 (1,909) 6,312
Net decrease in cash and cash equivalents (757) (1,091) (337)
Cash and cash equivalents at beginning of year 2,481 1,724 633
-------- ------- -------
Cash and cash equivalents at end of year $ 1,724 $ 633 $ 296
-------- ------- -------
-------- ------- -------
Supplemental information on non-cash transactions:
Capital lease obligations entered into $ 210 $ 3,806 $ 138
Tax benefit of stock options exercised 961 5,463 -
Supplemental disclosure of cash paid for income taxes 1,328 3,171 -
See accompanying notes.
F-7
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
1. ORGANIZATION AND ACQUISITIONS
Aegis Communications Group, Inc. ("Aegis" or the "Company"), formerly known
as ATC Communications Group, Inc., was incorporated in 1985. Through its
subsidiary, Aegis has provided outsourced telecommunications-based
marketing, customer service and call center management services to large
U.S. corporations in a variety of industries.
At June 30, 1998, Aegis had the following operating subsidiary:
Percent Principal
Name Date acquired Owned by Ownership business activity
---------------------------------------------------------------------------------------
Advanced Telemarketing April 1988 Aegis 98.9% Call center
Corporation (d/b/a ATC management
Communications) ("Advanced")
During fiscal 1997 and 1998, 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 and 26,374 shares, respectively of the
Company's Common Stock. The Company recognized approximately $529 in
fiscal 1997 and $12 in fiscal 1998 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 Aegis 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.
F-8
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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. In June 1998, Statement of Position 98-5, "Reporting
on the Cost of Startup Activities", was issued. This statement requires
costs of startup activities to be expensed as incurred and is effective
for financial statements for fiscal years beginning after December 15,
1998. The Company believes that adoption of this statement will not
have material impact on the Company's consolidated results of operations
or financial position.
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. Aegis joins with its subsidiaries in filing a consolidated
federal income tax return. In 1993, Aegis adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), 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 1998 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. Major Clients").
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.
F-9
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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.
EARNINGS PER SHARE. In February 1997, Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128") was issued.
The Company has adopted SFAS No. 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 to the extent their inclusion
would be anti-dilutive.
COMPREHENSIVE INCOME. In June 1998, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") was
issued. 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.
F-10
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
SEGMENT REPORTING. In December 1997, Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued. This statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements. Because the
Company operated a single business segment during the fiscal year ended
June 30, 1998, this standard is not applicable to the current year
financial statements of the Company. However, as a result of the Merger
(see "Note 14. Subsequent Events"), this standard will impact the Company's
annual financial statements in subsequent periods.
3. REVOLVING LINE OF CREDIT
Revolving line of credit at June 30, 1997 and 1998, is summarized below:
1997 1998
-------- -------
Revolving line of credit by Advanced of up to $12,000
with a commercial bank at 0.50% over the bank's prime rate
(effective rate of 9.00% at June 30, 1998) secured by
Advanced's accounts receivable, furniture and equipment and
expiring in January 1999. $ - $ 6,623
Bridge financing facility by Advanced with a commercial bank
at the bank's prime rate (effective rate of 8.50% at June 30,
1998) secured by a bank letter of credit $ - $ 2,000
-------- -------
$ - $ 8,623
-------- -------
-------- -------
4. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1998, is summarized below:
1997 1998
-------- -------
Note payable to a commercial bank of $1,000 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 $ 556 $ 222
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 4,662
-------- -------
6,149 4,884
Less current maturities (1,395) (1,413)
-------- -------
$ 4,754 $ 3,471
-------- -------
-------- -------
F-11
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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 Aegis. 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 Aegis. The
guaranty agreement limits Aegis' ability to incur indebtedness, enter into
guaranties and to acquire other companies.
Future maturities of long-term debt at June 30, 1998 are as follows:
Fiscal Years Ending June 30,
----------------------------
1999 $ 1,413
2000 1,257
2001 1,362
2002 852
2003 and thereafter -
-------
$ 4,884
-------
-------
The Company paid interest in the amount of $904, $617 and $1,118 in fiscal
1996, 1997 and 1998, respectively.
5. LEASES
Capital leases are included in the accompanying consolidated balance sheet
under the following captions at June 30, 1998:
Equipment $ 6,061
Less accumulated depreciation (1,622)
-------
$ 4,439
-------
-------
F-12
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
Future minimum lease payments for all noncancelable leases with initial or
remaining terms of one year or more at June 30, 1998 are as follows:
Capital Operating
Fiscal Years Ending June 30, Leases Leases
---------------------------- ------ ------
1999 $1,553 $ 3,074
2000 1,511 2,297
2001 1,502 2,216
2002 876 1,381
2003 and thereafter - 4,322
------ -------
Total minimum future lease payments $5,442 $13,290
Less: amounts representing interest (780) -------
------ -------
Present value of future lease payments $4,662
------
------
Rent expense on operating leases for the years ended June 30, 1996, 1997,
and 1998 was $4,413, $4,641 and $4,125, 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
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. EARNINGS PER SHARE
The Company has adopted SFAS No. 128 and has restated all prior period
financial statements pursuant to SFAS No. 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 the 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 fiscal years ended June 30,
1996 and 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, the operating subsidiary of the
Company. Net loss applicable to common stock for the fiscal year ended June
30, 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.
Basic and diluted weighted average shares outstanding for the fiscal years
ended June 30, 1996, 1997 and 1998 were computed as follows:
1996 1997 1998
------ ------ ------
BASIC
Weighted average common shares outstanding 13,897 18,091 21,830
Weighted average treasury shares (6) (15) (347)
------ ------ ------
Shares used in Basic EPS calculation 13,891 18,076 21,483
------ ------ ------
------ ------ ------
DILUTED
Shares used in Basic EPS calculation 13,891 18,076 21,483
Common stock equivalents:
Dilutive stock options and warrants, net of shares
assumed repurchased with exercise proceeds 3,026 1,415 - (1)
Common Stock assumed issued on conversion of
dilutive preferred stock 4,260 2,659 - (1)
------ ------ ------
Shares used in Diluted EPS calculation 21,177 22,150 21,483
------ ------ ------
------ ------ ------
F-14
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
Basic and diluted earnings (loss) per share for the fiscal years ended
June 30, 1996, 1997 and 1998 were computed as follows:
1996 1997 1998
------ ------ ------
BASIC
Net income (loss) $5,850 $1,429 $(4,861)
Less: net income applicable to Advanced minority interest (146) (130) - (2)
Less: preferred stock dividends (103) - (21)
------ ------ -------
Net income (loss) applicable to common stock -- basic $5,601 $1,299 $(4,882)
------ ------ -------
------ ------ -------
Basic earnings (loss) per share $ 0.40 $ 0.07 ($0.23)
------ ------ -------
------ ------ -------
DILUTED
Net income (loss) $5,850 $1,429 $(4,861)
Less: net income applicable to Advanced minority interest (601) (205) - (2)
------ ------ -------
Net income (loss) applicable to common stock -- diluted $5,249 $1,224 $(4,861)
------ ------ -------
------ ------ -------
Diluted earnings (loss) per share $ 0.25 $ 0.06 ($0.23)
------ ------ -------
------ ------ ------
Net income (loss) applicable to Advanced minority interest for the fiscal
years ended June 30, 1997, 1997 and 1998 was computed as follows:
1996 1997 1998
------ ------ -------
BASIC
Advanced net income (loss) after income tax allocation $6,678 $2,524 $ -
Minority interest 2.18% 5.17% - (2)
------ ------ -------
Net income (loss) applicable to Advanced minority interest $ 146 $ 130 $ -
------ ------ -------
------ ------ -------
DILUTED
Advanced net income (loss) after income tax allocation $6,678 $2,524 $ -
Minority interest 9.00% 8.15% - (2)
------ ------ -------
Net income (loss) applicable to Advanced minority interest $ 601 $ 205 $ -
------ ------ -------
------ ------ -------
- ----------------------------------------------------------------------------------------------------------
(1) For the fiscal year ended June 30, 1998, common stock equivalents are not
included in diluted EPS calculations because their inclusion would be
anti-dilutive.
(2) Net loss applicable to common stock for the fiscal year ended June 30, 1998
was 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-15
CONFIDENTIAL DRAFT 09/27/98 7:37 PM
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
8. RELATED PARTY TRANSACTIONS
At June 30, 1996, 1997 and 1998, an executive officer of the Company, had
outstanding borrowings and accrued interest of approximately $566, $3,540
and $3,847, respectively. The borrowing bears 6% annual interest, is due
in full on March 31, 1999. At June 30, 1998, the borrowing was secured by
collateral pledged by Codinvest Limited, a shareholder of the Company. In
connection with the merger discussed in "Note 14. Subsequent Events", the
executive officer paid one-half of the principal amount of the note. The
remaining balance on the note is secured by shares of the Company's Common
Stock and options to purchase shares of the Company's Common Stock held by
the executive officer. Interest income from the receivable amounted to
approximately $27, $79 and $223 in 1996, 1997, and 1998, respectively.
At June 30, 1997 and 1998, FEM Inc., a company controlled by a shareholder
of the Company, had outstanding borrowings and accrued interest of $198 and
$296, respectively, pursuant to a note receivable to the Company. The note
bears 6% annual interest and is due in full on December 31, 1998.
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:
1996 1997 1998
------- ------- --------
Current
Federal $ 1,894 $ 127 $ (1,986)
State 500 260 -
Deferred 213 (4,748) (577)
------- ------- --------
2,607 (4,361) (2,563)
------- ------- --------
Direct credits to equity related to compensation
expense for tax purposes in excess of amount
recognized for financial reporting purposes 961 5,315 -
------- ------- --------
Total income tax expense (benefit) per the
statements of operations $ 3,568 $ 955 $ (2,563)
------- ------- --------
------- ------- --------
F-16
CONFIDENTIAL DRAFT 09/27/98 7:37 PM
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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:
1996 1997 1998
----- ------ -------
Statutory rate 34.0% 34.0% (34.0%)
State income tax 3.5% 7.2% -
Goodwill amortization 0.3% 1.0% 0.5%
Tax credits - (5.2%) (3.5%)
Other 0.1% 3.0% 2.5%
----- ------ -------
37.9% 40.0% (34.5%)
----- ------ -------
----- ------ -------
The components of deferred taxes included in the accompanying
consolidated balance sheet as of June 30 are as follows:
1997 1998
------- --------
Deferred tax assets:
Accrued expenses $ 343 $ 340
Net operating loss carryforwards 5,396 5,128
Tax credits 125 1,108
------- --------
Gross deferred tax assets 5,864 6,576
Deferred tax liabilities:
Fixed assets (828) (963)
------- --------
Net deferred tax asset $ 5,036 $ 5,613
------- --------
------- --------
At June 30, 1998, the Company had net operating loss carryforwards
of approximately $15,082. Due to an ownership change which took place
in a prior year, approximately $1,957 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 $280 per year.
10. COMMITMENTS AND CONTINGENCIES
In October 1997, the Company entered into a release and separation
agreement with an officer of the Company pursuant to which he continues to
receive bimonthly payments based on his previous annual base salary rate of
$400 for a period of one year. These payments will cease in October 1998.
F-17
CONFIDENTIAL DRAFT 09/27/98 7:37 PM
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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 $15.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have
been filed or are pending against the Company. Management believes that
the claims are without merit and that the ultimate resolution of such
contingencies, for which adequate reserves have been made, will not have a
material adverse effect on the financial position or results of operations
of the Company.
11. MAJOR CLIENTS
The Company had sales to major clients comprising the following percentages
of consolidated revenues for the years ended June 30:
Customer 1996 1997 1998
-------- ---- ---- ----
A 11% 19% 27%
B 10% 9% 19%
C 44% 44% 19%
D 5% 6% 12%
E 12% 6% 2%
12. STOCK OPTIONS AND WARRANTS
In February 1993, the Company's shareholders approved the ATC
Communications Group, 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.
F-18
CONFIDENTIAL DRAFT 09/27/98 7:37 PM
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
Information regarding the 1992 Plan and 1996 Plan is summarized below:
1992 Plan 1996 Plan
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- -------- ---------- --------
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
Granted 2,240,000 $2.65 2,196,000 $ 2.77
Exercised - -
Cancelled (2,375,000) $6.75 (2,634,000) $ 8.38
----------- -------- ---------- --------
Outstanding at June 30, 1998 1,962,000 $1.36 1,215,000 $ 1.91
----------- -------- ---------- --------
----------- -------- ---------- --------
Exercisable at June 30, 1998 1,281,000 $1.29 501,668 $ 2.50
----------- -------- ---------- --------
----------- -------- ---------- --------
The following tables summarize information about stock options outstanding
at June 30, 1998:
Options Outstanding Vested Options
------------------------------------------ -----------------------
Weighted Weighted Weighted
Exercise Average Average Average
Price Remaining Number of Exercise Number of Exercise
Range Contractual Life Shares Price Shares Price
- --------------- ---------------- ---------- --------- --------- --------
$1.00 -- $1.50 7.57 years 2,902,000 $1.41 1,587,668 $1.33
$1.63 -- $4.00 8.46 years 310,000 $3.32 230,000 $3.91
$5.00 -- $13.00 7.75 years 35,000 $8.73 35,000 $8.73
F-19
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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 commensurate with the option's
remaining expected life, 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:
Year Ended June 30,
----------------------------------
1996 1997 1998
--------- --------- ---------
AS REPORTED:
Net income (loss) from continuing operations $ 5,850 $ 1,429 $ (4,861)
-------- -------- ---------
-------- -------- ---------
Basic earnings (loss) per share from
continuing operations $ 0.40 $ 0.07 $ (0.23)
-------- -------- ---------
-------- -------- ---------
Diluted earnings (loss) per share from
continuing operations $ 0.25 $ 0.06 $ (0.23)
-------- -------- ---------
-------- -------- ---------
PRO FORMA:
Net income (loss) $ 5,436 $ (1,237) $ (7,827)
-------- -------- ---------
-------- -------- ---------
Basic earnings (loss) per share from
continuing operations $ 0.37 $ (0.07) $ (0.36)
-------- -------- ---------
-------- -------- ---------
Diluted earnings (loss) per share from
continuing operations $ 0.23 $ (0.07) $ (0.36)
-------- -------- ---------
-------- -------- ---------
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 Aegis 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,
1998, fully vested options to purchase 11,669 shares of Advanced Common
were outstanding. The options to purchase Advanced Common outstanding at
June 30, 1998 are subject to the Rights Plan as discussed above.
F-20
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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 Aegis Common Stock at
$0.8125 per share, the market price at the date of grant. The Aegis
options granted became fully exercisable on August 1, 1995 and are
exercisable for 10 years from the date of grant. During fiscal years 1996
and 1997, options to purchase 1,348,701 and 1,062,179 shares, respectively,
of Aegis Common Stock were exercised pursuant to this grant.
In December 1996, the Company initiated the Aegis 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 and 1998, the Company issued 414,696 and 26,734 shares, respectively,
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 20% of their compensation, not to exceed $10 per year.
The Company may, at its discretion, match employee contributions. There
was no employer matching contribution made in fiscal years 1996, 1997 or
1998.
14. SUBSEQUENT EVENTS
On June 25, 1998, a summary judgment was entered against ATC in a breach of
contract case filed by an ATC option holder in the United States District
Court, District of Kansas. The amount of the judgment, including
prejudgment interest and costs, was approximately $2.4 million. On July 29,
1998, the Company settled the lawsuit (the "Kansas Litigation Settlement")
for a cash payment of $1.9 million. As part of the settlement, the
plaintiff also agreed to exercise its option (granted on December 21, 1994)
to acquire 225,000 shares of the Company's common stock for $1.00 per share
by September 15, 1998. In addition, the Company obtained a full release
and waiver of the plaintiff's claims in connection with the Kansas matter.
On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC") completed the acquisition of IQI, Inc., a New York corporation
("IQI"). The acquisition was effected through the merger (the "Merger") of
ATC Merger Sub, Inc., a New York corporation and wholly-owned subsidiary of
the ATC ("Sub"), with and into IQI pursuant to an Agreement and Plan of
Merger dated as of April 7, 1998 (the "Merger Agreement") by and between
the ATC, Sub and IQI. Thayer Equity Investors III, L.P. ("Thayer")
beneficially owned approximately 63% of IQI's common stock
F-21
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
prior to the Merger, with the balance of common stock ownership being held
by approximately fifty other stockholders.
Pursuant to the Merger Agreement, each former holder of common stock, $.001
par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Registrant ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares, or rights to acquire shares, of ATC
Common Stock to holders of IQI Common Stock and IQI stock options and
warrants in a tax-free exchange. The acquisition has been accounted for as
a reverse purchase, meaning that for accounting purposes, IQI is the
surviving corporation and is treated as having acquired ATC in a purchase
accounting transaction. Subsequent to the Merger, former IQI stockholders
own approximately 57.5% of the Company's Common Stock and the Registrant's
pre-merger stockholders own approximately 42.5% of the Company's Common
Stock. Consequently, Thayer and its affiliates hold approximately 37.7% of
the Company's Common Stock.
IQI's stockholders approved the Merger at a Special Meeting of Stockholders
held on July 9, 1998. ATC's stockholders approved the Merger at the Annual
Meeting of Stockholders held on July 9, 1998. At the ATC Annual Meeting of
Stockholders, the ATC stockholders also elected twelve directors, five of
whom were nominated by the IQI board of directors, five of whom were
nominated by the ATC board of directors and two of whom were jointly
nominated by the ATC and IQI boards. The directors elected were William G.
Moore, Jr., Darryl D. Pounds, Michael G. Santry, Matthew S. Waller, David
L. Malcolm, Daniel H. Chapman, Peter V. Ueberroth, Drew Lewis, Frederic V.
Malek, Paul G. Stern, Stephen A. McNeely, and Edward Blank.
In connection with the consummation of the Merger, the Registrant changed
its corporate name to Aegis Communications Group, Inc., which became
effective with the filing of its Amended and Restated Certificate of
Incorporation on July 9, 1998. In addition, the Registrant changed its
Nasdaq National Market System ticker symbol to "AGIS," effective July 13,
1998.
Also in connection with the Merger, IQI entered into a Second Amended and
Restated Credit Agreement dated as of July 9, 1998 (the "Credit Agreement")
with The Bank of Nova Scotia ("Scotiabank") and Credit Suisse First Boston
("CSFB") whereby Scotiabank and CSFB rolled over and continued their loan
commitments aggregating $53.0 million and Scotiabank committed to provide
IQI an additional $12.0 million in revolving loans, resulting in a total
facility of $65.0 million. The proceeds of the additional loan were used
to refinance the bank indebtedness of Advanced, to pay transaction
expenses, and for general corporate and working capital needs of IQI and
Advanced. As part of the amendment of the Credit Agreement, the Company
and Advanced agreed to guarantee the IQI indebtedness and grant blanket
security interests in their assets to secure repayment of the banks' loans.
The Company also pledged its shares of Advanced common stock to the banks
to secure repayment of the banks' loans.
In connection with the Merger, Thayer provided approximately $6.8 million
in subordinated indebtedness as well as a guarantee for $2,000 in bridge
financing to assist in funding the Company's working capital needs. In
connection with the guarantee, and for additional consideration of $110,
the Company issued to Thayer warrants to purchase 1,100,000 shares of the
Company's Common Stock at an exercise price of $1.96 (110% of the average
of the high and low
F-22
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
prices of ATC Common Stock on April 7, 1998, the day before the
announcement of the proposed Merger).
On July 6, 1998, the Company received an additional financing commitment
from Thayer and certain other shareholders of IQI. Under the commitment,
the Thayer-led group agreed to lend the Company, at its election, up to an
additional $4.0 million in subordinated indebtedness at any time within 90
days after the Merger. In connection with this commitment and effective
upon the Merger, the Company issued the Thayer-led group additional
warrants to purchase up to 350,000 shares of the Company's Common Stock at
an exercise price of $2.375 per share and provided certain anti-dilution
protection. The Thayer-led group's obligation to fund the debt and the
Company's obligation to issue the warrants are subject to customary
conditions. The additional indebtedness, when and if drawn, is convertible
into the Company's Common Stock at a conversion price of $2.375 per share,
the closing price of such stock on July 2, 1998, the date the Thayer-led
group agreed to the commitment. Such debt will be in addition to, and on
the same basic terms as, the subordinated debt that Thayer had previously
committed to lend to the Company. As of September 18, 1998, the Company
had drawn $1.9 million of this commitment in connection with the payment of
the Kansas Litigation Settlement.
The Merger Agreement also contains a provision extending the maturity date
of one-half of the principal amount of the promissory note payable to the
Company by Michael G. Santry, the Company's Co-Chairman, to March 31, 1999.
At August 31, 1998, the principal and accrued but unpaid interest on the
note totaled approximately $1.8 million.
Concurrent with the Merger, Aegis changed its fiscal year end from June 30
to December 31 and, accordingly, will file an annual report on Form 10-K
for the period ended December 31, 1998. The first quarterly report on Form
10-Q for the combined company will be filed for the quarter ending
September 30, 1998.
In September 1998, the Company initiated the Aegis Communications Group,
Inc. 1998 Stock Option and Restricted Stock Plan (the "1998 Plan") which
provides for the granting of options to purchase up to a maximum of
7,500,000 shares of Common Stock to key employees, officers and directors
of the Company and its operating subsidiary. Options granted pursuant to
the 1998 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 2008.
F-23
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited Pro
Forma Financial Data") of Aegis 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 "IQI As Adjusted" data reflect IQI's acquisition of
InterServ Services Corporation (the "InterServ Acquisition") as if it had
occurred on January 1, 1997. 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. 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. The historical IQI data and historical ATC data
for the six months ended June 30, 1998 have been derived from the unaudited
financial statements of such companies, which in the opinion of management of
the Company, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the
unaudited periods.
The unaudited pro forma statement of operations data for the six months
ended June 30, 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 June 30, 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 Aegis 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.
F-24
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
IQI
-------------------------------------------------
Pro Forma Adjustments Merger
------------------------ As ATC Adjust- Aegis
Historical InterServ(1) Other Adjusted Historical ments Pro Forma
---------- ------------ ---------- ---------- ---------- --------- ----------
Revenues:
Teleservices $115,609 $ 6,401 $ - $ 122,010 $ 89,610 $ - $ 211,620
Marketing research services 18,223 18,920 - 37,143 - - 37,143
--------- --------- ------- ---------- ---------- -------- ----------
Total revenues 133,832 25,321 - 159,153 89,610 - 248,763
Cost of services 88,190 16,785 - 104,975 65,710 - 170,685
--------- --------- ------- ---------- ---------- -------- ----------
Gross profit 45,642 8,536 - 54,178 23,900 - 78,078
Operating expenses 36,312 8,340 (588)(2) 43,486 25,625 - 69,111
(578)(2)
Depreciation and amortization 6,093 936 504 (3) 7,533 3,981 1,055 (6) 12,569
--------- --------- ------- ---------- ---------- -------- ----------
Operating income (loss) 3,237 (740) 662 3,159 (5,706) (1,055) (3,602)
Interest expense, net 3,626 221 665 (4) 4,512 640 655 (7) 5,807
--------- --------- ------- ---------- ---------- -------- ----------
Loss before income taxes (389) (961) (3) (1,353) (6,346) (1,710) (9,409)
Income tax expense (benefit) 595 220 (35)(5) 780 (2,015) (262)(8) (1,497)
--------- --------- ------- ---------- ---------- -------- ----------
Net income (loss) $ (984) $ (1,181) $ 32 $ (2,133) $ (4,331) $(1,448) $ (7,912)
--------- --------- ------- ---------- ---------- -------- ----------
--------- --------- ------- ---------- ---------- -------- ----------
Net loss per share $ (0.04) $ (0.07) $ (0.21) $ (0.16)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average shares
outstanding(9) 27,233 29,259 20,905 50,164
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
See accompanying notes.
F-25
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical
------------------------ Merger Aegis
IQI ATC Adjustments Pro Forma
---------- ------------ ----------- ---------
Revenues:
Teleservices $ 73,085 $ 47,945 $ - $ 121,030
Marketing research services 15,971 - - 15,971
--------- --------- ------- ----------
Total revenues 89,056 47,945 - 137,001
Cost of services 57,390 34,705 - 92,095
--------- --------- ------- ----------
Gross profit 31,666 13,240 - 44,906
Operating expenses 23,884 11,771 - 35,655
Depreciation and amortization 4,998 2,241 504 (6) 7,743
--------- --------- ------- ----------
Operating income (loss) 2,784 (772) (504) 1,508
Interest expense, net 2,429 540 326 (7) 3,295
Litigation settlement - 1,900 - 1,900
--------- --------- ------- ----------
Income (loss) before income taxes 355 (3,212) (830) (3,688)
Income tax expense (benefit) 742 (1,140) (130)(8) (529)
--------- --------- ------- ----------
Net income (loss) $ (387) $ (2,072) $ (700) $ (3,159)
--------- --------- ------- ----------
--------- --------- ------- ----------
Earnings (loss) per share: $ (0.01) $ (0.10) $ (0.06)
--------- --------- ----------
--------- --------- ----------
Weighted average shares
outstanding(9) 30,122 21,478 51,600
--------- --------- ----------
--------- --------- ----------
See accompanying notes.
F-26
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED)
(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:
Additional goodwill resulting from Merger $ 22,477
Additional goodwill related to anticipated restructuring reserve 250
Additional goodwill related to stock options of ATC 2,090
Additional goodwill related to Merger transaction costs, net of
deferred financing costs - bank ($500) 3,455
--------
Total increase to goodwill $ 28,271
Estimated life 25 years
--------
Annual amortization of additional goodwill $ 1,131
--------
--------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
Amortization of additional goodwill $ 1,131 $ 566
Actual amortization of goodwill recorded by ATC (76) (62)
---------- -------
Net increase in amortization of goodwill $ 1,055 $ 504
---------- -------
---------- -------
F-27
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED)
(7) Concurrent with the Merger, IQI entered into a new loan agreement with its
lenders and borrowed an additional $4.6 million. Thayer provided
subordinated financing of $6.8 million to Aegis. Proceeds from these
financing transactions was used to refinance $8.6 million of existing
indebtedness of Advanced and repay ATC's term loan of $0.2 million. As a
result, pro forma indebtedness increased by $2.6 million. Had such debt
transactions occurred at the beginning of the periods presented, interest
expense would have increased and deferred financing costs associated with
the issuance of the debt would have been amortized during the period.
Additionally, had the Chairman of ATC repaid borrowings of approximately
$2.0 million at the beginning of the periods presented, interest income
would have decreased. Total interest expense, net, would have increased as
follows:
INTEREST EXPENSE
---------------------------
AMOUNT YEAR SIX MONTHS
AVERAGE OUTSTANDING ENDED ENDED
INTEREST AT JUNE 30, DECEMBER 31, JUNE 30,
RATE 1998 1997 1998
-------- ------------ ------------ ----------
Additional bank loan to IQI 8.25% $ 4,600 $ 379 $ 190
Additional subordinated indebtedness 12.00% 6,827 819 409
Refinance indebtedness of Advanced 8.75% (8,623) (754) (377)
Repay Advanced term loan 9.00% (222) (20) (10)
Additional amortization of deferred
financing costs - bank loan 83 41
Additional amortization of deferred
financing costs - Thayer warrants 38 19
------ ------
Increase in interest expense $ 545 $ 272
Decrease in interest income related to
repayment of borrowings by
Chairman of ATC 110 55
------ ------
Net increase in interest expense $ 655 $ 327
------ ------
------ ------
(8) As a result of the pro forma adjustments described in items (6) and (7)
above, Aegis would record an income tax benefit of $0.3 million for the
year ended December 31, 1997 and $0.1 million for the six months ended
June 30, 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 Merger exchange ratio of 9.7513. The weighted average
shares do not include common stock equivalents because their effect would
be anti-dilutive.
F-28
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1998
(IN THOUSANDS)
HISTORICAL AEGIS
------------------- MERGER PRO FORMA
IQI ATC ADJUSTMENTS COMBINED
-------- --------- --------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,945 $ 296 $ (3,455) (1) $ 6,740
2,582 (2)
(500) (3)
2,000 (4)
(1,127) (2)
Accounts receivable, net 32,097 21,728 - 53,825
Notes receivable - 4,332 (2,000) (4) 2,332
Other current assets 3,942 1,112 (70) (5) 4,984
-------- -------- --------- ---------
Total current assets 42,984 27,468 (2,571) 67,882
Property and equipment, net 23,631 13,573 1,127 (2) 38,152
(180) (5)
Cost in excess of net assets
acquired, net 42,454 1,638 22,477 (1) 72,363
3,455 (1)
2,090 (1)
250 (5)
Deferred financing costs, net 1,262 - 500 (3) 2,045
283 (6)
Deferred tax assets - 5,273 - 5,273
Other assets 912 386 - 1,298
-------- -------- --------- ---------
$111,243 $ 48,338 $ 27,431 $187,013
-------- -------- --------- ---------
-------- -------- --------- ---------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ - $ 8,623 $ (8,623) (2) -
Current portion of long-term debt 350 222 (222) (2) 350
Current portion of capital leases 751 1,191 - 1,941
Accounts payable and accrued expenses 18,322 11,867 - 30,190
Other current liabilities 3,046 121 - 3,167
-------- -------- --------- ---------
Total current liabilities 22,470 22,024 (8,845) 35,649
Long-term obligations, less current portions 51,600 3,471 4,600 (2) 59,672
Subordinated indebtedness 3,070 - 6,827 (2) 9,897
Other liabilities 3,043 - - 3,043
Shareholders' equity:
Preferred stock - 0 - 0
Common stock 3 218 301 (1) 520
(3) (7)
Treasury stock - (1,421) - (1,421)
Additional paid-in capital 29,195 18,309 24,265 (1) 77,792
283 (6)
5,740 (7)
Cumulative translation adjustment 13 - - 13
Retained earnings 1,849 5,737 (5,737) (7) 1,849
-------- -------- --------- ---------
Total shareholders' equity 31,060 22,843 24,850 78,753
-------- -------- --------- ---------
$111,243 $48,338 $ 27,431 $187,013
-------- -------- --------- ---------
-------- -------- --------- ---------
See accompanying notes.
F-29
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED)
(1) In connection with the Merger, each share of IQI Common Stock issued and
outstanding immediately prior to the Merger was converted into the right to
receive 9.7513 shares of ATC Common Stock. Had the Merger occurred on June
30, 1998, ATC would have issued 30,121,828 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
$22.8 million at June 30, 1998, resulting in an excess of purchase price
over the tangible book value of the assets acquired and liabilities assumed
of $22.5 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 $3.3 million, net of deferred financing costs of $0.7
million.
As a result of the above transactions, the following entries would have
been made at June 30, 1998:
Goodwill associated with purchase price $ 22,477
Goodwill associated with Merger transaction costs 3,455
Additional goodwill related to stock options of ATC 2,090
Cash (3,455)
Common stock ($.01 par value) $ 301
Additional paid-in capital 24,265
(2) Concurrent with the Merger, IQI entered into a new loan agreement with
its lenders and borrowed an additional $4.6 million. In addition, Thayer
provided subordinated financing of $6.8 million at the closing of the
Merger (for a cumulative commitment of $8.8 million). Proceeds from
these financing transactions was used to refinance $8.6 million of
existing indebtedness of Advanced, repay Advanced's term loan of $0.2
million and repay certain lease obligations of Advanced of $1.1 million.
As a result, pro forma indebtedness and obligations increased by $2.6
million and $1.5 million, respectively, as follows:
Proceeds from additional bank loan to IQI $ 4,600
Proceeds from additional subordinated indebtedness 6,827
Refinance indebtedness of Advanced (8,623)
Repay Advanced term loan (222)
---------
Net increase in debt 2,582
Repay Advanced lease obligations (1,127)
---------
Net increase in obligations $ 1,455
---------
---------
F-30
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS (CONTINUED)
(Dollars in thousands, except where noted)
(3) 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).
(4) The Chairman of ATC had outstanding borrowings from ATC of approximately
$3.8 million at June 30, 1998, including accrued interest. Pursuant to the
Merger Agreement, approximately $2.0 million was paid at the closing of the
Merger and the remaining principal balance and accrued interest is due on
March 31, 1999.
(5) In connection with the Merger, Aegis anticipates that it will record a
restructuring reserve in the quarter ending September 30, 1998 totaling
$13.0 million. This reserve includes estimates of one-time write-offs of
redundant hardware and software; costs of conversion to common accounting,
reporting and information technology platforms; and consolidation of
certain functions including costs to relocate administrative offices and
employees, costs to migrate certain locations, severance and other
associated expenses. An accrual for the $0.3 million of these expenses
related to ATC has been included in property and equipment, net, other
assets and in goodwill. However, the unaudited pro forma condensed
combined statements of operations do not reflect any anticipated benefits
from these restructuring costs because such benefits will be realized over
a period of several quarters beyond the date the restructuring costs are
incurred.
(6) In connection with the $2.0 million bridge financing guaranteed by Thayer,
ATC issued Thayer, for the purchase price of $0.1 million, warrants to
purchase up to 1.1 million shares of common stock of Aegis at an exercise
price of $1.96 per share. The fair market value of the warrants was
approximately $0.2 million at June 30, 1998. Such fair market value has
been included as deferred financing costs and will be amortized over five
years.
In connection with the up to $4.0 million financing commitment provided by
Thayer, Thayer received warrants to purchase 350,000 shares of common stock
of Aegis at an exercise price of $2.375 per share. The fair market value of
the warrants was approximately $0.1 million at July 6, 1998, the date the
commitment was made. Such fair market value has been included as deferred
financing costs and will be amortized over five years.
(7) As a result of the Merger, the equity of IQI and ATC will be combined. As a
result, the following entries will be made:
Eliminate IQI's common stock $ (3)
Eliminate ATC's retained earnings (5,737)
Additional paid-in capital 5,740
F-31
AEGIS COMMUNICATIONS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(IN THOUSANDS)
Charged To
Earnings -
Balance at General and Balance at
Beginning of Administrative Net End
Description Year Expenses Write-Off of Year
- ------------------------------- ------------ -------------- --------- ----------
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $ 91 $ 125 $ (41) $ 175
------ ------- ------- -------
------ ------- ------- -------
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts $ 175 $ (75) $ (26) $ 74
------ ------- ------- -------
------ ------- ------- -------
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts $ 74 $ 270 $ - $ 344
------ ------- ------- -------
------ ------- ------- -------
F-32
EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
Exhibit 3.1 Amended and Restated Certificate of Incorporation.
Exhibit 3.2 Amended and Restated Bylaws.
Exhibit 10.10 Stockholders Agreement dated July 9, 1998 by and among ATC
Communications Group, Inc., 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.
Exhibit 10.11 Escrow Agreement dated July 9, 1998 between ATC Communications Group, Inc.,
the representative of the shareholders of IQI, Inc., and Harris Trust and
Savings Bank (filed herewith).
Exhibit 21.1 Subsidiaries of Registrant
Exhibit 27.1 Financial Data Schedule.