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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 DECEMBER 31, 2000.
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ______
Commission file number: 0-14315
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AEGIS COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
(State of Incorporation) (IRS Employer Identification No.)
7880 BENT BRANCH DRIVE, SUITE 150, IRVING, TEXAS 75063
(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. [ ]
The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of March 14, 2001 was approximately $20.5
million.
As of March 14, 2001, 52,116,134 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Aegis Communications Group, Inc. is a leading provider of multi-channel
customer relationship management (CRM) and comprehensive marketing research
services, including database management, analytical services and market
intelligence, to Fortune 500 and emerging e-commerce companies. We provide
services through our two operating segments, CRM and marketing research. For a
discussion of the financial results of these two segments, please see "Notes to
Consolidated Financial Statements--18. Segments." Our service offerings include:
web-enabled and telephone-based customer service, help desk, and customer
acquisition and retention; multilingual communications programs; client service
center facilities management; order provisioning, which is the transferring of
data into our clients' billing systems and customer records; and database
management. Our web-enabled customer care (e-care) capabilities include online
customer-initiated call back, web call-through (or "Voice over Internet
Protocol", or "VoIP"), automated e-mail response, live web text chat, pushed
content web sessions (in which we send, or "push", web pages to the customer
from anywhere on the Internet), click-stream analysis, web self-service,
fax/e-mail on demand and online management reporting. Our database service
offerings include profiling and data overlay, segmentation, modeling, survey
results analysis, financial analysis and customer lifecycle analysis. Our
Elrick & Lavidge marketing research division ("E&L") provides research to
clients, representing a broad range of industries, including marketing research
measuring customer satisfaction, likelihood of customer retention, point-of-sale
research, full service quantitative and qualitative research, segmentation and
market structure, and marketing services.
Aegis specializes in the execution and management of large volume customer
contact programs through multiple methods of contact for major U.S. corporations
in a variety of industries. Aegis' operations are technology driven through our
advanced data and communications systems, which permit real-time interface with
our clients' host systems via the Internet or dedicated networks. Aegis believes
it competes on the basis of four primary differentiators:
- consistency and quality of service;
- the ability to implement advanced technology, including e-care
capabilities, predictive dialing, call blending and proprietary front-end
interfaces that enable real-time access to clients' host data;
- responsiveness to changing client needs and adaptability to unique client
requirements; and
- cost effectiveness.
Aegis is a Delaware corporation, formerly known as ATC Communications
Group, Inc. ("ATC"). On July 9, 1998, ATC completed the acquisition of
IQI, Inc., a New York corporation ("IQI"). The acquisition was effected through
the merger (the "Merger") of a wholly owned subsidiary of ATC with and into IQI
pursuant to an Agreement and Plan of Merger, dated as of April 7, 1998 (the
"Merger Agreement"). Effective upon the Merger, the Company formally changed its
name to Aegis Communications Group, Inc. and its trading symbol to "AGIS".
Our headquarters are located at 7880 Bent Branch Drive, Suite 150, Irving,
Texas 75063. Our telephone number is (972) 830-1800 and our web-site address is
www.aegiscomgroup.com. Unless the context requires otherwise, references to the
Company in this report include its consolidated subsidiaries.
2
RECENT DEVELOPMENTS
On March 1, 2001, the Company received an offer from an acquisition group
made up of its principal shareholders for the purchase of all of the outstanding
shares of Common Stock not already owned by the acquisition group at a price of
$1.00 per share in cash. Questor Partners Fund II, L.P. and certain affiliated
funds ("Questor") are leading the acquisition group and are expected to fund the
transaction. The acquisition group will include Thayer Equity Investors III,
L.P. and certain affiliated funds ("Thayer") and is expected to include certain
other significant shareholders. It is anticipated that Thayer and certain other
significant shareholders would receive approximately $10 million of cash in
exchange for certain of the Company's securities held by such shareholders.
The offer was made to the Company's Board of Directors. On March 15, 2001,
the Board established a special committee of two independent directors to
consider the offer. The special committee is expected to engage its own
financial advisor and legal counsel in connection with the proposed transaction.
SERVICES AND STRATEGY
CUSTOMER SOLUTIONS
We develop and implement customized multi-channel contact programs designed
to strengthen our clients' relationships with their customers. Our CRM solutions
consist of telephone-based marketing and customer service programs
(teleservices) as well as e-care capabilities, which comprise handling a variety
of customer contacts through our clients' Internet web-sites, and our
phone-based customer service offerings.
Aegis designs, manages and conducts large, telecommunications-based CRM
programs which feature live, knowledgeable customer service representatives
("CSRs") provided on an outsourced basis to large U.S. corporations in a wide
variety of industries. We offer both inbound and outbound CRM solutions.
Inbound CRM solutions require answering incoming telephone calls or
web-initiated queries and responding to customer service requests. To
illustrate, when one of our client's customers requests an interaction (e.g.,
places a call to a toll-free "800" customer service number, sends an e-mail to
our client, or initiates an online call back or text chat at a client's
web-site) it is directed to an Aegis client service center and answered by one
of our trained CSRs. The CSR is able to handle the customer's inquiry because,
in most instances, the customer's account information has been transferred
instantaneously to the CSR's computer screen via our system's links to the
client's customer database. At the end of the interaction, the customer's record
is automatically updated in the client's database with any new information.
Outbound CRM solutions involve making outgoing telephone calls, usually to
market a client's products or to acquire new customers for the client. We do not
engage in any form of outbound calling that uses computerized voice
presentations or makes unsolicited financial requests, nor is Aegis engaged in
the "900" number business.
In March 2000, we introduced the Aegis E.CARE.PLUS(SM) suite of web-enabled
customer care capabilities that transformed a number of our production
workstations into multi-channel capable workstations able to handle a variety of
customer interactions, especially those originating from the Internet. Through
the E.CARE.PLUS(SM) suite of services, we can assist our clients by providing
real-time, web-based data that tracks customers' interactions with a client's
web-site, allows us to handle all aspects of responding to client e-mail from
customers, provides a secure chat window to conduct one-on-one chat with client
customers, initiates live voice conversations when a client customer clicks an
icon on a client's web-site, and performs other functions.
3
Aegis endeavors to establish long-term relationships with major corporations
and emerging e-commerce companies that utilize telecommunications, including the
Internet, as important, ongoing elements in their core CRM strategies. These
arrangements usually require Aegis to develop unique software systems for the
client. By offering high quality, customized, flexible and fully-integrated
customer contact management services designed to improve quality, productivity
and effectiveness, Aegis can enhance and add value to our clients' existing
marketing and customer service programs.
MARKETING RESEARCH
Elrick & Lavidge offers several information-based services designed to
assist research clients in more effectively marketing products and services to
their customers.
Included among E&L's custom research offerings are online, in-store, and
on-site behavioral research; comprehensive expertise in customer satisfaction,
customer value analysis (how a client's customers perceive value), and customer
life cycle studies (factors that comprise gaining and retaining customers);
market segmentation; product and concept testing; brand positioning; market
structure and tracking studies; mystery shopping; and focus group research. E&L
also has two information-based syndicated research products in its "HOW AMERICA
SHOPS-REGISTERED TRADEMARK-" series. "RE-TAILING(SM) probes the relationships
between online and traditional retail selling options while delivering
information and insights that help subscribers maximize profitable business.
"COBRAND DYNAMICS(SM)" analyzes how and which consumers use which types and
brands of credit cards for the full range of consumer purchases.
Industries on which E&L focuses include consumer goods and services,
financial services, telecommunications, utilities, healthcare, entertainment and
technology. E&L's data collection methods include online, in-store, focus group,
in-person, one-on-one, and telephone interviews.
Elements of E&L's growth strategy include applications of advanced
technology, applied marketing sciences, web-centric data management and ongoing
analyses of the growth of online sales or transaction environments for corporate
clients. E&L has extended its behavioral research capabilities to include "HOW
AMERICA SHOPS-REGISTERED TRADEMARK-," a series of services defining how and why
people make decisions at the point of purchase whether online or in traditional
environments. These capabilities encompass both business-to-business and
business-to-consumer interactions.
OBJECTIVE
Aegis' objective is to become the premier high-quality, full service
provider of outsourced CRM solutions to Fortune 500 corporations and emerging
e-commerce companies. We believe that e-care and the inbound segment of the CRM
market possess the greatest long-term growth potential in our industry and we
are concentrating our efforts primarily on those segments. In order to serve all
of our clients' needs, however, we offer outbound services as well. For the year
ended December 31, 2000, approximately 63% of our revenues were generated by
inbound CRM solutions, 28% from outbound CRM solutions and 9% from marketing
research. In comparison, for the year ended December 31, 1999, approximately 50%
of Aegis' revenues were generated by inbound CRM solutions, 39% by outbound CRM
solutions and 11% from marketing research.
OPERATIONS
As of December 31, 2000, Aegis operated or managed approximately 6,200
production workstations in its 19 client service centers and 3 marketing
research facilities. A workstation includes a cubicle, personal computer with
monitor and keyboard, a headset and an automatic call distributor console. All
of our facilities are located in the continental United States, except for one
client service center in Canada.
4
CRM SOLUTIONS
Five Lucent Technologies G-3 telecommunications switches, five Rockwell
Galaxy GVS 3000 Automatic Call Distributors ("ACDs") and two Rockwell Spectrum
ACDs interfaced primarily with multiple Data General systems are utilized to
operate Aegis' client service centers. The data system itself is based on an
open architecture design UNIX operating system supported by a sophisticated
relational database. This open architecture design allows us to interface
seamlessly, and in real-time, with our clients' host systems. It also provides
the flexibility that enables Aegis to deliver solutions rapidly to our clients'
marketing and customer service needs. Outbound calling is enhanced through
either a Rockwell Predictive Dialing System based on a fault tolerant Tandem
Platform or an EIS (portal connect) dialer. Aegis also maintains a substantial
staff of software engineers who create customized software applications for our
clients and respond to changing client needs. Our 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 this "call blending" ability.
The quality of our people is critical to our success. Because our marketing
and service representatives deal directly with our clients' customers and sales
prospects, we place a heavy emphasis on their training and the quality control
process. Our training facilities are equipped with workstations for live role
playing. We employ a large staff of trainers dedicated to teaching the details
of client programs to our marketing and service representatives. The training
curriculum includes instruction on the client's 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 initial
and follow-up training for all representatives which, depending on the
complexity of the client program, can take up to six weeks to complete. Our
training curriculum is developed by professional experts in adult learning
methods and includes a "hands-on" PC lab experience. This attentiveness to
training enables our representatives to perform an assortment of duties when
handling inbound and outbound calling programs. Along with our clients, we
monitor our marketing and customer service representatives to insure strict
compliance with the client's quantitative and qualitative standards. In many
instances, quality is evaluated and communicated on a daily basis.
MARKETING RESEARCH
As of December 31, 2000, E&L maintained four full-service offices in major
cities throughout the United States. E&L also staffs three research service
centers at separate locations containing, in the aggregate, 225
computer-assisted telephone interview ("CATI") workstations.
As of December 31, 2000, E&L employed approximately 160 full-time marketing
research professionals. In addition, the firm has a part-time staff of about 400
associates in its field and telephone interviewing centers. Knowledge of our
clients' industries is important to our success. We have concentrated on
developing expertise in several industries, including telecommunications,
consumer packaged goods and financial services. Consistently updated industry
expertise enables us to provide reliable customer and market information and
advisory services to clients in those industries.
INDUSTRY AND COMPETITION
CUSTOMER SOLUTIONS
Expenditures by clients on teleservices in the United States were
$147.7 billion in 2000, according to the Winterberry Group. This represents a
19% increase over 1999. Total teleservice expenditures are projected to grow at
a rate of 13% through 2004, because of the increasing importance of inbound
customer service and help desk functions in the management and retention of
profitable customer relationships. Historically, most teleservice functions have
been provided by companies' internal call centers. However, in response to the
quickening pace of technological advancement, and the resultant
5
need for infrastructure development and replacement, companies are increasingly
outsourcing their teleservice requirements. In 2000, third-party teleservice
providers accounted for $19.2 billion, or 13% of total teleservice expenditures.
By 2004, the Winterberry Group projects that third-party teleservices will grow
to $35.6 billion, representing about 15% of total teleservice spending. Aegis
believes that large corporations and emerging e-commerce companies will
increasingly outsource their CRM 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 like Aegis.
We compete in the market that provides large corporations, as well as
emerging e-commerce companies, with outsourced CRM solutions across multiple
communications channels including the telephone, Internet, and e-mail. The
telephone-based CRM industry is spread among many competitors, including a large
number of in-house organizations and numerous independent providers like Aegis.
Our market is very competitive. Competitors range from very small firms offering
specialized applications to large, full-service companies with multiple, high
volume client service centers, including APAC Customer Services, 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 Corporation. We also compete
against the in-house call center and customer service operations of clients and
prospective clients. We believe we compete primarily on the basis of:
- consistency and quality of service;
- the ability to implement advanced technology, including e-care
capabilities, predictive dialing, call blending and proprietary front-end
interfaces which enable real-time access to clients' host data;
- responsiveness to changing client needs and adaptability to unique client
requirements; and
- cost effectiveness.
MARKETING RESEARCH
The 174 research companies in the Council of American Survey Research
Organizations reported total research marketing revenue of $7.4 billion in 1999.
The June 5, 2000 issue of MARKETING NEWS ranked Elrick & Lavidge as the
thirty-first largest marketing research company in the United States.
The marketing research industry is highly competitive and is characterized
by a large number of relatively small organizations and a small number of
companies with sizable resources. E&L regularly experiences significant
competition from numerous market participants, including other marketing
research firms, in-house marketing and research departments of various
companies, advertising agencies and business consulting firms. Marketing
research firms with which we regularly compete include Maritz Marketing
Research, Inc., Opinion Research Corp., Burke Incorporated, and Market
Facts, Inc., among others. In the emerging online market research sector,
competitors include BizRate.com, Gomez Advisors, Harris Interactive, and
Greenfield Online, among others. We believe that we compete primarily on the
basis of: (1) quality of research information; (2) the ability to rapidly
obtain, analyze and communicate marketing research information;
(3) consistency; and (4) cost effectiveness.
MARKETING OF SERVICES
We seek to differentiate ourselves from our competitors through our emphasis
on quality and service to the client, technological capabilities, ability to
meet and enhance the client's changing requirements and cost effectiveness. We
seek to develop and maintain long-term relationships with our clients and we
focus our marketing efforts on Fortune 500 and emerging e-commerce companies
that utilize integrated customer service and marketing research as important,
ongoing elements in their core CRM and marketing strategy. We believe these
corporations present the greatest potential for our
6
recurring revenue growth and that their customer relationship requirements fit
well with our technology and client support infrastructure. We obtain new
business by responding to requests for proposals, through client and consultant
referrals and by targeting potential new clients. New business is also gained by
identifying additional needs of our existing clients and cross-selling our
services to meet those needs.
GOVERNMENT REGULATION
Both federal and state governments regulate our business. The Federal
Communications Commission's ("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 ("FTC") to issue
regulations prohibiting misrepresentation in telephone sales. The FTC then
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 these rules and regulations, bills are frequently introduced
in Congress to regulate the use of credit information. We cannot predict whether
this legislation will be enacted and what effect, if any, it would have on our
industry.
Most states have also enacted or are considering legislation to regulate
telephone solicitations. For example, telephone sales in certain states are not
final until a written contract is delivered to and signed by the buyer, and then
the contract 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. Some industries we serve are also subject to various state
government regulations with regard to selling practices and consumer disclosure
requirements.
We specifically train our representatives to conduct calls in an approved
manner and believe we are in compliance in all material respects with all
federal and state regulations. There can be no assurance, however, that we may
not be subject to regulatory challenge for a violation of federal or state law
by any of our clients.
REVENUES AND SEASONAL NATURE OF BUSINESS
The timing and size of our clients' marketing programs directly affect our
revenues. Our expenses are also directly affected by these factors. We cannot
predict the seasonal variations in our clients' demands for our services.
PERSONNEL AND TRAINING
Our business depends on people. Our highest priority is to hire, train,
retain and manage good people. We attempt to locate our client service centers
where the cost of labor is relatively low and there are many qualified and
motivated workers. We do this to lower our operating costs while maintaining a
high quality workforce with the lowest turnover rate achievable. Still, our
attrition rate is high compared to most other industries and it is difficult and
costly to hire and train new employees.
7
RELIANCE ON MAJOR CLIENTS
We have historically relied on a few major clients for the bulk of our
revenue. In 2000, with AT&T's acquisition of one of our cable industry clients,
AT&T accounted for approximately 36% of our revenues and American Express
accounted for approximately 14%. In 1999, AT&T accounted for approximately 24%
of our revenues and American Express for approximately 16%. Revenues from AT&T
are derived from separate contractual arrangements with several different
business units of this client. From time to time, AT&T reorganizes or curtails
its marketing programs, negotiates price reductions in certain of its programs
and significantly reduces its volume of business with its CRM solutions vendors,
including Aegis, all of which negatively affect our revenues. Although we try to
build and improve our customer relationships, it is our goal to reduce our
dependence on a few major clients by broadening our customer base because of the
detrimental impact their unilateral decisions can have on our business.
QUALITY ASSURANCE
Because our services involve direct contact with our clients' customers and
sale prospects, we must maintain a reputation for quality service. To that end,
our representatives are monitored to ensure that they comply with the client's
guidelines and deliver quality and efficient service. We regularly measure the
quality of our services by benchmarking factors such as sales per hour and level
of customer satisfaction. Our information systems enable us to provide clients
with real time reports regarding the status of an ongoing campaign. We also
transmit summary data and captured information electronically to our clients.
Access to this data enables our clients to modify or enhance an ongoing campaign
to improve its effectiveness.
Since our client service representatives deal directly with our clients'
customers and prospects, we place a heavy emphasis on training and quality
control processes. We dedicate a training staff at each facility to conduct both
primary and recurrent training for all client service representatives. We employ
a quality control staff at each facility who measure quality on both a
quantitative and qualitative basis. We believe this attentiveness to training
and customer service enables our client service representatives to perform a
variety of highly complex and proprietary functions for our clients.
EMPLOYEES
As of December 31, 2000, Aegis employed approximately 9,500 persons,
including over 8,000 client service representatives. We believe our relationship
with our employees is generally good.
ITEM 2. PROPERTIES
Our principal executive offices and operational and administrative
headquarters are located in a 23,333 square foot leased building in Irving,
Texas. This lease expires on December 31, 2003. Aegis also has a number of
administrative personnel in New York, New York who occupy leased facilities
consisting of 13,542 square feet of office space. The term of this lease expires
in October 2003. All of our facilities are occupied pursuant to various lease
arrangements, except the Dalton and Browns Valley, Minnesota facilities, which
Aegis owns. Aegis believes that the development of additional Aegis-operated
centers should enhance our long-term profitability. Accordingly, Aegis continues
to implement its new site selection strategy, which focuses on locating client
service centers in what we believe are markets offering lower wage rates, better
employee retention and generally lower operating costs. To that end, in 1999 we
closed centers in Addison, Texas and Euless, Texas, which were located in higher
cost, higher turnover markets, and opened new client service centers in St.
Joseph, Missouri and Sierra Vista, Arizona. In 2000 we closed a center in
Virginia Beach, Virginia and opened a new client service center in Terra Haute,
Indiana. Subsequent to December 31, 2000, we closed two additional centers in
Hazelton, Pennsylvania and Newport News, Virginia and have signed a lease to
open a new client service center in Rocky Mount, North Carolina. As of
December 31, 2000, we performed our services in the facilities listed below:
8
CLIENT SERVICE CENTERS
----------------------
NUMBER OF
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- ---------------------------- -------------- ------------------ -------- ------------
Arlington, TX............... April 1990 August 31, 2002 11,600 146
Barrie, Canada.............. April 1996 August 31, 2001 8,000 82
Browns Valley, MN........... January 1996 Owned 4,000 47
Dalton, MN.................. April 1995 Owned 4,224 56
Elkins, WV.................. November 1998 October 31, 2008 20,125 204
Fairmont, WV................ October 1997 February 28, 2009 48,000 581
Hazleton, PA *.............. April 1996 April 30, 2001 4,700 80
Irving, TX (2 facilities)... September 1985 December 31, 2003 97,126 1,211
Joplin, MO.................. February 1998 February 1, 2008 33,055 445
Los Angeles, CA............. October 1985 October 31, 2002 68,700 825
Mesquite, TX................ November 1996 September 15, 2001 10,575 168
Newport News, VA *.......... April 1995 April 30, 2001 10,000 120
Port St. Lucie, FL.......... September 1997 July 23, 2007 44,000 272
San Francisco, CA........... April 1985 December 31, 2001 5,180 35
Sierra Vista, AZ............ February 1999 March 1, 2009 45,000 600
St. Joseph, MO.............. April 1999 June 1, 2004 27,316 338
Terre Haute, IN............. August 2000 September 30, 2010 34,680 475
Tucker, GA.................. March 1993 May 31, 2005 43,347 311
------- -----
519,628 5,996
======= =====
*Center was closed subsequent to December 31, 2000.
9
MARKETING RESEARCH FACILITIES AND FULL-SERVICE OFFICES
------------------------------------------------------
NUMBER OF
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- ---------------------------- -------------- ------------------ -------- ------------
Chicago, Illinois........... 1951 January 31, 2004 23,632 56
Cincinnati, Ohio #1......... 1985 April 30, 2001 7,900 64
Cincinnati, Ohio #2......... 1985 August 31, 2005 5,853 --
Clarksville, Tennessee...... 1985 December 31, 2003 7,500 105
Kansas City, Missouri....... 1992 May 31, 2003 4,228 --
Paramus, New Jersey......... 1979 October 31, 2005 12,158 --
Tucker, Georgia............. 1979 January 31, 2003 29,325 --
------- -----
90,596 225
======= =====
Aegis believes it can extend the leases at these locations or relocate the
facilities on terms comparable with its current lease obligations. While our
current capacity is sufficient to handle our current production demands, as our
growth continues, additional client service center facilities may be needed.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary litigation incidental to its businesses, neither Aegis
nor its subsidiaries are parties to, nor are their properties the subject of,
any material pending legal proceedings. We believe that the litigation
incidental to our business is not likely, individually or in the aggregate, to
have a material adverse effect on our results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
On September 20, 1999 we received notification from Nasdaq that we no longer
met the minimum requirements for continued listing on the Nasdaq National Market
System and, therefore, the Nasdaq staff determined that our continued listing
was no longer warranted. Accordingly, our common stock, $0.01 par value per
share (the "Common Stock"), now trades on the National Association of Securities
Dealers' ("NASD's") Over-the-Counter Electronic Bulletin Board ("OTC BB") under
the symbol "AGIS". As of March 14, 2001, there were approximately 52,116,134
shares of Aegis common stock outstanding held by approximately 799 holders of
record.
The table below lists the range of high and low bid prices for our Common
Stock as reported by the Nasdaq National Market System and OTC BB for the
two-year period ended December 31, 2000 and the subsequent interim period. These
quotations reflect inter-dealer prices, without retail markup, markdown, or
commission, and may not necessarily represent actual transactions.
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- ---------------------------- ---------- ----------
First Quarter............................................... 7/8 13/16
Second Quarter.............................................. 3 1/2 11/16
Third Quarter............................................... 1 7/32 7/16
Fourth Quarter.............................................. 1 1/2 15/32
YEAR ENDED DECEMBER 31, 2000 HIGH LOW
- ---------------------------- ---------- ----------
First Quarter............................................... 2 1/2 15/16
Second Quarter.............................................. 1 5/8 15/16
Third Quarter............................................... 1 7/32 47/64
Fourth Quarter.............................................. 1 1/32 9/16
INTERIM PERIOD FROM JANUARY 1, 2001 HIGH LOW
- ----------------------------------- ---------- ----------
through March 23, 2001...................................... 31/32 19/32
DIVIDENDS
To date, we have not declared a cash dividend on our common stock. We intend
to retain any earnings for use in the operation and expansion of our business,
and therefore do not anticipate declaring a cash dividend in the foreseeable
future. We have accrued an annual dividend of $0.36 per share on 29,778
outstanding shares of our Series B Preferred Stock. Our Series D and E Preferred
Stock accrue dividends quarterly at a rate of 15% per annum. Our Series F
Preferred Stock accrues dividends quarterly at a rate of 9.626% per annum. Under
our current Credit Agreement, Aegis and its subsidiaries are prohibited from
paying dividends on our Common Stock until all the lender's commitments have
been met and all of Aegis' and its subsidiaries' obligations under the Credit
Agreement have been satisfied. See "Notes to Consolidated Financial
Statements--4. Sale of Redeemable Convertible Preferred Stock, 7. Long-Term
Debt, and 10. Shareholders' Equity."
PRIVATE PLACEMENTS OF CONVERTIBLE PREFERRED STOCK
In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by our then largest shareholder, Thayer Equity,
agreed to convert approximately $12.1 million of our subordinated debt into two
new series of convertible preferred stock. The 77,300 shares of Series D
11
Preferred Stock issued, ($0.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.00 per share, and
the 44,018 shares of new Series E Preferred ($0.01 par value per share, $100 per
share liquidation preference) are convertible into Company Common Stock at
$2.375 per share. Both series earn cumulative dividends (payable-in-cash or
in-kind in additional shares of the respective series of Preferred Stock) at the
annual rate of 15%, and are non-voting except on specified matters. In
consideration of the conversion of the subordinated debt into preferred stock,
the Company also issued the Thayer-led group warrants to purchase an additional
1,000,000 shares of Company Common Stock at $0.90625 per share. As of
December 31, 2000, the Series D Preferred Stock has accrued dividends paid in
kind of approximately 19,107 shares of Series D Preferred Stock, and the
Series E Preferred Stock has accrued dividends paid in kind of approximately
10,880 shares of Series E Preferred Stock.
In an effort to reduce outstanding debt on our balance sheet, thereby
providing us the needed flexibility to renegotiate our bank revolving credit
agreement (and cure then outstanding defaults), and provide access to working
capital to fund future operations, on December 10, 1999, we completed the sale
of 46,750 shares of newly issued Preferred F senior voting convertible preferred
stock (the "Preferred F Shares") to Questor Partners Fund II, L.P., Questor
Side-by-Side Partners II, L.P., and Questor Side-by-Side Partners II 3(c)(1),
L.P. (the "Questor Investors") for an aggregate purchase price of
$46.75 million. The Preferred F Shares are entitled to receive dividends, in
preference to all other capital stock of the Company, except for the Company's
Series B Voting Convertible Preferred Stock, par value $0.01 per share (the
"Preferred B Shares"), at the rate of 9.626% per annum, which will accrue and be
cumulative from their original issue date. The dividends on the Preferred F
Shares accrue on each share from its issuance on a daily basis, whether or not
earned or declared. To the extent that dividends have not been paid on any
March 31, June 30, September 30 or December 31 of any year, all such dividends
are added to the investment value of such share. The Preferred F Shares are
convertible into shares of Common Stock on the basis of one share of Common
Stock per $1.00 of investment value of the Preferred F Shares. The Preferred F
Shares also participate, on an as-converted basis, with the Common Stock in any
dividends that may be declared and paid after the payment of preferential
dividends. The Preferred F Shares vote on an as-converted basis. We used the
proceeds from the sale of the Preferred F Shares to pay transaction expenses and
repay outstanding bank debt.
As a result of the sale of the Preferred F Shares and subsequent increases
in the investment value of the Preferred F Shares resulting from dividends, on
an as-converted basis, on December 31, 2000 the Questor Investors collectively
own approximately 39.2% of our Common Stock and Common Stock equivalents
outstanding. The Preferred F Shares vote on an as-converted basis and represent
approximately 49.9% of our voting equity securities at December 31, 2000.
The sales and exchanges of the Preferred D, E and F Shares described above
were exempt under Rule 506 of Regulation D under the Securities Act of 1933, as
amended. The Thayer and Questor investors are "accredited investors" as defined
by Regulation D and each of the private placements exceeded $5.0 million in
value.
2001 PROPOSED ACQUISITION BY MAJORITY SHAREHOLDERS
On March 1, 2001, Aegis received an offer from an acquisition group made up
of its principal shareholders for the purchase of all of the outstanding shares
of Common Stock not already owned by the acquisition group at a price of $1.00
per share in cash. Questor is leading the acquisition group and is expected to
fund the transaction. The acquisition group will include Thayer and other
significant shareholders. It is anticipated that Thayer and certain other
significant shareholders would receive approximately $10 million of cash in
exchange for certain of the Company's securities held by such shareholders.
12
The offer was made to our Board of Directors. On March 15, 2001, the Board
established a special committee of two independent directors to consider the
offer. The special committee is expected to engage its own financial advisor and
legal counsel in connection with the proposed transaction.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth certain selected consolidated historical
financial data for Aegis 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.
YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -----------------------------------------
1996(1) 1996(2) 1997(3) 1998 1999 2000
-------- ------------ -------- -------- -------- --------
Revenues:
Teleservices.................................. $57,543 $26,756 $115,609 $195,355 $219,066 $267,496
Marketing research services................... -- -- 18,223 32,683 27,202 27,868
------- ------- -------- -------- -------- --------
Total revenues.................................. $57,543 $26,756 $133,832 $228,038 $246,268 $295,364
Gross profit.................................... 16,834 6,092 45,642 66,677 69,594 93,682
SG&A expenses................................... 13,588 8,760 36,312 50,510 65,905 76,835
Depreciation.................................... 1,314 969 4,501 10,018 12,954 13,893
Acquisition goodwill amortization............... -- 55 1,592 2,876 2,723 2,378
Non-cash asset impairment charge................ -- -- -- -- 20,399 --
Restructuring and other non-recurring charges... -- -- -- 8,395 541 3,539
------- ------- -------- -------- -------- --------
Operating income (loss)(4)...................... 1,932 (3,692) 3,237 (5,122) (32,928) (2,963)
Other income, net............................... 877 648 -- -- -- --
Interest expense, net........................... 190 450 3,626 4,799 5,864 4,516
Non-cash interest expense....................... -- -- -- 3,871 1,597 1,210
------- ------- -------- -------- -------- --------
Income (loss) before income taxes............... 2,619 (3,494) (389) (13,792) (40,389) (8,689)
Income tax expense (benefit)(1)................. 17 1,794 595 (2,989) (6,213) (2,305)
------- ------- -------- -------- -------- --------
Net income (loss)(4)............................ 2,602 (5,288) (984) (10,803) (34,176) (6,384)
Preferred stock dividends....................... -- -- -- -- 1,208 6,775
------- ------- -------- -------- -------- --------
Net income (loss) after preferred stock
dividends..................................... $ 2,602 $(5,288) $ (984) $(10,803) $(35,384) $(13,159)
======= ======= ======== ======== ======== ========
Basic and diluted earnings (loss) per share..... $ 0.11 $ (0.22) $ (0.04) $ (0.27) $ (0.68) $ (0.25)
======= ======= ======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding................. 24,378 24,417 27,233 40,383 52,043 52,004
OPERATING DATA
EBITDA (5)...................................... $ 4,123 $(2,020) $ 9,330 $ 16,167 $ 3,689 $ 16,847
Net cash provided by (used in) operating
activities.................................... $ 2,915 $ (139) $ 2,329 $ 7,906 $(10,455) $ (575)
Net cash provided by (used in) investing
activities.................................... $(5,858) $ 1,596 $(25,794) $(16,213) $(10,180) $(14,097)
Net cash provided by financing activities....... $ 1,651 $ 665 $ 26,492 $ 13,699 $ 15,923 $ 9,941
Client service centers at end of period......... 19 20 25 21 19
Teleservices workstations at end of period...... 2,238 2,462 5,658 5,382 5,996
Marketing research facilities/offices at end of
period........................................ 10 10 9 11 7
Marketing research workstations at end of
period........................................ 371 360 225 225 225
13
AS OF DECEMBER 31,
-------------------
1997 1998 1999 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
Working capital......................................... $17,624 $35,881 $36,716 $44,357
Total assets............................................ 101,736 180,544 160,585 174,982
Current portions of long-term obligations............... 3,009 2,758 2,243 2,039
Long-term obligations, less current portions............ 51,257 79,580 43,689 56,926
Total liabilities....................................... 71,163 108,716 70,987 91,343
Redeemable convertible preferred stock.................. -- -- 41,970 46,655
Shareholders' equity.................................... 30,573 71,828 47,628 36,984
- ------------------------
(1) Through July 31, 1996, the Company had a fiscal year end of July 31. The
Company operated as a subchapter S-corporation through November 17, 1996, at
which time it became a C-corporation for tax purposes and changed its fiscal
year from July 31 to December 31.
(2) Represents operations of the Company for the period from August 1, 1996 to
December 31, 1996. Amounts include the acquisition of Lexi
International, Inc. ("Lexi") on November 22, 1996.
(3) Includes the acquisition of InterServ Services Corporation ("InterServ") as
of July 12, 1997 (the "InterServ Acquisition").
(4) The historical results of operations include certain non-recurring expenses,
which are summarized in the table below:
YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -----------------------------------------
1996(1) 1996(2) 1997(3) 1998 1999 2000
-------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Officers' salary.............................. $2,417 $ 116 $ -- $ -- $ -- $ --
Lexi and IQI bonuses and compensation, legal
and audit fees, and software licensing
expenses.................................... 810 2,490 443 -- -- --
Non-cash asset impairment charge.............. -- -- -- -- 20,399 --
Restructuring and other non-recurring
charges..................................... -- -- -- 8,395 541 3,539
------ ------ ------ ------ ------- ------
Total non-recurring expenses.................. $3,227 $2,606 $ 443 $8,395 $20,940 $3,539
====== ====== ====== ====== ======= ======
- ------------------------------
(5) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization, non-cash asset impairment
charge and restructuring and other non-recurring charges. 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.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. ("Sub"), a New York corporation and wholly-owned subsidiary of ATC,
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.
The Merger 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. Accordingly, the pre-merger
consolidated financial information reported is that of IQI. See "Notes to
Consolidated Financial Statements--3. Mergers and Acquisitions."
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues................................................. 100.0 % 100.0 % 100.0 %
Cost of services, excluding depreciation and amortization
shown below............................................ 70.8 % 71.7 % 68.3 %
----- ----- -----
Gross profit............................................. 29.2 % 28.3 % 31.7 %
Selling, general and administrative expenses............. 22.1 % 26.8 % 26.0 %
Depreciation............................................. 4.4 % 5.3 % 4.7 %
Acquisition goodwill amortization........................ 1.3 % 1.1 % 0.8 %
Non-cash asset impairment charge......................... -- 8.3 % --
Restructuring and other non-recurring charges............ 3.7 % 0.2 % 1.2 %
----- ----- -----
Total expenses......................................... 31.5 % 41.7 % 32.7 %
----- ----- -----
Operating loss........................................... (2.3)% (13.4)% (1.0)%
Interest expense, net.................................... 2.1 % 2.4 % 1.5 %
Non-cash interest expense................................ 1.7 % 0.6 % 0.4 %
----- ----- -----
Loss before income taxes................................. (6.1)% (16.4)% (2.9)%
Income tax benefit....................................... (1.3)% (2.5)% (0.8)%
----- ----- -----
Net loss............................................... (4.8)% (13.9)% (2.1)%
Preferred stock dividends................................ -- 0.5 % 2.3 %
----- ----- -----
Net loss after preferred stock dividends............... (4.8)% (14.4)% (4.4)%
===== ===== =====
HISTORICAL YEAR ENDED DECEMBER 31, 2000 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1999
Aegis recognized a net loss after preferred stock dividends of
$13.2 million or $0.25 per share for the year ended December 31, 2000 versus a
net loss after preferred stock dividends of $35.4 million or $0.68 per share in
1999. Excluding $3.5 million ($2.2 million, net of taxes) in non-recurring
charges, Aegis recognized a net loss after preferred stock dividends of
$11.0 million or $0.21 per share in 2000. In 1999, excluding $20.4 million in a
non-cash asset impairment charge and $0.5 million ($0.3 million, net of tax) in
restructuring and other non-recurring charges, the net loss after preferred
stock dividends was $14.7 million or $0.28 per share.
15
Total revenues generated during the year ended December 31, 2000 were
$295.4 million as compared to $246.3 in 1999, an increase of $49.1 million, or
19.9%. The increase in revenue in 2000 was due primarily to increases in inbound
CRM revenues of approximately $62.0 million, or 50.4%, and high capacity
utilization rates, especially in the fourth quarter of 2000. Marketing research
revenues increased $0.7 million, or 2.4% during 2000 versus the prior year. For
the years ended December 31, 1999 and 2000, our actual mix of revenues was as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 % 2000 %
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Inbound CRM....................................... $122,964 49.9% $184,981 62.6%
Outbound CRM...................................... 96,102 39.1% 82,515 28.0%
-------- ----- -------- -----
CRM total....................................... 219,066 89.0% 267,496 90.6%
Marketing research................................ 27,202 11.0% 27,868 9.4%
-------- ----- -------- -----
Total revenues.................................. $246,268 100.0% $295,364 100.0%
======== ===== ======== =====
Despite these increases in revenues, we remain concerned about the potential
impact in 2001 of the slowing U.S. economy and issues arising from the intense
competition that our telecommunications clients are encountering. We have seen
evidence of these issues with the termination of an agreement with one of our
telecommunications customers, VoiceStream, in the first quarter of 2001 as they
have taken the services being performed by Aegis and other service providers
in-house to fill excess capacity in their internal call centers. The
stabilization of Aegis' operating platform has enabled management to react
appropriately and we have been able to mitigate the potential negative impact on
our short-term financial results. However, we believe that the Company will
continue to face the challenges of a slowing economy and the difficulties being
experienced in the telecommunications client sector. Therefore, we do not think
it is likely that we will be able to sustain the high capacity utilization
levels we experienced in the fourth quarter of 2000, at least in the near-term.
As a result of the acquisition of one of our clients by AT&T, our largest
telecommunications client, and giving effect to this merger as if it occurred at
the beginning of the period, for the year ended December 31, 2000, approximately
36% of our total revenues were generated by AT&T. AT&T generated revenues
representing approximately 24% of total revenues for the year ended
December 31, 1999. Revenues from AT&T are derived from separate contractual
arrangements with several different AT&T business units. For the year ended
December 31, 2000, approximately 14% of our total revenues were generated by
American Express, our largest financial services client, as compared to
approximately 16% in the prior year.
Aegis seeks to secure recurring revenues from long-term relationships with
targeted corporate clients that utilize telecommunications and marketing
research strategies as integral, ongoing elements in their marketing and CRM
programs. In addition to providing services on an outsourcing basis, in which we
provide all or a substantial portion of a client's CRM and/or marketing research
needs, we also continue to perform project-based services for certain clients.
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 year ended December 31, 2000, gross profit earned on revenues
increased approximately $24.1 million, or 34.6%, from 1999, primarily due to the
increased revenue and to cost reduction initiatives implemented in 2000. Gross
profit as a percentage of revenues ("gross margin") for 2000 was 31.7% as
compared to 28.3% in the prior year. The increases in gross profit are due to
improved capacity utilization resulting from the revenue increase, a reduction
in operating costs due to the implementation of the cost reduction initiatives
mentioned above and improved operating efficiencies resulting from the
implementation of our new site selection strategy discussed below.
16
Our new site selection strategy focuses on locating client service centers
in areas where we believe Aegis can more effectively attract and retain
employees and efficiently control front-line costs. In keeping with this site
strategy, during the quarter ended September 30, 2000, we completed a portion of
the build-out of a new 475-workstation client service center in Terre Haute,
Indiana. The new center opened concurrent with the closing of our 120-seat
center in Virginia Beach, Virginia on August 31, 2000. Subsequent to
December 31, 2000, we also closed our centers in Newport News, Virginia and
Hazelton, Pennsylvania and signed a lease to open a new client service center in
Rocky Mount, North Carolina.
Selling, general and administrative ("SG&A") expenses increased
$10.9 million, or 16.6%, in the year ended December 31, 2000 versus 1999;
however, as a percentage of revenues, SG&A expenses for the current year were
26.0% versus 26.8% in 1999. The increase in dollar expense is primarily
attributable to $6.4 million in special charges associated with unanticipated
costs of certain employee benefits recorded in the second quarter 2000. The
Company has implemented a new employee benefit plan effective October 1, 2000
which has helped control such unanticipated costs and should help the Company
effectively manage employee benefits costs in the future.
Following the new management team's initial assessment of the Aegis
operating platform, management took aggressive steps beginning in the second
quarter of 2000 to focus on its most profitable assets and to streamline the
Aegis organization by reducing headcount not directly responsible for improving
profitability. The reduction in SG&A expenses as a percentage of revenue in the
current year, despite the special charges, is primarily due to cost reduction
programs combined with rigorous financial controls implemented by management
during the second quarter of 2000.
Depreciation and amortization expenses increased $0.6 million, or 3.8%, in
2000 as compared to the prior year due to $0.8 million in special charges
associated with write-offs of the salvage value of outmoded equipment. As a
percentage of revenues, depreciation and amortization expenses were 5.5% in 2000
versus 6.4% in the prior year. The decreases in depreciation and amortization
expenses as a percentage of revenues are due primarily to the increase in
revenues over the prior year periods and the reduction of acquisition goodwill
amortization expense resulting from a non-cash asset impairment charge taken at
March 31, 1999. See "Notes to Consolidated Financial Statements--6. Non-Cash
Asset Impairment Charge."
The Company's results for 2000 included non-recurring charges of
$3.5 million ($2.2 million, net of tax) recorded in connection with the
transition in the Company's executive management team and actions taken to
implement the above noted broad-based turnaround plan designed to improve
productivity and promote profitable revenue growth.
Net interest expense decreased $1.7 million, or 23.3%, in the year ended
December 31, 2000 as compared to the prior year due to the reduction of
long-term debt, held throughout the year, resulting from the use of proceeds
from the Company's sale of $46.75 million of convertible preferred stock on
December 10, 1999.
Our statutory state and federal income tax benefit rate for the years ended
December 31, 1999 and 2000 was approximately 40.0%. Our effective tax rate on
reported taxable income or loss differs from the statutory rate due primarily to
the non-deductibility, for tax purposes, of our goodwill amortization expense
and, in the prior year, to the non-deductibility of the non-cash asset
impairment charge taken at March 31, 1999.
The Company has a net deferred tax asset of $15.6 million at December 31,
2000. Management periodically evaluates the realizability of the deferred tax
asset. As part of this evaluation, we have considered past operating results,
the trend of operating results over the last two quarters, the outlook for
future financial performance, as well as other evidence, in determining that a
valuation allowance was not necessary at December 31, 2000. However, should the
Company's future operating results be
17
significantly below assumptions used in the evaluation of the realizability of
the deferred tax asset, it may be necessary to consider the need for a valuation
allowance in the future.
Preferred dividends increased to approximately $6.8 million for the year
ended December 31, 2000 from $1.2 million in the prior year as a result of the
conversion of affiliated debt to Series D and E Preferred Shares and the sale of
Preferred F Shares. During 2000, dividends on the Preferred F Shares were not
paid in cash, but were added to the investment value of such shares. Dividends
on the Series D and E Preferred Shares are currently being paid in additional
shares of Series D and E Preferred Shares, respectively. See "Notes to
Consolidated Financial Statements--4. Sale of Redeemable Convertible Preferred
Stock."
HISTORICAL YEAR ENDED DECEMBER 31, 1999 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1998
We experienced a net loss after preferred stock dividends of $35.4 million,
or 14.4% of revenues, for the year ended December 31, 1999 as compared to a net
loss of approximately (restated) $10.8 million, or 4.8% of revenues, for the
year ended December 31, 1998. Excluding an approximately $20.4 million non-cash
asset impairment charge and $0.5 million ($0.3 million, net of taxes) of
restructuring and other non-recurring charges, the net loss after preferred
stock dividends was approximately $14.7 million, or 6.0% of revenues, in 1999.
Excluding approximately $8.4 million ($5.1 million, net of taxes) in
merger-related restructuring and other non-recurring charges, we experienced a
net loss of approximately $5.7 million, or 2.5% of revenues, in 1998.
Revenues increased $18.2 million, or 8.0%, to approximately $246.3 million
during 1999 as compared to revenues of $228.0 million in 1998. The increase in
revenues was due primarily to the impact of revenues contributed by ATC after
the Merger. Inbound customer solutions revenues increased approximately
$61.4 million, or 99.7%, in 1999. This increase was somewhat offset by a decline
in outbound customer solutions revenues of approximately $37.7 million, or
28.2%, and a drop in marketing research revenues of approximately $5.5 million,
or 16.8%. For the years ended December 31, 1998 and 1999, our actual mix of
revenues was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 % 1999 %
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Inbound CRM................................... $ 61,577 27.0% $122,964 49.9%
Outbound CRM.................................. 133,778 58.7% 96,102 39.1%
-------- ------ -------- ------
CRM total................................... 195,355 85.7% 219,066 89.0%
Marketing research............................ 32,683 14.3% 27,202 11.0%
-------- ------ -------- ------
Total revenues.............................. $228,038 100.0% $246,268 100.0%
======== ====== ======== ======
On a pro forma basis for the Merger, revenues decreased $29.7 million, or
10.8%, from approximately $276.0 million in 1998. This decrease was primarily
the result of the curtailment of certain outbound programs by our largest
telecommunications client and a large financial services client, and a decline
in marketing research revenues. On a pro forma basis for the Merger, outbound
customer solutions revenues in 1999 declined $48.4 million, or 33.5%, from 1998
while marketing research revenues dropped $5.5 million, or 16.8%, from 1998.
These declines were offset somewhat by an approximately $24.2 million, or 24.5%,
increase in inbound customer solutions revenues in 1999. On
18
a pro forma basis for the Merger as if it had occurred on January 1, 1998, our
mix of revenues, for 1998 and 1999, was as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 % 1999 %
----------- ---------- ---------- --------
(PRO FORMA) (DOLLARS IN THOUSANDS)
Inbound CRM.................................. $ 98,783 35.8% $122,964 49.9%
Outbound CRM................................. 144,518 52.4% 96,102 39.1%
-------- ------ -------- ------
CRM total.................................. 243,301 88.2% 219,066 89.0%
Marketing research........................... 32,683 11.8% 27,202 11.0%
-------- ------ -------- ------
Total revenues............................. $275,984 100.0% $246,268 100.0%
======== ====== ======== ======
For the year ended December 31, 1999, approximately 24% of our revenues were
generated by our largest telecommunications client and approximately 16% by our
largest financial services client, as compared to approximately 27% and 11% (23%
and 9%, on a pro forma basis for the Merger, respectively), in the year ended
December 31, 1998.
As part of our site migration plan, we closed our Addison, Texas facility in
August 1999. Work being performed at this center was migrated to two new client
service centers in St. Joseph, Missouri and Sierra Vista, Arizona during the
second quarter of 1999. The lease on the Addison client service center expired
on October 31, 1999.
During the first quarter of 1999, our largest client, AT&T, reduced its
marketing spending and, as a result, discontinued agreements with Aegis for two
customer acquisition programs under which we were providing both outbound and
inbound services. Subsequent to the end of the quarter, we were notified by our
historically second largest financial services client that the client would
curtail its outbound customer acquisition spending with Aegis beginning in the
second quarter of 1999. During the second quarter of 1999, we expanded our
inbound customer service relationship with our largest client, AT&T. Under this
addition to an existing master agreement, Aegis began performing critical
customer care functions, including the handling of inbound orders and inquiries,
for this client's growing consumer customer base, beginning in the third quarter
of 1999. This new offering requires the use of more than 700 workstations in
Aegis client service centers in Texas and Los Angeles and is in addition to the
inbound customer solutions Aegis provides for this client's small business
customers from our Fairmont, West Virginia facility. We no longer furnish
traditional, hourly-rate outbound telemarketing for this client. As such, all
services now provided to this client are either inbound or pay-for-performance
outbound.
Gross profit increased $2.9 million, or 4.4%, to approximately
$69.6 million in 1999 from approximately $66.7 million in 1998. The increase in
gross profit was due to the increase in revenues over 1998 which was primarily
attributable to the inclusion of ATC-related SG&A revenues for a full year in
1999 versus six months in 1998 following the Merger. Gross profit as a
percentage of revenues ("gross margin") for 1999 was 28.3% as compared to 29.2%
in 1998. The decrease in gross margin was primarily due to a decline in capacity
utilization from the prior year period resulting from lower volumes of business
from our two largest telecommunications clients, a large financial services
client and our marketing research division, several new programs being billed at
training rather than production rates as they were being ramped-up, and
redundant facilities and training costs associated with the Addison, Texas
client service center being open simultaneously with two new centers in Sierra
Vista, Arizona and St. Joseph, Missouri for part of the third quarter. The
Addison facility ceased operations in August 1999 and its lease expired on
October 31, 1999.
Selling, general and administrative ("SG&A") expenses increased
approximately $15.4 million, or 30.5% in 1999. As a percentage of revenues, SG&A
expenses for 1999 were 26.8% versus 22.1% in
19
1998. The increase in SG&A expenses is primarily attributable to the inclusion
of ATC-related SG&A expenses for a full year in 1999 versus six months in 1998
following the Merger. The increase in SG&A expenses as a percentage of revenues
is primarily attributable to expenditures to support anticipated program
volumes, which were not realized during the first six months of 1999.
Depreciation and amortization expenses increased approximately
$2.8 million, or 21.6%, to approximately $15.7 million in 1999 from
approximately $12.9 million in 1998. As a percentage of revenues, depreciation
and amortization expense was 6.4% in 1999 versus 5.7% in 1998. The increases in
depreciation and amortization expense as a percentage of revenues are due to the
addition of ATC's depreciation and amortization expenses subsequent to the
Merger, additional amortization expense resulting from the goodwill recorded in
the Merger, and additional depreciation resulting from investments in the
completion of three new client service centers and the expansion of three
existing centers since the first quarter of 1998.
As a result of the performance of our Elrick & Lavidge ("E&L") marketing
research division since its acquisition by IQI in July 1997, in the first
quarter of 1999 we performed an analysis (based on E&L's estimated future cash
flows undiscounted and without interest) of the carrying value of the goodwill
associated with the purchase of E&L. As a result of this evaluation, it was
determined that the carrying value of the goodwill associated with the purchase
of E&L had been impaired. Accordingly, in the first quarter of 1999, we adjusted
the carrying value of E&L's long-lived assets to their fair value resulting in a
non-cash asset impairment charge of $20.4 million, which reduced the amount of
goodwill on our balance sheet by a corresponding amount. This reduction is
expected to result in a decrease in Aegis' goodwill amortization expense of
approximately $1.1 million annually.
We recorded pre-tax restructuring charges related to the Merger of
$8.4 million ($5.1 million, net of taxes) in the year ended December 31, 1998
and $0.5 million ($0.3 million, net of taxes) in the first quarter of 1999.
These charges were primarily attributable to one-time write-offs of redundant
hardware and software, severance costs and the consolidation of certain
administrative functions including costs to relocate offices and employees.
Management believes that all Merger-related restructuring efforts have been
completed and all related charges recorded.
Net interest expense increased approximately $1.2 million, or 13.9%, in 1999
versus 1998 due to increased utilization of our revolving line of credit and the
issuance of additional subordinated indebtedness during 1999.
Non-cash interest expense related to the beneficial conversion feature in
the subordinated debt financing provided by the Thayer-led group in July 1998
was recognized in 1998. We determined that a beneficial conversion feature
existed for subordinated debt issued in July 1998 and quantified the amount as
non-cash interest expense of $3.1 million at the issuance date.
Our statutory state and federal income tax benefit rate for 1999 was
approximately 40.0%. Our effective tax rate on reported taxable loss differs
from the statutory rate due primarily to the non-deductibility, for tax
purposes, of our goodwill amortization expense and the asset impairment charge.
Excluding a non-cash impairment charge of $20.4 million, or $0.39 per share,
and restructuring and other non-recurring charges of $0.5 million
($0.3 million, net of taxes, or $0.01 per share), the Company experienced a net
loss after preferred stock dividends of $14.7 million, or $0.28 per share, for
1999 as compared to a net loss in 1998 of approximately $5.7 million, or $0.14
per share, excluding restructuring and other non-recurring charges of
approximately $8.4 million ($5.1 million, net of taxes, or $0.13 per share).
20
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 DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in) operating activities.... $ 7,906 $(10,455) $ (575)
Net cash provided by (used in) investing activities.... (16,213) (10,180) (14,097)
Net cash provided by financing activities.............. 13,699 15,923 9,941
Effect of exchange rates on cash....................... 21 54 (17)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................................ $ 5,413 $ (4,658) $ (4,748)
======== ======== ========
We have historically utilized cash flow from operations, available borrowing
capacity under our credit facility, subordinated indebtedness provided by
certain of our shareholders (primarily Thayer Equity) and the issuance of
convertible preferred stock to meet our liquidity needs. We anticipate that cash
flow from operations and funds available under our revolving line of credit, as
amended should enable us to meet our liquidity needs for the foreseeable future.
See "Credit Facility" below.
Cash used in operating activities improved approximately $9.9 million, or
94.5%, during the year ended December 31, 2000 as compared to the prior year
period due to decreased operating losses resulting from increased revenues and
improved gross profit margins. Increases in our accounts receivable, resulting
from higher revenues, were partially offset by increases in our accrued expenses
resulting in significant improvement in cash flow from operating activities in
the year ended December 31, 2000.
Cash used in investing activities during 2000 increased $3.9 million, or
38.5%, from 1999 primarily due to capital expenditures on two new
telecommunications switches put into service in the first quarter of 2000 and
capital expenditures related to the opening of the new Terre Haute facility
during the third quarter 2000. Capital expenditures have consisted primarily of
new telecommunications equipment and information technology hardware and
software required in the maintenance, upgrade and expansion of our operations
including the build-out of new client service centers and the upgrade or
replacement of workstations in our existing facilities. Capital expenditures
during 2000 were funded with proceeds from bank borrowings under an expanded
revolving line of credit and available cash. See "Credit Facility" below.
Cash provided by financing activities during 2000 was $9.9 million, a
$6.0 million reduction from 1999. During 2000 financing activities consisted
primarily of proceeds of approximately $35.0 million from our revolving line of
credit, which were somewhat offset by payments of capital lease obligations of
$2.7 million, and principal payments on our revolving line of credit of
$22.3 million. In the prior year, our financing activities were centered
primarily around proceeds from our revolving line of credit, proceeds from
affiliated debt and proceeds from and payments on long-term bank debt. See
"Credit Facility" below.
1999 QUESTOR TRANSACTION
In an effort to reduce outstanding debt on our balance sheet in 1999,
thereby providing us the needed flexibility to renegotiate our bank revolving
credit agreement (and cure then outstanding defaults), and provide access to
working capital to fund future operations, on December 10, 1999, we completed
the sale of 46,750 shares of newly issued Preferred F Shares to the Questor
Investors for an aggregate purchase price of $46.75 million. The Preferred F
Shares are entitled to receive dividends, in preference to all other capital
stock of the Company, except for the Company's Series B Voting
21
Convertible Preferred Stock, par value $0.01 per share (the "Preferred B
Shares"), at the rate of 9.626% per annum, which accrue and cumulate from their
original issue date. The dividends on the Preferred F Shares accrue on each
share from its issuance on a daily basis, whether or not earned or declared. To
the extent that dividends have not been paid in-cash on any March 31, June 30,
September 30 or December 31 of any year, all such dividends are added to the
investment value of such share. The Preferred F Shares also participate, on an
as-converted basis, with the Common Stock in any dividends that may be declared
and paid after the payment of preferential dividends. The Preferred F Shares are
convertible into shares of Common Stock on the basis of one share of Common
Stock per $1.00 of investment value of the Preferred F Shares. The Preferred F
Shares vote on an as-converted basis. We used the proceeds from the sale of the
Preferred F Shares to repay outstanding bank debt and pay transaction expenses.
For the year ended December 31, 2000, accrued dividends on the Preferred F
Shares were added to the investment value of such shares.
As a result of the sale of the Preferred F Shares and subsequent increases
to the investment value of such shares, on an as-converted basis, the Questor
Investors collectively beneficially own approximately 49.9% of the Company's
voting issued and outstanding Common Stock and approximately 39.2% of the
Company's Common Stock and Common Stock equivalents outstanding at December 31,
2000.
PROPOSED 2001 MAJORITY SHAREHOLDERS ACQUISITION
On March 1, 2001, the Company received an offer from an acquisition group
made up of its principal shareholders for the purchase of all of the outstanding
shares of Common Stock not already owned by the acquisition group at a price of
$1.00 per share in cash. Questor and certain affiliated funds are leading the
acquisition group and are expected to fund the transaction. The acquisition
group will include Thayer and certain affiliated funds and is expected to
include certain other significant shareholders. It is anticipated that Thayer
and certain other significant shareholders would receive approximately
$10 million of cash in exchange for certain of the Company's securities held by
such shareholders.
The offer was made to the Company's Board of Directors. On March 15, 2001,
the Board established a special committee of two independent directors to
consider the offer. The special committee is expected to engage its own
financial advisor and legal counsel in connection with the proposed transaction.
CREDIT FACILITY
In conjunction with the December 10, 1999 closing of the Questor Transaction
and the associated repayment of bank debt, we entered into the Third Amended and
Restated Credit Agreement (the "Credit Agreement") with Bank of Nova Scotia
("Scotiabank") and Credit Suisse First Boston ("CSFB"), thereby curing all
outstanding defaults through December 31, 1999. Under the amended agreement, our
lenders expanded their aggregate revolving credit facility commitments from
$30.0 million to $45.0 million at closing. We met certain financial targets in
the fourth quarter of 1999, which resulted in a $1.5 million increase in the
commitment under the credit facility, and we met certain financial targets in
the first quarter of 2000, which resulted in an additional $2.5 million increase
in the commitment. This agreement matures June 30, 2003. Borrowings under this
agreement bear interest at fluctuating rates based upon prime rate and the
London Interbank Borrowing Offered Rate ("LIBOR"). The margin above the
applicable prime rate or the LIBOR rate is determined based upon the funded debt
to earnings before interest, taxes, depreciation and amortization ("EBIDTA")
ratio. The weighted-average interest rate on the outstanding balances of
$32.3 million and $45.0 million at December 31, 1999 and 2000 was 8.5% and 8.6%,
respectively. Margins in 2000 ranged between 0.75% and 3.5%. Interest payments
are due quarterly.
22
As a result of charges recorded in the second quarter of 2000 (see "Results
of Operations" above), the Company was in default of certain covenants of the
Credit Agreement at June 30, 2000. On July 28, 2000, following negotiations with
Scotiabank and CSFB, we entered into the First Amendment to the Credit Agreement
(the "First Amendment"), which: i) waived the Company's default under certain
financial covenants of the Credit Agreement; and ii) amended and restated
certain covenants of the agreement related to the interest rate, availability
under the revolving line of credit, and certain financial targets. As a result
of the First Amendment, the Company's borrowing base under the First Amendment
was restricted to $49.0 million. At December 31, 2000, the Company was in
compliance with the covenants of the Credit Agreement, as amended. At
December 31, 2000, we estimated that our available borrowing capacity under the
amended agreement at approximately $4.0 million.
SUBORDINATED INDEBTEDNESS
In 1996, IQI issued a subordinated note payable to a shareholder aggregating
$3.0 million due November 2003. In December 1997, IQI and the shareholder
consummated an agreement to settle outstanding issues between the shareholder,
IQI and Thayer (IQI's principal shareholder). As part of such settlement, the
aggregate principal balance of the note was reduced to $1.0 million and the
interest rate increased from 8% to 12% on the remaining note. The $2.0 million
reduction to the shareholder note was treated as a contribution of capital by
the shareholder.
In connection with the March 1998 amendment to the Bank Loan, IQI issued a
subordinated note payable to Thayer of $2.0 million due August 31, 2003 with
interest payable quarterly at an annual rate of 15%. Proceeds from the note
payable were used for working capital purposes and to pay down $1.0 million of
the term portion of the Bank Loan. Payments under the note payable are
subordinated to the Bank Loan. Therefore, quarterly accrued interest is rolled
into the principal balance of the note payable. At December 31, 1999 and 2000,
the balance due on the note payable was approximately $2.6 million and
$3.0 million, respectively and the Company recognized $0.2 million,
$0.4 million and $0.4 million in interest expense during 1998, 1999 and 2000,
respectively pursuant to the note payable.
Prior to the Merger, on July 6, 1998, the Company received an additional
financing commitment from Thayer Equity and certain other shareholders of IQI.
Under the commitment, the Thayer-led group agreed to lend the Company, at our
election, up to an additional $4.0 million in subordinated indebtedness at any
time within 90 days after the Merger. As of October 23, 1998, we had drawn the
full commitment amount of $4.0 million. 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 our Common Stock at an exercise
price of $2.375 per share and provided certain anti-dilution protection. This
indebtedness is convertible into our Common Stock at a conversion price of
$2.375 per share. This debt is in addition to, and on the same basic terms as,
the subordinated debt that Thayer Equity had previously loaned to us.
In connection with the Merger, Thayer Equity provided the Company with
$6.8 million in subordinated indebtedness as well as a guarantee for
$2.0 million in bridge financing to assist in funding the Company's working
capital needs. This subordinated indebtedness is convertible into shares of our
Common Stock at a conversion price of $2.00 per share. In connection with the
guarantee, and for additional consideration of $110,000, the Company issued to
Thayer Equity warrants to purchase 1,100,000 shares of our Common Stock at an
exercise price of $1.96.
On March 30, 1999, Thayer Equity provided the Company with approximately
$5.7 million in additional subordinated indebtedness. Approximately one-half of
the proceeds from this financing were used to pay down bank debt and the
remainder for working capital purposes. The additional indebtedness is
convertible into our Common Stock at a conversion price of $1.15 per share. This
debt is in addition to, and on the same basic terms as, the subordinated debt
that Thayer Equity had previously loaned to us. The note payable matures on
August 31, 2003 with interest payable at a 12%
23
annual rate. Payments under the note payable are subordinated to bank debt;
therefore, quarterly accrued interest is rolled into the principal balance of
the note payable. At December 31, 1999 and 2000, the balance due on the note
payable was $6.2 million and $7.0 million, respectively and the Company
recognized $0.5 million and $0.8 million in interest expense during 1999 and
2000, respectively pursuant to the note payable.
NOTE RECEIVABLE
As of December 31, 2000, Michael G. Santry, a former director of the
Company, owed the Company approximately $2.2 million, including accrued
interest, under a secured promissory note dated September 16, 1997. The note
bears interest at an annual rate of 7% and is secured by 7,000 shares of our
Common Stock, options to purchase 1,750,000 shares of our Common Stock held by
Mr. Santry and other collateral. On May 26, 2000, under the terms of an amended
and restated promissory note and an amended pledge agreement, the Company
extended the term of the loan until March 31, 2001 and Mr. Santry agreed to pay
accrued but unpaid interest on the loan for the period October 1, 1999 through
September 30, 2000, pay rent on office space sub-leased from the Company, and
make certain other payments to the Company. On July 1, 2000, October 1, 2000 and
January 1, 2001, Mr. Santry defaulted on certain payment conditions of the
amended and restated secured promissory note. As a result, the Company exercised
its rights under the amended and restated secured promissory note to cancel
options to purchase 1,312,500 shares of our Common Stock held by Mr. Santry.
Mr. Santry resigned as a director of the Company on August 9, 2000. Mr. Santry
remains obligated under the promissory note, which remains secured by the
collateral described above, less the cancelled options. Because Mr. Santry was
an affiliate of the Company and the amount of the loan had been outstanding for
more than one year, the balance of the note receivable was reclassified as a
reduction to additional paid-in capital in shareholders' equity in the fourth
quarter of 1999.
GROWTH STRATEGIES
We primarily compete in the segment of the customer relationship management
CRM market that provides large corporations, as well as emerging e-commerce
companies, with outsourced multi-channel support (customer interaction support
across multiple communications channels including the Internet, e-mail and the
telephone). The CRM industry is very competitive and is spread among many
competitors, including a large number of in-house organizations and numerous
independent providers like Aegis. To compete more effectively in this market, in
March 2000, we introduced the Aegis E.CARE.PLUS(SM) suite of web-enabled
customer care capabilities that transformed a number of our production
workstations into multi-channel capable workstations able to handle a variety of
customer interactions, especially those originating from the Internet. The
transformation of additional workstations into e-care stations will require
capital expenditures and may require additional borrowing, including utilizing
funds available under the existing credit facility.
We also anticipate the continued implementation of our new site selection
strategy, which focuses on locating client service centers in areas where we
believe Aegis can more effectively attract and retain employees and efficiently
control front-line costs. Our growth and continued implementation of our growth
strategies may necessitate additional client service centers and such facilities
will require furniture, equipment and technology consistent with our existing
facilities. Any additional client service centers will require capital
expenditures and may require additional borrowing under the existing credit
facility. In addition, expenses associated with such centers may temporarily
adversely affect operating income.
Although no assurances can be made in this regard, based on our ability to
secure such financing to date, our current credit facility and anticipated cash
flow from operations, management anticipates that for the foreseeable future we
should be able to sufficiently fund the combination of our future working
capital needs, expenditures associated with the roll-out of our e-care
capabilities, and the
24
capital equipment requirements for the build-out of additional facilities needed
to meet unanticipated growth.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation-An Interpretation of APB 25." This interpretation
clarifies (i) the definition of employee for purposes of applying Opinion 25,
(ii) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (iii) the accounting consequence of various modifications to the terms of
a previously fixed stock option or award, and (iv) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000; however, certain conclusions in the Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998 or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation will be recognized on
a prospective basis from July 1, 2000. The implementation of FIN 44 did not have
a material effect on our financial position, results of operations or cash
flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended, requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivatives
and whether it qualifies for hedging accounting. SFAS No. 133 will be effective
for the Company's fiscal year ending December 31, 2001. Management believes that
the adoption of this statement will not have a significant impact on the
Company's financial position, results of operations or cash flows.
On December 3, 1999, the SEC released Staff Accounting Bulletin 101 "Revenue
Recognition in the Financial Statement" ("SAB 101"). This bulletin established
more clearly defined revenue recognition criteria than previously existing
accounting pronouncements. On June 26, 2000, the SEC released SAB 101(B), which
delays the required implementation of SAB 101 until no later than the fourth
quarter of fiscal years ending December 31, 2000. The effects of this bulletin
were not material to our financial position, results of operations or cash
flows.
We believe that any recently issued accounting pronouncements will not have
any material impact on our financial position, results of operations or cash
flows.
OUTLOOK AND UNCERTAINTIES
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain information in this Form 10-K contains "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 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", and "intends," the
negative thereof
25
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:
CONTROL BY PRINCIPAL SHAREHOLDERS
As a consequence of the Questor Transaction, the Questor Investors (through
their ownership of the Preferred F Shares) collectively own at December 31,
2000, on an as-converted basis, approximately 49.9% of our voting issued and
outstanding common stock and approximately 39.2% of our Common Stock and Common
Stock equivalents outstanding.
Thayer Equity and its affiliates (through their ownership of Common Stock,
warrants, convertible subordinated debt and convertible Series D and Series E
Preferred Stock) collectively own approximately 25.7% of our Common Stock and
Common Stock equivalents outstanding. The Series D and Series E Preferred Stock
are non-voting; therefore, Thayer holds approximately 18.3% of our voting equity
securities.
Under the terms of a Stockholders Agreement among Questor, Thayer and
certain other stockholders of the Company, each of Questor and Thayer has the
right to nominate six of twelve board members and to approve certain major
decisions (described below). As a result, Questor and Thayer can exercise
significant control over the outcome of substantially all matters that require a
Board of Directors or shareholder vote. This fact may discourage, delay or
prevent a change in control of Aegis. In addition, since our officers serve at
the pleasure of the Board of Directors, the Thayer and Questor investors
exercise significant control over day-to-day operations.
The Stockholders Agreement provides that the parties to the agreement
satisfy a "right of first offer" to the others prior to a transfer of its shares
to a third party. The Stockholders Agreement also provides that the parties
provide each other with certain "tag-along" rights in the event of a sale or
transfer of shares to a third party. The parties are required to use their best
efforts to vote all of their shares to elect and continue in office twelve
directors, six of whom are nominated by Questor and six of whom are nominated by
Thayer. Questor also agreed that from and after the Closing of the Questor
financing, it will use its best efforts to cause its Board designees to abstain
from voting on any Board action in connection with the optional redemption of
the Preferred F Shares. Further, the other parties agreed that from and after
the Closing they will use their best efforts to cause their Board designees to
abstain from voting on any Board action in connection with the repayment of
certain indebtedness owed to Edward Blank and his affiliates, or the redemption
or repurchase of any or all of either the Preferred D Shares or the Preferred E
Shares. Additionally, each committee of the Board will be constituted so that
the number of Questor Designees (as defined in the Stockholders Agreement) and
Existing Stockholder Designees (as defined in the Stockholders' Agreement) on
any such committee is as nearly as possible in the same proportion as the number
of Questor Designees and Existing Stockholder Designees on the entire Board. The
Stockholders Agreement and the Bylaws also provides that certain major decisions
will require the affirmative vote of not less than three-fourths of the
directors of the Board.
The list of major decisions include:
- issuing shares, including any indebtedness convertible into shares, or any
other form of equity in the Company or any subsidiary of the Company other
than a) granting options to directors or employees of the Company pursuant
to any incentive or other benefit plan adopted by the Board, b) issuing
shares of Common Stock pursuant to the exercise of such options and
c) issuing shares of Common Stock or any security, including any debt
convertible into shares of Common Stock, or any other form of equity in
the Company, in one or more offerings, where the aggregate purchase price
for all such issuances does not exceed $500,000;
- adoption of any stock-based employee benefit plan by the Company;
26
- incurring debt or entering into guarantees for borrowed money (excluding
trade payables) in excess of $2,500,000 in a 12 month period, subject to
certain exceptions;
- selling, leasing, pledging or granting a security interest or encumbrance
in all or substantially all of the Company's or any subsidiary of the
Company's assets, except in connection with the incurrence of indebtedness
for borrowed money that does not involve a major decision under 3 above;
- acquiring (whether through an asset purchase, merger, equity purchase or
otherwise) any assets (excluding acquisitions of raw materials and
supplies in the ordinary course of business) having a value, individually
or in the aggregate for any series of related transactions, in excess of
$2,000,000;
- selling or otherwise disposing of any assets (excluding sales or other
dispositions of inventory in the ordinary course of business) having a
value, individually or in the aggregate for any series of related
transactions, in excess of $2,000,000;
- amending the By-laws or the Certificate of Incorporation of the Company;
- any Change of Control Transaction;
- executing or delivering any assignment for the benefit of creditors of the
Company;
- filing any voluntary petition in bankruptcy or receivership with respect
to the Company; and
- taking any action while there is a vacancy on the Board, including without
limitation the filling of such vacancy.
As previously noted, on March 1, 2001, the Company received an offer from an
acquisition group made up of its principal shareholders for the purchase of all
of the outstanding shares of Common Stock not already owned by the acquisition
group at a price of $1.00 per share in cash. Questor and certain affiliated
funds are leading the acquisition group and are expected to fund the
transaction. The acquisition group will include Thayer and certain affiliated
funds and is expected to include certain other significant shareholders. It is
anticipated that Thayer and certain other significant shareholders would receive
approximately $10 million of cash in exchange for certain of the Company's
securities held by such shareholders.
The offer was made to the Company's Board of Directors. On March 15, 2001,
the Board established a special committee of two independent directors to
consider the offer. The special committee is expected to engage its own
financial advisor and legal counsel in connection with the proposed transaction.
Questor's proposal also indicates that Questor is interested only in acquiring
the publicly held shares, and is not interested in selling its interest in
Aegis.
SHARES AVAILABLE FOR FUTURE SALE
Questor, Thayer and their respective affiliates combined, own greater than
60% of our Common Stock and Common Stock equivalents outstanding and over 60% of
our voting equity securities (through their ownership of Common Stock, warrants,
convertible subordinated debt and convertible preferred stock). Although
Questor, Thayer and other affiliates of Aegis are restricted to some extent from
reselling their respective shares of Aegis Common Stock under applicable
securities laws, both possess registration rights with respect to the shares of
capital stock they own that can be exercised at any time. We cannot predict the
effect that future sales of stock, especially by Questor or Thayer, 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
conversion of preferred stock or the exercise of stock options), and even the
perception that such sales could occur, may adversely affect prevailing market
prices for Aegis Common Stock.
27
NEW MANAGEMENT
Our future success depends in large part on the efforts and abilities of
management. During 2000 we have added a new President and Chief Executive
Officer, President of our E&L marketing research division, Executive Vice
President of Administration, Executive Vice President of Sales and Marketing,
Chief Technology Officer and Chief Financial Officer. Each new officer must
familiarize himself with Aegis and its operations.
In addition, under the stockholders agreement, each of Questor and Thayer
may nominate six directors to the board. Although we expect that our board of
directors will be able to resolve major business issues, we cannot assure you
that deadlocks will not occur.
RELIANCE ON MAJOR CLIENTS
We have historically relied on a few major clients for the bulk of our
revenue. In 2000, AT&T and American Express accounted for approximately 36% and
14% of our revenues, respectively. Relying on one or a few major clients
includes a number of more specific business risks that may adversely impact our
ability to derive revenue from the client, including:
- 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.
For example, from time to time, AT&T reorganizes or curtails its marketing
programs, negotiates price reductions in certain of its programs or
significantly reduces its volume of business with us. In the first quarter of
2001, VoiceStream terminated its contract with us, and other CRM providers, and
moved its CRM business in-house in an effort to reduce costs. Other customers
may do the same. Many of our clients are concentrated in the telecommunications,
financial services, and consumer goods industries. A significant downturn in any
of these industries or a trend away from their use of telephone-based sales,
marketing research or outsourced customer relationship management services could
materially and adversely affect our business. Although we believe our relations
with our major clients are good, the loss of one or more of our major clients
could have a material adverse effect on our operating results. See "Item 1.
Business--Reliance on Major Clients."
LEVERAGE AND FUTURE CAPITAL REQUIREMENTS
At December 31, 2000, we had borrowed $45.0 million under our revolving line
of credit, had long-term capital leases of approximately $0.9 million and
subordinated indebtedness of $11.0 million, which results in a total debt to
total capitalization ratio of approximately 40.5%. Our tangible net book value
(including redeemable convertible preferred stock) was approximately
$37.8 million at December 31, 2000. Although we used the net proceeds from the
$46.8 million Questor transaction to reduce our outstanding bank debt by
approximately $42.0 million, our leverage could still adversely affect our
ability to obtain additional financing for working capital, acquisitions or
other purposes and could make our business more vulnerable to economic downturns
and competitive pressures. Our 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
28
and cash flows from operations are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
additional equity or debt financings or from other sources. Any additional
equity financings may be dilutive to our stockholders and the terms of any debt
financings are likely to contain restrictive covenants that limit our ability to
pursue certain courses of action. In addition, the terms of the Credit Agreement
and the Questor transaction limit our ability to incur debt other than pursuant
to the existing facilities. We cannot assure you that additional funding will be
available on acceptable terms, if at all. If adequate funds are not available,
we may be required to restructure our existing indebtedness or forego strategic
decisions or delay, scale back or eliminate operations, which could have a
material adverse effect on our business, financial condition and results of
operations.
FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH
We anticipate that the trend toward outsourcing of telephone and
Internet-based sales, marketing, and customer relationship management
activities, as well as increased penetration of new and existing clients and
markets will drive future growth. A number of other factors, including the
effective and timely initiation and development of client relationships, the
opening of new client service centers the recruitment, motivation and retention
of qualified personnel, the slowing U.S. economy, and intensified competition
among our telecommunications clients will affect growth. Sustaining growth will
also require better and faster systems and additional management, operational
and financial resources. We cannot assure you that we will be able to manage
expanding operations effectively or maintain or accelerate growth.
POSSIBLE VOLATILITY OF STOCK PRICE
Our stock price can be volatile, in response to:
- the Questor proposal to acquire all the outstanding common stock not owned
by the proposed acquisition group;
- sales or proposed sales by Questor, Thayer or other affiliates;
- variations in quarterly operating results;
- the depth and liquidity of the market for Aegis Common Stock;
- investor perception of Aegis and the industry in which it competes;
- the gain or loss of significant customer contracts;
- changes in management;
- changes in or new services by Aegis or competitors;
- general trends in the industry; and
- other events or factors.
In addition, the stock market generally 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. Since the Merger, the
market price per share of Aegis Common Stock has ranged from $3.50 to $0.44. On
March 23, 2001, the closing bid price for the Company's stock was $0.88.
29
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We could experience quarterly variations in revenues and operating income as
a result of many factors, including:
- the commencement or termination of significant CRM programs;
- the timing of clients' marketing campaigns and customer service programs;
- the timing of additional SG&A expenses incurred to acquire and support new
business;
- changes in Aegis' revenue mix among its various service offerings; and
- price competition.
In connection with certain contracts, we could incur costs in periods prior
to recognizing revenue under those contracts. In addition, we must plan our
operating expenditures based on revenue forecasts, and a revenue shortfall below
such forecast in any quarter would likely materially and adversely affect our
operating results for that quarter.
DEPENDENCE ON KEY PERSONNEL
The success of Aegis depends in large part on the abilities and continued
service of our executive officers and other key employees and our ability to
hire and retain qualified executive officers and key personnel. We cannot assure
you that we will be able to hire or retain these people. Losing one or more of
them could materially and adversely affect our results of operations.
RISKS ASSOCIATED WITH OUR CONTRACTS
Our contracts generally do not ensure a minimum level of revenue, and the
profitability of each client program may fluctuate, sometimes significantly,
throughout the various stages of such program. Although we seek to sign
long-term contracts with our clients, our contracts generally enable the client
to terminate the contract, or terminate or reduce program call volumes, on
relatively short notice. Although, certain of such contracts require the client
to pay a contractually agreed amount in the event of early termination, others
do not, and we cannot assure you that we will be able to collect such amount or
that such amount, if received, will sufficiently compensate us for our
investment in the canceled program or for the revenues we may lose as a result
of early termination.
DEPENDENCE ON OUTSOURCING TREND AND INDUSTRIES SERVED
Our growth depends in part on continued demand for our services prompted by
the outsourcing trend, as well as continued growth in the industries we serve.
If the interest in outsourcing wanes or there is a significant downturn in the
telecommunications, financial services, consumer products, entertainment or
other industries, we could be materially and adversely affected.
GOVERNMENT REGULATION
Both Federal and state governments regulate our business and the customer
solutions industry as a whole. In addition to current laws, rules and
regulations that regulate our business, bills are frequently introduced in
Congress to regulate the use of credit information. We cannot predict whether
additional Federal or state legislation will be enacted that regulates our
business. Additional Federal or state legislation could limit our activities or
increase our cost of doing business which could, in turn, cause our operating
results to suffer. See "Item 1. Business--Government Regulation."
30
DEPENDENCE ON LABOR FORCE
Our business is very labor intensive and characterized by high personnel
turnover. Although by industry standards we believe our employees are highly
qualified and well trained, many employees receive modest hourly wages and many
are part-time employees. A higher turnover rate among our employees would
increase our recruiting and training costs and decrease operating efficiencies
and productivity. Some of our operations require specially trained employees.
Growth in our business will require us to recruit and train qualified personnel
at an accelerated rate from time to time. We cannot assure you that we will be
able to continue to hire, train and retain a sufficient labor force of qualified
employees. A significant portion of our costs consists of wages paid to hourly
workers. An increase in hourly wages, costs of employee benefits or employment
taxes could materially adversely affect us.
During 2000, the United Steelworkers of America ("USWA") undertook an effort
to organize the Company's call center workforce located in Elkins, West
Virginia. The Company believes that a unionized workforce would be contrary to
the Company's best interests, and to its employees', customers' and
shareholders' best interests as well, and accordingly, vigorously opposed the
unionization effort. Although the USWA ultimately withdrew its election petition
in Elkins, there can be no assurances that the USWA or another union will not
endeavor to organize the Company's workforce in Elkins or other call center
locations. Unionization of the Company's workforce could materially and
adversely affect our results of operations.
COMPETITION
Our industry is very competitive. We cannot assure you that, as the customer
solutions industry continues to evolve, additional competitors with greater
resources than ours will not enter the industry (or particular segments of the
industry) or that our clients will not choose to conduct more of their
telephone-based sales, marketing research or customer relationship management
activities internally. The development of new forms of direct sales and
marketing techniques, such as interactive home shopping through television,
computer networks, including the Internet, and other media, could adversely
effect the demand for our services. In addition, the increased use of new
telephone-based technologies, such as interactive voice response systems, and
increased use of the Internet as a tool by our clients could reduce the demand
for certain of our 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 we attempt to
monitor industry trends and respond accordingly, we cannot assure you that we
will be able to anticipate and successfully respond to such trends in a timely
manner. See "Item 1. Business--Industry and Competition."
RELIANCE ON TECHNOLOGY AND COMPUTER SYSTEMS
We rely on specialized telecommunications and computer technology to meet
our clients' needs. We will need to continue to select, invest in and develop
new and enhanced technology to remain competitive. Our future success will also
depend on our ability to develop information technology solutions that keep pace
with evolving industry standards and changing client demands. Our business is
highly dependent on our computer and telephone equipment and software systems,
the temporary or permanent loss of which could materially and adversely affect
our business.
TELEPHONE SERVICE DEPENDENCE
We depend on service provided by various local and long distance telephone
companies. If service is disrupted or telephone costs increase significantly and
we cannot recover those costs by increasing the price of our services, our
operating results will suffer.
31
RISK OF BUSINESS INTERRUPTION
Our business will suffer if we are unable to protect our client service
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. We
may incur contractual damages to some clients or allow some clients to terminate
or renegotiate their contracts with us if one of these events occurs. We
maintain property damage and business interruption insurance, but it may not
adequately compensate us for any losses we may incur.
OTHER UNCERTAINTIES
We discuss other operating, financial or legal risks or uncertainties in
this Form 10-K in specific contexts and in our other filings with the
Commission. We are also 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
We have exposure to market risk associated with the floating rate portion of
the interest charged on our $45.0 million revolving credit facility. The credit
facility, which matures on June 30, 2003, bears interest at fluctuating rates
based upon the LIBOR rate and the prime rate. The margin above the applicable
LIBOR rate or the prime rate is determined based on the ratio of funded debt to
earnings before interest, taxes, depreciation and amortization, provided that
such rates were fixed at 3.50% and 2.50%, respectively, through December 31,
2000. The Company's exposure to interest rate risk due to changes in the LIBOR
rate and prime rate is not expected to be material and at December 31, 2000, the
fair value of the credit facility approximates its related carrying value
because the obligation bears interest at the current market rate.
We purchased an interest rate collar that expired March 31, 2000 to hedge
against the risk that our interest rate under our Credit Agreement would rise
beyond a specified level. This collar historically cost the Company about
$75,000 on an annualized basis. With this exception, we have not and do not
intend to use derivative financial instruments to manage the impact of interest
rate changes on our debt obligations or on our investments.
We invest our cash reserves in high quality short-term liquid money market
instruments with major financial institutions. The rate of interest earned on
these investments varies with overall market rates. A hypothetical one hundred
basis point change in the interest rate earned on these investments would not
have a material effect on our income or cash flows.
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.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the definitive proxy statement of the
Company for the 2001 Annual Meeting of Stockholders under the captions "Election
of Directors" and "Executive Officers" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the definitive proxy statement of the
Company for the 2001 Annual Meeting of Stockholders under the caption
"Compensation of Directors and Executive Officers" and is incorporated herein by
reference. Information in the section entitled "Report of the Compensation
Committee of the Board of Directors" and in the subsection entitled "Performance
Graph" are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the definitive proxy statement of the
Company for the 2001 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the definitive proxy statement of the
Company for the 2001 Annual Meeting of Stockholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
(2) FINANCIAL STATEMENT SCHEDULES
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.
(3) EXHIBITS
The exhibits to this report on Form 10-K are listed under item 14(c) below.
(B) REPORTS ON FORM 8-K
On March 2, 2001, we filed a report on Form 8-K reporting under "Item
5.-Other Events", that on March 1, 2001 the Company received an offer from an
acquisition group made up of its principal shareholders for the purchase of all
of the outstanding shares of Common Stock not already owned by the acquisition
group at a price of $1.00 per share in cash.
Questor and certain affiliated funds are leading the acquisition group and
are expected to fund the transaction. The acquisition group will include Thayer
and certain affiliated funds and is expected to include certain other
significant shareholders. It is anticipated that Thayer and certain other
significant shareholders would receive approximately $10 million of cash in
exchange for certain of the Company's securities held by such shareholders.
33
The offer was made to the Company's Board of Directors. On March 15, 2001,
the Board established a special committee of two independent directors to
consider the offer. The special committee is expected to engage its own
financial advisor and legal counsel in connection with the proposed transaction.
On March 21, 2001, we filed a report on Form 8-K reporting under "Item
5.--Other Events," that Stanton D. Anderson, a partner with the law firm of
McDermott, Will, & Emery, had been elected to our Board of Directors, replacing
Robert Denious who had resigned from the board.
We also reported that on March 21, 2001, the Board of Directors had
established a special independent committee of board members to consider the
previously announced offer dated March 1, 2001 from an acquisition group made up
of Aegis' principal stockholders to purchase all of the outstanding shares not
already owned by the acquisition group at a price of $1.00 per share in cash.
The special committee consists of two independent board members, Josh S. Weston
and Stanton D. Anderson.
The committee will engage its own independent financial advisor and legal
counsel as it considers the offer and assesses any other alternatives that the
special committee believes may be available and in the best interests of the
Registrant. The committee has been granted the authority to accept or reject or
to negotiate modifications to the offer on behalf of Aegis. We anticipate that
the review of the special committee will take approximately thirty to sixty
days.
The Company also received a letter from Questor Management Company dated
March 13, 2001 stating reasons that Questor believes its proposal is fair to,
and in the best interests of, Aegis and its public stockholders.
(C) EXHIBITS
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 to Exhibit 4.6 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 of the
Company's Form 10-K Annual Report for the year ended
December 31, 1999).
3.2 Amended and Restated Bylaws (filed herewith).
4.1 Specimen of Share Certificate of Company's Common Stock
(Incorporated by reference to Exhibit 4.1 of the Company's
Form 10-Q for the quarterly period ended September 30,
1998).
4.2 Form of Series B Preferred Stock certificate, as amended.
(Incorporated by reference to the Company's Form 10-K
Annual Report for the year ended June 30, 1994).
4.3 Elimination Certificate for Series D Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 4.3
of the Company's Form 8-K filed on December 20, 1999).
4.4 Series D and E Preferred Stock Certificate of Designation
(Incorporated by reference to Exhibit 4.10 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1999).
4.5 Amendment of Series D & E Certificate of Designation of the
Company (Incorporated by reference to Exhibit 4.2 of the
Company's Form 8-K filed on December 20, 1999).
4.6 Series F Preferred Stock Certificate of Designation
(Incorporated by reference to the Exhibit 4.1 of the
Company's Form 8-K Current Report filed on December 20,
1999)
34
10.1 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 to Exhibit 4.7 of the Company's Form 10-Q
Quarterly Report for the quarter ended March 31, 1998).
10.2 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 to Exhibit 4.8 of the Company's Form 10-Q
Quarterly Report for the quarter ended March 31, 1998).
10.3 Second Warrant to Purchase Shares of Common Stock of ATC
Communications Group, Inc. dated May 4, 1998,
(Incorporated by reference to Exhibit 10.29 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).
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 to Exhibit 10.26 of the
Company's Form 10-Q Quarterly Report 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 to Exhibit 10.22
of the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 1998).
10.6 Security Agreement between ATC Communications Group, Inc.
and Thayer Equity Investors III, L.P. dated May 4, 1998,
(Incorporated by reference to Exhibit 10.28 of the
Company's Form 10-Q Quarterly Report 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 to Exhibit 10.28 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).
10.8 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 to Exhibit 10.25
of the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 1998).
10.9 Promissory Note by and between Aegis Communications
Group, Inc. and Thayer Equity Investors III, L.P. dated
March 31, 1999 in the original principal amount of
$5.7 million (Incorporated by reference to Exhibit 10.24
of the Company's Form 10-K Annual Report for the year
ended December 31, 1998.
10.10 Securities Exchange Agreement entered into as of June 30,
1999 by and among Aegis Communications Group, Inc., Thayer
Equity Investors III, L.P., Edward Blank, The Edward Blank
1995 Grantor Retained Annuity Trust and ITC Service
Company (Incorporated by reference to Exhibit 10.25t of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1999).
10.11 Series Four Warrant to Purchase Shares of Common Stock of
Aegis Communications Group, Inc. issued to Thayer Equity
Investors III, L.P., Edward Blank, The Edward Blank 1995
Grantor Retained Annuity Trust and ITC Service Company
dated June 30, 1999 (Incorporated by reference to
Exhibit 10.27 of the Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1999).
10.12 Series Five Warrant to Purchase Shares of Common Stock of
Aegis Communications Group, Inc. issued to Thayer Equity
Investors III, L.P. dated June 30, 1999 (Incorporated by
reference to Exhibit 10.28 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30,
1999).
35
10.13 Parent Guaranty, dated as of August 6, 1999, made by Thayer
Equity Investors III, L.P. pursuant to the Fourth
Amendment to the Second Amended and Restated Credit
Agreement, in favor of each of 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 to
Exhibit 10.30 of the Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1999).
10.14 Third Amended and Restated Credit Agreement dated
December 10, 1999 (Incorporated by reference to
Exhibit 10.8 to the Company's Form 8-K Current Report
filed on December 20, 1999).
10.15 First Amendment, dated as of July 28, 2000, to the Third
Amended and Restated Credit Agreement 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 to the lenders
(Incorporated by reference to Exhibit 10.41 to the
Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 2000).
10.16 Series F Senior Voting Convertible Preferred Stock Purchase
and Registration Rights Agreement dated August 25, 1999 by
and among the Company, Questor Partners Fund II, L.P., a
Delaware limited partnership, Questor Side-by-Side
Partners II, L.P., a Delaware limited partnership, and
Questor Side-by-Side Partners II 3(c)(1), L.P., a Delaware
limited partnership, Thayer Equity Investors III, L.P., a
Delaware limited partnership, TC Co-Investors, LLC, a
Delaware limited liability company, ITC Services Company,
Edward Blank, trusts created by Edward Blank as both
grantor and trustee under Article Fourth of The Edward
Blank 1995 Grantor Retained Annuity Trust, dated
December 29, 1995, a trust organized under the laws of New
Jersey, and Amendment Nos. 1 and 2 thereto dated
August 26, 1999 and October 22, 1999, respectively
(Incorporated by reference to Exhibit 10.31 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended September 30, 1999).
10.17 Stockholders and Voting Agreement dated as of August 25,
1999 by and among Questor Partners Fund II, L.P., a
Delaware limited partnership, Questor Side-by-Side
Partners II, L.P., a Delaware limited partnership, and
Questor Side-by-Side Partners II 3(c)(1), L.P., a Delaware
limited partnership and the stockholders listed on
Schedule A thereto (Incorporated by reference to
Exhibit 10.34 of the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 1999).
10.18 Amendment No. 1 to the Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement
Purchase Agreement, dated August 26, 1999 (Incorporated by
reference to Exhibit 10.32 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended
September 30, 1999).
10.19 Amendment No. 2 to the Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights
Agreement, dated October 22, 1999 (Incorporated by
reference to Exhibit 10.33 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended
September 30, 1999).
10.20 Stockholders Agreement dated December 10, 1999 by and among
the Company, Questor Partners Fund II, L.P., a Delaware
limited Partnership, Questor Side-by-Side Partners II,
L.P., a Delaware limited partnership, Questor Side-by-Side
Partners II 3(c)(1), L.P., a Delaware limited partnership,
Thayer Equity Investors III, L.P., a Delaware limited
partnership and TC Co-Investors, LLC, a Delaware limited
liability company. (Incorporated by reference to
Exhibit 10.4 of the Company's Form 8-K Current Report
filed on December 20, 1999).
10.21 Second Amended and Restated Promissory Note dated May 26,
2000 by and between Aegis Communications Group, Inc. and
Michael G. Santry (Incorporated by reference to
Exhibit 10.41 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 2000).
36
10.22 Second Amended Pledge Agreement dated May 26, 2000 by and
between Aegis Communications Group, Inc. and Michael G.
Santry (Incorporated by reference to Exhibit 10.41 to the
Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 2000).
10.23 Letter of Amendment, dated April 7, 1998, of Promissory Note
by Michael G. Santry in favor of ATC Communications
Group, Inc. (Incorporated by reference to Exhibit 4.12 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).
10.24 Stock Pledge Agreement between Michael G. Santry and ATC
Communications Group, Inc., dated April 7, 1998
(Incorporated by reference to Exhibit 4.13 to the
Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).
10.25 1992 Stock Option Plan as amended (Incorporated by reference
to Exhibit 4.1 of the Company's Form S-8 Registration
Statement--File No. 333-01131).
10.26 1996 Stock Option Plan as amended (Incorporated by reference
to Exhibit 4.2 of the Company's Form S-8 Registration
Statement--File No. 333-01131).
10.27 Amended and Restated 1998 Stock Option Plan (Incorporated by
reference to Exhibit 10.39 to the Company's Form 10-Q
Quarterly Report for the quarterly period ended March 31,
2000).
10.28 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).
10.29 Employment Agreement between Hugh E. Sawyer and the Company
dated March 29, 2000, as amended (Incorporated by
reference to Exhibit 10.39 to the Company's Form 10-Q
Quarterly Report for the quarterly period ended March 31,
2000).
10.30 Employment Agreement between Michael J. Graham and the
Company dated May 8, 2000, as amended (Incorporated by
reference to Exhibit 10.41 to the Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30,
2000).
10.31 Agreement by and among Stephen A McNeely and Aegis
Communications Group, Inc. and its subsidiaries dated
April 17, 2000 (Incorporated by reference to
Exhibit 10.45 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 2000).
10.32 Employment Agreement between Thomas P.G. Franklin and Aegis
Communications Group, Inc. and its subsidiaries dated
October 13, 2000 (Incorporated by reference to
Exhibit 10.46 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 2000).
10.33 Employment Agreement between Herman M. Schwarz and Aegis
Communications Group, Inc. and its subsidiaries dated
October 23, 2000 (Incorporated by reference to
Exhibit 10.46 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 2000).
21.1 Subsidiaries of the Registrant (Incorporated by reference
from the Company's Form 10-K Annual Report for the year
ended June 30, 1998).
23.1 Consent of PricewaterhouseCoopers LLP, dated March 29, 2001
(filed herewith)
Copies of the above Exhibits are available to stockholders of record at a
charge of $0.50 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
37
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
December 31, 1998, 1999 and 2000.......................... F-3
Consolidated Balance Sheets at December 31, 1999 and 2000... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
Report of Independent Accountants on Financial Statement
Schedule.................................................. F-31
Schedule II--Valuation and Qualifying Accounts for the Years
Ended December 31, 1998, 1999 and 2000.................... F-32
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aegis Communications Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Aegis
Communications Group, Inc. and its subsidiaries at December 31, 2000 and
December 31, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 2, 2001, except for Note 20,
as to which the date is March 15, 2001
F-2
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues.................................................... $228,038 $246,268 $295,364
Cost of services, excluding depreciation and amortization
shown below............................................... 161,361 176,674 201,682
-------- -------- --------
Gross profit................................................ 66,677 69,594 93,682
Selling, general and administrative expenses................ 50,510 65,905 76,835
Depreciation................................................ 10,018 12,954 13,893
Acquisition goodwill amortization........................... 2,876 2,723 2,378
Non-cash asset impairment charge............................ -- 20,399 --
Restructuring and other non-recurring charges............... 8,395 541 3,539
-------- -------- --------
Total expenses............................................ 71,799 102,522 96,645
-------- -------- --------
Operating loss.............................................. (5,122) (32,928) (2,963)
Interest expense, net....................................... 4,799 5,864 4,516
Non-cash interest expense................................... 3,871 1,597 1,210
-------- -------- --------
Loss before income taxes.................................... (13,792) (40,389) (8,689)
Income tax benefit.......................................... (2,989) (6,213) (2,305)
-------- -------- --------
Net loss.................................................. (10,803) (34,176) (6,384)
Preferred stock dividends................................... -- 1,208 6,775
-------- -------- --------
Net loss after preferred stock dividends.................. $(10,803) $(35,384) $(13,159)
======== ======== ========
Basic and diluted loss per share............................ $ (0.27) $ (0.68) $ (0.25)
======== ======== ========
Basic and diluted weighted average shares outstanding:...... 40,383 52,043 52,004
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,043 $ 1,295
Accounts receivable -- trade, less allowance for doubtful
accounts of $1,058 in 1999 and $1,239 in 2000........... 54,839 71,827
Current deferred tax assets............................... 715 2,587
Prepaid expenses and other current assets................. 2,417 3,065
-------- --------
Total current assets.................................... 64,014 78,774
Property and equipment:
Equipment and software.................................... 49,134 61,262
Leasehold improvements.................................... 6,616 6,876
Furniture and fixtures.................................... 9,913 11,999
-------- --------
65,663 80,137
Accumulated depreciation and software amortization........ 32,175 44,103
-------- --------
33,488 36,034
Cost in excess of net assets acquired, net of accumulated
amortization of $5,461 in 1999 and $7,839 in 2000......... 48,203 45,825
Deferred tax assets......................................... 12,884 12,965
Deferred financing costs, net............................... 1,762 1,254
Other assets................................................ 234 130
-------- --------
$160,585 $174,982
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of long-term obligations................. $ 2,243 $ 2,039
Accounts payable.......................................... 6,332 7,543
Accrued compensation expense and related liabilities...... 5,629 8,315
Accrued interest expense.................................. 250 598
Other accrued expenses.................................... 10,464 13,788
Other current liabilities................................. 2,380 2,134
-------- --------
Total current liabilities............................... 27,298 34,417
Revolving line of credit.................................... 32,334 45,000
Long-term obligations, net of current portions.............. 1,554 928
Subordinated indebtedness due to affiliates................. 9,801 10,998
Commitments and contingencies
Redeemable convertible preferred stock 46,750, 9.626%
cumulative Series F shares issued and outstanding in 1999
and 2000.................................................. 41,970 46,655
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative
Series B shares issued and outstanding in 1999 and 2000;
83,206 and 96,407, 15% cumulative Series D shares issued
and outstanding in 1999 and 2000, respectively; and,
47,381 and 54,898, 15% cumulative Series E shares issued
and outstanding in 1999 and 2000, respectively.......... 2 2
Common stock, $.01 par value, 200,000,000 shares
authorized; 52,492,616 and 52,646,768 shares issued in
1999 and 2000, respectively............................. 525 526
Additional paid-in capital................................ 92,882 94,694
Treasury shares, at cost, 761,000 and 475,600 shares in
1999 and 2000, respectively............................. (1,918) (1,199)
Cumulative translation adjustment......................... 88 71
Retained deficit.......................................... (43,951) (57,110)
-------- --------
Total shareholders' equity.............................. 47,628 36,984
-------- --------
$160,585 $174,982
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK
---------------------------------------------------------------
SERIES B SERIES D SERIES E COMMON STOCK
------------------- ------------------- ------------------- ---------------------
PAR PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
-------- -------- -------- -------- -------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1997....... -- $-- -- $-- -- $-- 29,865,950 $299
Issuance of stock pursuant to
InterServ earnout.............. -- -- -- -- -- -- 251,486 2
Issuance of stock and adjustment
of capital pursuant to ATC/IQI
merger......................... 29,778 -- -- -- -- -- 21,839,625 218
Exercise of stock options........ -- -- -- -- -- -- 353,055 4
Purchase of subsidiary minority
interest....................... -- -- -- -- -- -- 1,334 --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- --
Issuance of convertible
subordinated debt with
beneficial conversion
feature........................ -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ --- ------ --- ------ --- ---------- ----
BALANCE AT DECEMBER 31, 1998....... 29,778 $-- -- $-- -- $-- 52,311,450 $523
Proceeds from conversion of
subordinated debt.............. -- -- 77,300 1 44,018 1 -- --
Settlement of merger escrow
shares......................... -- -- -- -- -- -- -- --
Proceeds from sale of treasury
shares......................... -- -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 179,820 2
Purchase of subsidiary minority
interest....................... -- -- -- -- -- -- 1,346 --
Proceeds from issuance of
preferred shares upon
conversion of dividends........ -- -- 5,906 -- 3,363 -- -- --
Director's note receivable....... -- -- -- -- -- -- -- --
Dividends on preferred stock..... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ --- ------ --- ------ --- ---------- ----
BALANCE AT DECEMBER 31, 1999....... 29,778 $-- 83,206 $ 1 47,381 $ 1 52,492,616 $525
Proceeds from sale of treasury
shares......................... -- -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 154,152 1
Proceeds from issuance of
preferred shares upon
conversion of dividends........ -- -- 13,201 -- 7,517 -- -- --
Dividends on preferred stock..... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ --- ------ --- ------ --- ---------- ----
BALANCE AT DECEMBER 31, 2000....... 29,778 $-- 96,407 $ 1 54,898 $ 1 52,646,768 $526
====== === ====== === ====== === ========== ====
TREASURY STOCK
------------------- ADDITIONAL CUMULATIVE RETAINED TOTAL
PAR PAID-IN TRANSLATION EARNINGS SHAREHOLDERS'
SHARES VALUE CAPITAL ADJUSTMENT (DEFICIT) EQUITY
-------- -------- ---------- ----------- --------- -------------
BALANCE AT DECEMBER 31, 1997....... -- $ -- $28,025 $ 13 $ 2,236 $ 30,573
Issuance of stock pursuant to
InterServ earnout.............. -- -- -- -- -- $ 2
Issuance of stock and adjustment
of capital pursuant to ATC/IQI
merger......................... 361,000 (1,421) 49,876 -- -- $ 48,673
Exercise of stock options........ -- -- 266 -- -- $ 270
Purchase of subsidiary minority
interest....................... -- -- -- -- -- $ --
Foreign currency translation
adjustment..................... -- -- -- 21 -- $ 21
Issuance of convertible
subordinated debt with
beneficial conversion
feature........................ -- -- 3,092 -- -- $ 3,092
Net loss......................... -- -- -- -- (10,803) $(10,803)
-------- ------- ------- ---- -------- --------
BALANCE AT DECEMBER 31, 1998....... 361,000 $(1,421) $81,259 $ 34 $ (8,567) $ 71,828
Proceeds from conversion of
subordinated debt.............. -- -- 12,130 -- -- $ 12,132
Settlement of merger escrow
shares......................... 500,000 (891) 891 -- -- $ --
Proceeds from sale of treasury
shares......................... (100,000) 394 (291) -- -- $ 103
Exercise of stock options........ -- -- 178 -- -- $ 180
Purchase of subsidiary minority
interest....................... -- -- -- -- -- $ --
Proceeds from issuance of
preferred shares upon
conversion of dividends........ -- -- 927 -- -- $ 927
Director's note receivable....... -- -- (2,212) -- -- $ (2,212)
Dividends on preferred stock..... -- -- -- -- (1,208) $ (1,208)
Foreign currency translation
adjustment..................... -- -- -- 54 -- $ 54
Net loss......................... -- -- -- -- (34,176) $(34,176)
-------- ------- ------- ---- -------- --------
BALANCE AT DECEMBER 31, 1999....... 761,000 $(1,918) $92,882 $ 88 $(43,951) $ 47,628
Proceeds from sale of treasury
shares......................... (285,400) 719 (443) -- -- $ 276
Exercise of stock options........ -- -- 183 -- -- $ 184
Proceeds from issuance of
preferred shares upon
conversion of dividends........ -- -- 2,072 -- -- $ 2,072
Dividends on preferred stock..... -- -- -- -- (6,775) $ (6,775)
Foreign currency translation
adjustment..................... -- -- -- (17) -- $ (17)
Net loss......................... -- -- -- -- (6,384) $ (6,384)
-------- ------- ------- ---- -------- --------
BALANCE AT DECEMBER 31, 2000....... 475,600 $(1,199) $94,694 $ 71 $(57,110) $ 36,984
======== ======= ======= ==== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,803) $(34,176) $(6,384)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 12,894 15,677 16,271
Assets written-off...................................... 5,807 64 --
Deferred income taxes................................... (2,889) (6,213) (2,305)
Non-cash asset impairment charge........................ -- 20,399 --
Non-cash interest expense............................... 3,871 1,597 1,210
Other................................................... 22 8 (21)
Changes in operating assets and liabilities:
Accounts and notes receivable -- related parties...... 1,958 (27) --
Accounts and notes receivable -- other................ (3,375) (5,254) (16,988)
Prepaid and other current assets...................... 1,127 (755) (296)
Other assets.......................................... 306 59 104
Accounts payable and other accrued liabilities........ 2,208 (1,989) 8,080
Other current liabilities............................. (3,220) 155 (246)
-------- -------- -------
Net cash provided by (used in) operating activities..... 7,906 (10,455) (575)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (12,520) (10,180) (14,097)
Acquisition costs, ATC.................................... (3,989) -- --
Net cash acquired from acquisition of ATC................. 296 -- --
-------- -------- -------
Net cash used in investing activities................... (16,213) (10,180) (14,097)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 4,477 11,734 35,000
Proceeds from affiliate debt.............................. 12,871 5,685 --
Principal payments on long-term debt...................... (1,572) (40,975) (22,334)
Payments on capital lease obligations..................... (1,380) (2,813) (2,663)
Proceeds from exercise of stock options................... 269 179 184
Deferred financing costs.................................. (966) (189) --
Proceeds from issuance of preferred stock................. -- 41,699 --
Proceeds from sale of common stock........................ -- 103 276
Dividends on preferred stock.............................. -- (11) (11)
Credit balance in cash account............................ -- 511 (511)
-------- -------- -------
Net cash provided by financing activities............... 13,699 15,923 9,941
Effect of exchange rates on cash............................ 21 54 (17)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 5,413 (4,658) (4,748)
Cash and cash equivalents at beginning of period............ 5,288 10,701 6,043
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 10,701 $ 6,043 $ 1,295
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIODS FOR:
Interest.................................................. $ 4,886 $6,859 $4,170
Income taxes.............................................. 894 -- --
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of stock to effect acquisition of ATC............ $45,320 $ -- $ --
Capital lease obligations................................. 1,299 497 1,833
NON-CASH INVESTING AND FINANCING ACTIVITIES
On July 12, 1997, the Company acquired the outstanding stock of InterServ
Services Corporation in exchange for cash of $15,415, common stock valued at
$13,321 and options valued at $1,472. In accordance with the InterServ purchase
agreement, the Company accrued $1,908 as consideration for additional purchase
price of InterServ, which was paid in 1998 in cash and stock in the same
proportion as the initial transaction.
On July 9, 1998, the Company acquired the common stock of ATC Communications
Group, Inc. in exchange for common stock valued at $45,320.
During 1998, 1999 and 2000, the Company purchased equipment and furniture
under financing leases totaling $1,299, $497 and $1,833, respectively.
During 1999, the Company converted $12,132 in subordinated indebtedness due
to affiliates of the Company into shares of Series D and E convertible preferred
stock.
During 1999 and 2000, the Company converted $927 and $2,072, respectively in
dividends on the Series D and E convertible preferred stock into additional
Series D and E shares.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On July 9, 1998, Aegis Communications Group, Inc. ("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. ("Sub"), a New York
corporation and wholly-owned subsidiary of ATC, 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. 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. Accordingly, the pre-Merger consolidated financial information
reported is that of IQI. In connection with the Merger, each share of IQI Common
Stock was converted into 9.7513 shares of Common Stock. In order to provide
consistency in reporting, historical share information for periods prior to 1998
was converted on this basis.
The Merger Agreement also contained a provision placing 5% of the shares to
be issued to holders of IQI Common Stock (as a result of the Merger) into an
escrow account pending resolution of any claims brought by ATC against IQI. In
1999, claims were made and settled resulting in the return of 500,000 shares of
the original ATC escrow shares to the original ATC shareholders. The settlement
of shares was treated as a capital contribution from existing shareholders
valued at fair value on the settlement date.
The accompanying consolidated financial statements include the accounts of
Aegis, IQI (formerly Edward Blank Associates), ATC, Lexi International, Inc.
("Lexi") which was acquired on November 22, 1996, and InterServ Services
Corporation ("InterServ") and its subsidiaries, which were acquired on July 12,
1997 (collectively, "Aegis" or the Company). See "Note 3.--Mergers and
Acquisitions." All intercompany accounts have been eliminated in consolidation.
The accompanying consolidated financial statements give effect to the
acquisitions of ATC, Lexi and InterServ as of their respective effective
acquisition dates.
The Company provides outsourced telecommunications-based customer
relationship management ("CRM") to Fortune 500 and emerging e-commerce companies
in various industries through strategically located client service centers
throughout the United States and Canada. The Company also provides, through its
InterServ subsidiary, marketing research services.
At December 31, 2000, Aegis had the following operating subsidiaries:
STATE OF DATE PERCENTAGE
NAME INCORPORATION ACQUIRED OWNERSHIP PRINCIPAL BUSINESS ACTIVITY
- ---- ------------- -------------- ---------- ---------------------------
Advanced Telemarketing Customer solutions
Corporation (d/b/a ATC
Communications)......... Nevada July 1998 98.9%
InterServ Services Customer solutions and
Corporation............. Delaware July 1997 100.0% marketing research
Lexi International, Customer solutions
Inc..................... California November 1996 100.0%
IQI, Inc.................. New York N/A 100.0% Customer solutions
EBA Direct, Inc........... Canada N/A 100.0% Customer solutions
F-8
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) REVENUES. Customer solutions revenues earned under contracts based on
hours worked are recognized when the related services are performed at
rates expected to be realized under the contracts. Customer solutions
revenues earned under contracts based on successful sales are recognized
on the date such sale is verified by the customer. Marketing research
revenues are recognized when services are performed in accordance with
contract terms. 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.
On December 3, 1999, the SEC released Staff Accounting Bulletin 101
"Revenue Recognition in the Financial Statement" ("SAB 101"). This
bulletin established more clearly defined revenue recognition criteria
than previously existing accounting pronouncements. On June 26, 2000, the
SEC released SAB 101(B), which delays the required implementation of SAB
101 until no later than the fourth quarter of fiscal years ending
December 31, 2000. The effects of this bulletin were not material to our
financial position, results of operations or cash flows.
(c) 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
three-year to seven-year lives. Leasehold improvements are amortized over
the asset life or lease term, whichever is shorter. Assets acquired under
capitalized lease arrangements are recorded at the present value of the
minimum lease payments. Gains and losses from the retirement or
disposition of property and equipment are included in operations in the
period incurred. Maintenance and repairs are charged to operations as
incurred while renewals or improvements to such assets are capitalized.
(d) COST IN EXCESS OF NET ASSETS ACQUIRED. The cost in excess of net assets
acquired recognized is amortized using the straight-line method over
periods of 20 to 25 years.
(e) DEFERRED FINANCING COSTS. Deferred financing costs are amortized over
the term of the related debt using the straight-line method.
(f) DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Company's management of
financial market risk, the Company entered into an interest rate collar
agreement with off-balance sheet risk, including interest rate collar
agreements. The Company entered into this agreement in order to manage
the interest rate sensitivity associated with its variable-rate
indebtedness. The differential to be paid or received in connection with
this interest rate hedging agreement is recognized as interest rates
change and is charged or credited to interest expense over the life of
the agreement. The collar agreement terminated on March 31, 2000.
F-9
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended, establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS
No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains and
losses be reported either in the statement of operations or as a
component of comprehensive income (loss), depending on the type of
hedging relationship that exists. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. This statement is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.
(g) FOREIGN CURRENCY TRANSLATION. The financial position and results of
operations of the Company's Canadian subsidiary ("EBA Direct") are
measured using local currency as the functional currency. Assets and
liabilities are translated using the end of period exchange rates while
the statements of operations are translated at the average exchange rate
prevailing during the period. The translation adjustment arising from the
use of different exchange rates from period to period is a cumulative
translation adjustment in stockholders' equity. Effective January 1,
1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). 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. The adoption of this standard
did not have a material effect on the Company's consolidated results of
operations or financial position. No separate statement of comprehensive
income was presented as the amounts are immaterial for all periods.
(h) INCOME TAXES. Aegis joins with its subsidiaries in filing a consolidated
federal income tax return. Income taxes are presented based on the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Deferred income taxes are
calculated utilizing an asset and liability approach whereby deferred
taxes are presented for the tax effects of basis differences for assets
and liabilities arising from differing treatments for financial and
income reporting purposes. Valuation allowances are established for
deferred tax assets where management believes it is more likely than not
that the deferred tax asset will not be realized.
(i) 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.
(j) RECLASSIFICATIONS. Certain reclassifications have been made to prior
year balances to conform to current year presentation.
(k) 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.
(l) 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
F-10
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 14.--Major Clients."
(m) 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 were
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.
(n) 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. The Company applies SFAS No. 123 on a
disclosure basis only. As such, SFAS No. 123 does not impact the
Company's consolidated balance sheet or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--An Interpretation of APB 25." This
Interpretation clarifies (i) the definition of employee for purposes of
applying Opinion 25, (ii) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (iii) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000;
however, certain conclusions in the Interpretation cover specific events
that occur after either December 15, 1998, or January 12, 2000. To the
extent that this Interpretation covers events occurring during the period
after December 15, 1998 or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying the Interpretation will be
recognized on a prospective basis from July 1, 2000. The implementation
of FIN 44 did not have a material effect on our financial position,
results of operations or cash flows.
(o) 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.
(p) 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
F-11
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, the
assumed conversion of the Company's issued and outstanding preferred
stock, and convertible subordinated indebtedness. Common stock
equivalents are not included in diluted EPS calculations to the extent
their inclusion would be anti-dilutive.
3. MERGERS AND ACQUISITIONS
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. ("Sub"), a New York corporation and wholly-owned subsidiary of ATC,
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, $0.001
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.
Accordingly, the pre-Merger consolidated financial information reported is that
of IQI.
Effective upon the Merger, the Company formally changed its name to Aegis
Communications Group, Inc. and its trading symbol to "AGIS".
The Merger Agreement also contained a provision extending the maturity date
of one-half of the principal amount of the promissory note payable to the
Company by an officer of the Company to March 31, 1999. At December 31, 2000,
the principal and accrued but unpaid interest on the note totaled approximately
$2,200. See "Note 17.--Related Party Transactions."
The Merger Agreement also contained a provision placing 5% of the shares to
be issued to holders of IQI Common Stock (as a result of the Merger) into an
escrow account pending resolution of any claims brought by ATC against IQI. In
1999, claims were made and settled resulting in the return of 500,000 shares of
the original ATC escrow shares to the Company. The settlement of shares was
treated as a capital contribution from existing shareholders valued at fair
value on the settlement date.
F-12
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
3. MERGERS AND ACQUISITIONS (CONTINUED)
The merger of ATC and IQI was accounted for by the purchase method of
accounting, whereby purchase price is allocated to assets and liabilities
assumed based on management's estimate of the relative fair values of the assets
and liabilities assumed at the date of acquisition, as follows:
ATC
--------
Purchase Price:
Issuance of common stock.................................. $45,320
Intrinsic value of ATC stock options...................... 2,090
Transaction costs......................................... 4,177
-------
51,587
Fair Market Value of Assets Acquired and Liabilities
Assumed................................................... 20,966
-------
Excess of Purchase Price over Fair Value of Assets Acquired
and Liabilities Assumed................................... $30,621
=======
The following condensed consolidated pro forma statement of operations data
present the consolidated results of operations of the Company as if the Merger
had occurred on January 1, 1998, and is not necessarily indicative of what would
have occurred had the acquisitions been made as of that date, or of the results
which may occur in the future.
YEAR ENDED
DECEMBER 31, 1998
-----------------
(UNAUDITED)
Total revenues.............................................. $275,984
Cost of services............................................ 196,066
--------
Gross profit.............................................. 79,918
Operating expenses.......................................... 77,970
Restructuring and other non-recurring charges............... 8,395
--------
Operating loss............................................ (6,447)
Interest expense, net....................................... 6,176
Non-cash interest expense................................... 3,871
Litigation settlement....................................... 1,900
--------
Loss before income taxes.................................. (18,394)
Income tax benefit.......................................... (4,190)
--------
Net loss.................................................. (14,204)
========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.28)
========
Weighted average shares outstanding (in thousands).......... 51,382
F-13
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
4. SALE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
On December 10, 1999, the Company completed the sale of 46,750 shares of
newly issued Preferred F senior voting convertible preferred stock to Questor
Partners Fund II, L.P., Questor Side-by-Side Partners II, L.P., and Questor
Side-by-Side Partners II 3(c)(1), L.P. (collectively the "Questor Investors")
for an aggregate purchase price of $46,750. The Questor Investors, obtained the
funds used to acquire the Series F Preferred Stock through capital contributions
by their partners. The Company used the net proceeds from the sale of the
Preferred F Shares to repay outstanding bank debt and pay transaction expenses.
The Preferred F Shares are entitled to receive dividends, in preference to all
other capital stock of the Company, except for the Company's Series B Voting
Convertible Preferred Stock, par value $0.01 per share (the "Preferred B
Shares"), at the rate of 9.626% per annum, which will accrue and be cumulative
from their original issue date. The dividends on the Preferred F Shares, to the
extent that dividends have not been paid, are added to the investment value of
such shares. The Preferred F Shares are convertible into shares of Common Stock
on the basis of one share of Common Stock per $1.00 of investment value of the
Preferred F Shares. The Preferred F Shares have a liquidation preference equal
to the investment value of such shares. As a result of the sale of the Preferred
F Shares and subsequent increases in its investment value due to dividends, on
an as-converted basis, at December 31, 2000 the Questor Investors collectively
own approximately 49.9% of the Company's issued and outstanding Common Stock and
approximately 39.2% of the Company's Common Stock and Common Stock equivalents
outstanding at December 31, 2000. The Preferred F Shares vote on an as-converted
basis and represent approximately 49.9% of the voting equity stock. Because the
Preferred F Shares are redeemable at the option of the Questor Investors in the
event of a change of control, the Preferred F Shares is classified as neither a
debt nor an equity instrument on the balance sheets at December 31, 1999 and
2000.
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On July 29, 1998, the Company announced that it would record pre-tax
restructuring charges of $13,000 related to the Merger. Current and future
expenses related to the restructuring decision which meet the specific generally
accepted accounting principles ("GAAP") criteria for accrual have been referred
to herein as "restructuring and other non-recurring" charges. Expenses related
to the restructuring decision which do not meet the specific GAAP criteria for
accrual have been referred to herein as "other" charges. Other charges have not
been accrued, but are recognized as the related expenses are incurred.
Accordingly, the Company recorded pre-tax charges of approximately $8,395
($5,247, net of taxes) in the year ended December 31, 1998 and approximately
$541 ($330, net of taxes) in the quarter ended March 31, 1999, as a part of the
total restructuring. These charges are primarily attributable to one-time
write-offs of redundant hardware and software, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees.
The Company's results for 2000 included non-recurring charges of $3,539
($2,185, net of taxes) recorded in connection with the transition in the
Company's executive management team and actions taken to implement a plan
designed to improve productivity by streamlining the Company's operating
platform.
F-14
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
The following table details the restructuring and other non-recurring
charges for the years ended December 31, 1998, 1999 and 2000:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Write-offs of redundant hardware and software............... $4,713 $ -- $ --
Severance costs and consolidation of certain administrative
functions................................................. 661 -- 1,440
Other non-recurring changes................................. 3,021 541 2,099
------ ---- ------
Total..................................................... $8,395 $541 $3,539
====== ==== ======
6. NON-CASH ASSET IMPAIRMENT CHARGE
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the estimated future
cash flows (undiscounted and without interest charges) estimated to be generated
by those assets are less than the assets' carrying value. SFAS No. 121 also
requires that when a group of assets being tested for impairment was acquired as
part of a business combination that was accounted for using the purchase method
of accounting, any goodwill that arose as part of the transaction must be
included as part of the asset grouping. In accordance with SFAS No. 121, the
Company reviews long-lived assets whenever events or changes in facts and
circumstances indicate that the carrying value of the assets may not be
recoverable. As a result of the performance of the Company's Elrick & Lavidge
("E&L") marketing research division since its acquisition (in a purchase
accounting transaction) by IQI in July 1997, the Company has performed an
analysis (based on E&L's estimated future cash flows) of the carrying value of
the goodwill associated with the purchase of E&L. As a result of this
evaluation, it was determined that the carrying value of the goodwill associated
with the purchase of E&L has been impaired. Accordingly, in the quarter ended
March 31, 1999, the Company adjusted the carrying value of E&L's long-lived
assets to their fair value resulting in a non-cash asset impairment charge of
$20,399, which reduced the amount of goodwill on the Company's balance sheet.
7. LONG-TERM DEBT
In conjunction with the December 10, 1999 closing of the Questor investment
and the associated repayment of bank debt, the Company entered into the Third
Amended and Restated Credit Agreement (the "Credit Agreement") with The Bank of
Nova Scotia and Credit Suisse First Boston (the "Lenders"), thereby curing all
outstanding defaults at December 31, 1999. Under the amended agreement, our
lenders expanded their aggregate revolving credit facility commitments from
$30,000 to $45,000. Certain financial targets were met by the Company in the
fourth quarter of 1999, resulting in a $1,500 commitment increase, to $46,500.
Certain financial targets were also met by the Company in the first quarter of
2000, resulting in a $2,500 increase in the commitment bringing the total
revolving facility to $49,000. This agreement matures June 30, 2003. Borrowings
under this agreement bear interest at fluctuating rates based upon prime rate
and the London Interbank Borrowing Offered Rate ("LIBOR"). The margin above the
applicable prime rate or the LIBOR rate is determined based upon
F-15
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. LONG-TERM DEBT (CONTINUED)
the funded debt to earnings before interest, taxes, depreciation and
amortization ("EBIDTA") ratio. The weighted-average interest rate on the
outstanding balances of $32,334 and $45,000 at December 31, 1999 and 2000 was
8.5% and 8.6%, respectively. Margins in 2000 ranged between 0.75% and 3.5%.
Interest payments are due quarterly.
As a result of charges recorded in the second quarter of 2000 (see
Note 5.--"Restructuring and Other Non-Recurring Charges" above), the Company was
in default of certain covenants of the Credit Agreement at June 30, 2000. On
July 28, 2000, following negotiations with the Lenders, we entered into the
First Amendment to the Credit Agreement (the "First Amendment"), which:
i) waived the Company's default under certain financial covenants of the Credit
Agreement; and ii) amended and restated certain covenants of the agreement
related to the interest rate, availability under the revolving line of credit,
and certain financial targets. As a result of the default and subsequent Credit
Agreement amendment, the Company's borrowing base under the First Amendment was
limited to $49,000 and the interest rate was established at the LIBOR rate plus
3.50% and the prime rate plus 2.50% through December 31, 2000. At December 31,
2000, we estimated that our available borrowing capacity under the amended
agreement at approximately $4,000.
The Credit Agreement contains various covenants that limit, among other
things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the parent company, Aegis, and requires
the operating subsidiaries to meet certain financial covenants. Similarly, under
the terms of the Company's guaranty of our operating subsidiaries' obligations,
the Company is subject to certain covenants limiting, among other things, our
ability to incur indebtedness, enter into guaranties, and acquire other
companies. The Credit Agreement is collateralized by liens on the operating
subsidiaries' accounts receivable, furniture and equipment, and is guaranteed by
the Company.
The Company has granted to the Lenders a security interest in all of the
assets of the Company including, without limitation, the pledge of all the
capital stock of Lexi, InterServ and ATC owned by the Company. In addition,
Lexi, InterServ and ATC have guaranteed the obligations of the Company. The Bank
loan also prohibits the Company from paying dividends on its Common Stock until
all the bank's commitments have been terminated and all of the Company's
obligations under the Bank Loan have been satisfied.
At December 31, 1998 and 1999, the Company had an interest rate collar
agreement with an original notional principal amount of $19,600 whereby the
Company pays interest at LIBOR rates, subject to a floor of 5.6% and a cap of
8.0%. The agreement terminated on March 31, 2000. The effect of this agreement
on interest expense for the years ended December 31, 1998, 1999 and 2000 was
immaterial.
F-16
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. LONG-TERM DEBT (CONTINUED)
Long-term debt at December 31, 1999 and 2000, is summarized below:
1999 2000
-------- --------
Bank revolving loan......................................... $32,334 $45,000
Capital lease obligations (See Note 9)...................... 3,797 2,967
Subordinated indebtedness due to affiliates (See Note 8).... 9,801 10,998
------- -------
45,932 58,965
Less current maturities..................................... (2,243) (2,039)
------- -------
$43,689 $56,926
======= =======
Future maturities of long-term debt at December 31, 2000 are as follows:
Years ending December 31,
2001 $ 2,039
2002 760
2003 56,164
2004 --
2005 and thereafter --
-------
$58,963
=======
8. SUBORDINATED INDEBTEDNESS
In 1996, IQI issued a subordinated note payable to a shareholder aggregating
$3,000, due November 2003. In December 1997, IQI and the shareholder consummated
an agreement to settle outstanding issues between the shareholder, IQI and
Thayer (IQI's principal shareholder). As part of such settlement, the aggregate
principal balance of the note was reduced to $1,000 and the interest rate
increased from 8% to 12% on the remaining note. The $2,000 reduction to the
shareholder note was treated as a contribution of capital by the shareholder.
In connection with the March 1998 amendment to the Bank Loan, IQI issued a
subordinated note payable to Thayer of $2,000 due August 31, 2003 with interest
payable quarterly at an annual rate of 15%. Proceeds from the note payable were
used for working capital purposes and to pay down $1,000 of the term portion of
the Bank Loan. Payments under the note payable are subordinate to the Bank Loan.
Therefore, quarterly accrued interest is rolled into the principal balance of
the note payable. At December 31, 1999 and 2000, the balance due on the note
payable was approximately $2,582 and $2,999, respectively and the Company
recognized $224, $358 and $417 in interest expense during 1998, 1999 and 2000,
respectively pursuant to the note payable.
In connection with the Merger, on July 9, 1998, the Company issued a
subordinated note payable to Thayer of $6,872 due August 31, 2003 and bearing
interest at a 12% annual rate. Proceeds from the note payable were used to
pay-off certain obligations of ATC and for transaction expenses related to the
Merger. Payments under the note payable are subordinate to the Bank Loan.
Therefore, quarterly accrued interest is rolled into the principal balance of
the note payable. Also in connection with the Merger, the Company obtained a
commitment from Thayer and a Thayer-led group of shareholders to
F-17
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
8. SUBORDINATED INDEBTEDNESS (CONTINUED)
provide up to $4,000 of additional working capital to the Company. On July 29,
1998 and October 23, 1998, the Company executed notes payable aggregating $1,900
and $2,100, respectively, pursuant to this commitment. The notes payable mature
on August 31, 2003 with interest payable quarterly at an annual rate of 12%.
Payments under the note payable are subordinate to the Bank Loan. Therefore,
quarterly accrued interest is rolled into the principal balance of the note
payable. The Company recognized $555 and $700 in interest expense during 1998
and 1999 respectively, pursuant to these notes payable.
In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's largest shareholder, Thayer Equity
Investors III, L.P. ("Thayer Equity", and together the "Thayer-led group"),
agreed to convert the $6,872 and $4,000 subordinated notes payable due to the
Thayer-led group into two new series of convertible preferred stock. The balance
due on the converted subordinated debt was $12,132, including accrued interest,
on the conversion date. The 77,300 shares of new Series D Preferred Stock ($0.01
par value per share, $100 per share liquidation preference) are convertible into
Company Common Stock at $2.00 per share, and the 44,018 shares of new Series E
Preferred ($0.01 par value per share, $100 per share liquidation preference) are
convertible into Company Common Stock at $2.375 per share. Both series earn
cumulative dividends (payable-in-kind in additional shares of the respective
series of Preferred Stock) at the annual rate of 15%, and are non-voting except
on specified matters. The Company may, at its option, redeem the Series D and E
Preferred shares in cash or by the issuance of a convertible promissory note
bearing interest at a rate of 12%.
On March 30, 1999, Thayer Equity provided the Company with $5,667 in
additional subordinated indebtedness. Approximately one-half of the proceeds
from this financing were used to pay down bank debt and the remainder for
working capital purposes. The additional indebtedness is convertible into the
Company's Common Stock at a conversion price of $1.15 per share. The note
payable matures on August 31, 2003 with interest payable at a 12% annual rate.
Payments under the note payable are subordinated to bank debt; therefore,
quarterly accrued interest is rolled into the principal balance of the note
payable. At December 31, 1999 and 2000, the balance due on the note payable was
$6,206 and $6,999, respectively and the Company recognized $539 and $793 in
interest expense during 1999 and 2000, respectively pursuant to the note
payable.
9. LEASES
The Company has capital leases covering certain equipment. Capital leases
are included in the accompanying consolidated balance sheet under the following
captions:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Equipment................................................... $ 9,482 $ 8,051
Less accumulated depreciation............................... (5,317) (5,149)
------- -------
$ 4,165 $ 2,902
======= =======
F-18
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
9. LEASES (CONTINUED)
Future minimum lease payments for all noncancelable leases with initial or
remaining terms of one year or more at December 31, 2000 are as follows:
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- -------- ---------
2001 $2,232 $ 5,642
2002 812 4,683
2003 172 3,463
2004 -- 2,086
2005 and thereafter -- 7,254
------ -------
Total minimum future lease payments......................... $3,216 $23,128
=======
Less: amounts representing interest......................... (249)
------
Present value of future lease payments...................... $2,967
======
Rent expense on operating leases for the years ended December 31, 1998, 1999
and 2000 was $7,792, $9,369 and $9,949, respectively.
10. SHAREHOLDERS' EQUITY
As a result of the Merger, each share of IQI Common Stock was converted into
9.7513 shares of the Company's Common Stock. The Merger Agreement also contained
a provision placing 5% of the shares to be issued to holders of IQI Common Stock
(as a result of the Merger) into an escrow account pending resolution of any
claims brought by ATC against IQI. In 1999, claims were made and settled
resulting in the return of 500,000 shares of the original ATC escrow shares to
the Company. The settlement of shares was treated as a capital contribution from
existing shareholders valued at fair value on the settlement date.
At December 31, 2000, 29,778 shares of $0.01 par value Series B preferred
stock were issued and outstanding. Such shares were previously issued by ATC,
are convertible into shares of Common Stock at a conversion ratio of one share
of Series B preferred stock for two shares of Common Stock, and pay a cumulative
cash dividend at the annual rate of $0.36 per share. Accrued dividends payable
were $145 and $156 at December 31, 1999 and 2000, respectively.
In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's then largest shareholder, Thayer
Equity Investors III, L.P. ("Thayer Equity", and together the "Thayer-led
group"), agreed to convert $12,132 of its subordinated debt into two new series
of convertible preferred stock. The 77,300 shares of new Series D Preferred
Stock ($.01 par value per share, $100 per share liquidation preference) are
convertible into Company Common Stock at $2.00 per share, and the 44,018 shares
of new Series E Preferred ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.375 per share. Both
series earn cumulative dividends (payable-in-kind in additional shares of the
respective series of Preferred Stock) at the annual rate of 15%, and are
non-voting except on specified matters. The Company may, at its option, redeem
the Series D and E Preferred shares in cash or by the issuance of a convertible
promissory note bearing interest at a rate of 12%. In consideration of the
conversion of the
F-19
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
subordinated debt into preferred stock, the Company issued the Thayer-led group
warrants to purchase an additional 1,000,000 shares of Company Common Stock at
$0.90625 per share, the closing price of such stock on the date the debt was
converted into equity. The excess of the fair value of the convertible
subordinated debt extinguished over the fair value of the securities issued was
$6,300 which was recorded as an addition to paid-in capital as a result of this
capital transaction.
11. EARNINGS PER SHARE
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 and convertible subordinated indebtedness. Common stock
equivalents are not included in diluted EPS calculations to the extent their
inclusion would have an anti-dilutive effect.
Basic and diluted weighted average shares outstanding for the years ended
December 31, 1998, 1999 and 2000 were computed as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- ---------- --------
(IN THOUSANDS)
BASIC AND DILUTED(1)
Weighted average common shares outstanding.............. 40,744 52,425 52,613
------ ------ ------
40,744 52,425 52,613
Weighted average treasury shares........................ (361) (382) (609)
------ ------ ------
Shares used in EPS calculation........................ 40,383 52,043 52,004
====== ====== ======
ANTIDILUTIVE SECURITIES EXCLUDED FROM THE COMPUTATION OF
DILUTED EPS FOR THE PERIODS INDICATED ARE AS FOLLOWS:
Shares issuable under option agreements................. 7,741 7,956 12,463
Shares issuable under warrant agreements................ 2,756 2,756 2,756
Shares issuable upon conversion of preferred stock...... 59 53,236 59,180
Shares issuable upon conversion of convertible debt..... 5,386 5,397 6,086
- ------------------------
(1) For the years ended December 31, 1998, 1999 and 2000, common stock
equivalents are not included in diluted EPS calculations because their
inclusion would have an anti-dilutive effect.
F-20
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
12. INCOME TAXES
The components of the income tax benefit applicable to continuing operations
are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Deferred
Federal......................................... $(2,617) $(5,361) $(2,004)
State........................................... (372) (852) (301)
------- ------- -------
Total income tax benefit.......................... $(2,989) $(6,213) $(2,305)
======= ======= =======
A reconciliation of the expected statutory federal income tax benefit to the
actual benefit based on pre-tax loss is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Expected federal tax benefit at the statutory
rate........................................... $(3,638) $(14,136) $(2,985)
State taxes, net of federal benefit.............. (535) (554) (196)
Goodwill amortization and acquisition costs...... 1,151 8,173 832
Other items...................................... 33 304 44
------- -------- -------
$(2,989) $ (6,213) $(2,305)
======= ======== =======
The components of deferred taxes included in the accompanying consolidated
balance sheets as of December 31, 1999 and 2000 are as follows:
1999 2000
-------- --------
Deferred tax assets:
Bad debt reserve........................................ $ 405 $ 445
Accrued expenses........................................ 960 2,119
Net operating loss carryforwards........................ 13,389 13,053
Deferred income......................................... 57 --
Tax credits............................................. 1,142 1,142
Other................................................... 12 23
------- -------
Gross deferred tax assets................................. 15,965 16,782
Deferred tax liabilities:
Effect of cash to accrual accounting change............. (718) --
Depreciation............................................ (939) (521)
Other................................................... -- --
------- -------
Gross deferred tax liabilities............................ (1,657) (521)
Valuation allowance....................................... (709) (709)
------- -------
Net deferred tax asset.................................... $13,599 $15,552
======= =======
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $34,000 and unutilized tax credits of approximately $1,100. Due to
an ownership change and the
F-21
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
12. INCOME TAXES (CONTINUED)
separate return limitation year rules, the utilization of net operating losses
and tax credits may be limited in future years. The net operating loss
carryforwards and tax credits begin to expire in 2013. Management has
established a valuation allowance for deferred taxes where management believes
it is more likely than not that the deferred tax asset will not be realized.
13. COMMITMENTS AND CONTINGENCIES
As a result of the Merger, the Company assumed certain commitments of ATC
including: (a) ATC renegotiated the employment agreement with a former officer
of ATC and entered into a consulting agreement with the former officer through
December 1998, with a monthly consulting fee of $15, and (b) ATC entered into a
release and separation agreement with an officer of ATC pursuant to which he
continued to receive bimonthly payments based on his previous annual base salary
rate of $400 for a period of one year. These payments ceased in October 1998.
IQI had employment agreements with seven employees, five of whom were
employed as of December 31, 1997, which provide for, among other matters, annual
base compensation and certain additional compensation upon a change in control
of the Company, as defined. In 1998, the Company incurred $1,162 of additional
compensation related to these agreements, which is included in corporate
selling, general and administrative expenses. In September 1999, the Company
entered into a separation agreement with an officer of the Company whereby the
officer would maintain his position with the Company through March 31, 2000. The
officer received severance compensation through December 31, 2000 totaling $169.
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.
14. MAJOR CLIENTS
The Company had sales to major clients (those clients representing 10% or
more of consolidated revenues) of the following amounts for the periods
indicated.
YEAR ENDED DECEMBER 31,
------------------------------
CLIENT 1998 1999 2000
- ------ -------- -------- --------
AT&T:
Customer solutions revenues........................... $61,242 $58,648 $106,477
Marketing research revenues........................... 1,451 1,020 1,313
------- ------- --------
Total AT&T revenues................................. $62,693 $59,668 $107,790
======= ======= ========
American Express:
Customer solutions revenues........................... $26,071 $38,850 $ 39,898
Marketing research revenues........................... -- -- 70
------- ------- --------
Total American Express revenues..................... $26,071 $38,850 $ 39,968
======= ======= ========
F-22
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
15. STOCK OPTIONS AND WARRANTS
In November 1996, IQI established the 1996 Incentive Stock Option Plan (the
"IQI Plan"). The Plan provides for the award of incentive stock options to
directors, officers, key employees and members of Thayer's Advisory Board. The
IQI Plan was administered by a Compensation Committee, as established by IQI's
Board of Directors. These options are intended to qualify as incentive stock
options ("ISOs") under the Internal Revenue Code or non-statutory stock options
("NSOs") which are not intended to qualify. IQI reserved 3,929,774 shares of
common stock for issuance under the IQI Plan.
Prior to the Merger, ATC shareholders approved two stock option plans, which
provided for the granting of options to purchase up to 5,000,000 shares of
Common Stock to key employees, officers and directors of ATC and its operating
subsidiary (the "ATC Plans"). At the date of the Merger, options to purchase
4,447,000 shares of Common Stock granted pursuant to the ATC Plans were
outstanding.
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 9,000,000
shares of Common Stock to key employees, officers and directors of the Company
and its operating subsidiaries. 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. As a result of the adoption of the 1998 Plan, the Company will
not grant any future option to purchase shares of Common Stock pursuant to the
IQI Plan and ATC plans.
The following table summarizes certain information related to options for
common stock:
IQI PLAN/ATC PLANS 1998 PLAN
--------------------------- --------------------------
WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- --------- --------------
Outstanding at December 31, 1997............. 3,740,725 $2.72 -- --
Granted.................................... 134,666 $2.08 1,083,000 $2.81
ATC Options................................ 3,384,000 $1.43 -- --
Forfeited.................................. (248,604) $1.45 -- --
Exercised.................................. (353,055) $2.72 -- --
---------- ----- --------- -----
Outstanding at December 31, 1998............. 6,657,732 $2.10 1,083,000 $2.81
Granted.................................... -- -- 2,085,838 $1.02
Forfeited.................................. (1,543,897) $2.98 (147,000) $1.25
Exercised.................................. (174,820) $0.87 (5,000) $1.30
---------- ----- --------- -----
Outstanding at December 31, 1999............. 4,939,015 $1.86 3,016,838 $1.43
Granted.................................... -- -- 6,694,000 $1.92
Forfeited.................................. (1,102,427) $2.86 (930,558) $2.81
Exercised.................................. (1,872) $0.85 (152,280) $2.79
---------- ----- --------- -----
Outstanding at December 31, 2000............. 3,834,716 $1.57 8,628,000 $1.75
========== =========
F-23
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
15. STOCK OPTIONS AND WARRANTS (CONTINUED)
Included in options exercised in 1998 are 255,000 options granted pursuant
to the ATC Plans, which were exercised subsequent to the Merger at prices
ranging from $1.00 to $1.50.
Information with respect to stock options outstanding is as follows:
OPTIONS OUSTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
NUMBER WEIGHTED NUMBER
RANGE OF OUTSTANDING WEIGHTED AVERAGE EXERCISABLE WEIGHTED
EXERCISE AT DECEMBER 31, AVERAGE REMAINING AT DECEMBER 31, AVERAGE
PRICES 2000 EXERCISE PRICE LIFE (MONTHS) 2000 EXERCISE PRICE
- --------------------- --------------- -------------- ------------- --------------- --------------
0.7$0 to $1.06.... 3,421,342 $0.89 110.40 928,175 $0.98
1.0$8 to $1.63.... 2,916,000 $1.39 108.52 1,896,000 $1.43
1.6$4 to $2.09.... 5,499,884 $1.91 99.44 1,373,273 $2.08
2.1$0 to $4.00.... 625,490 $3.17 50.16 625,490 $3.17
---------- ---------
0.7$0 to $4.00.... 12,462,716 $1.57 102.10 4,822,938 $1.75
========== =========
The weighted-average fair value of options granted during 1998, 1999 and
2000 was $1.46, $0.68 and $1.22, respectively. The fair values of options issued
prior and subsequent to the Merger were estimated on the dates of grant based on
the fair value method and the Black-Scholes option pricing model, respectively,
with the following assumptions:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Expected life in years................................... 6.0 6.0 6.0
Risk-free interest rate.................................. 5.40% 5.55% 6.35%
Dividend yield........................................... -- -- --
Volatility factor........................................ 63.9% 75.7% 100.3%
These option valuation models require input of highly subjective
assumptions. Because the Company's stock options issued prior to the Merger have
characteristics significantly different from those of traded options, and
because change in the subjective input assumptions can materially affect the
fair-value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net loss, as reported........................... $(10,803) $(34,176) $(6,384)
Amortization of stock options' fair value, net
of income tax................................. 695 1,090 1,850
-------- -------- -------
Pro forma net loss.............................. $(11,498) $(35,266) $(8,234)
======== ======== =======
Pro forma basic and diluted net loss per
share......................................... $ (0.28) $ (0.68) $ (0.16)
======== ======== =======
F-24
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
15. STOCK OPTIONS AND WARRANTS (CONTINUED)
In April 1993, ATC initiated the Advanced Telemarketing Corporation 1993
Stock Option Plan which provides for the granting of options to ATC's key
employees, officers, and directors to purchase shares of ATC's common stock
("Advanced Common"). In December 1996, ATC initiated the ATC Communications
Group, Inc. 1996 Stock Exchange Rights Plan (the "Rights Plan") which provides
for holders of options to purchase shares of ATC Common to exchange shares of
ATC 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. At December 31,
1999 and 2000, fully vested options to purchase 11,668 shares of ATC Common were
outstanding. The options to purchase ATC Common outstanding at December 31, 1999
and 2000 are subject to the Rights Plan as discussed above.
In connection with the IQI Agreement, IQI issued warrants to a shareholder
to purchase an aggregate of 919,060 common shares for $3,000. The right to
exercise the warrants expires at the earlier of i) repayment of the subordinated
notes payable--shareholder, ii) the date the Company consummates an underwritten
public offering of common stock, iii) the consummation date of a sale of the
Company, as defined, or iv) November 2003. In December 1997, IQI and the
shareholder settled a dispute whereby the shareholder would purchase two-thirds
of the common shares subject to warrants (612,714 shares) by paying the exercise
price of $2,000. The balance of the warrants remains outstanding and subject to
their original terms.
In connection with the Merger, Thayer provided a guarantee for $2,000 in
bridge financing to assist in funding ATC'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 per share. The warrants were valued at $188.
On July 6, 1998, the Company received an additional financing commitment
from a Thayer-led group to advance to the Company up to an additional $4,000 in
subordinated indebtedness. In connection with this commitment, the Company
issued the Thayer-led group warrants to purchase up to 350,000 shares of the
Company's Common Stock at an exercise price of $2.375 per share. The warrants
were valued at $95. See "Note 8.--Subordinated Indebtedness."
In consideration of certain guarantees, the Company issued Thayer Equity a
warrant to purchase up to 800,000 shares of the Company's Common Stock,
exercisable only if the guarantee is drawn upon and at an exercise price based
on the then market price of such stock. As part of its settlement of an
indemnification claim made by the company related to the Merger, Thayer Equity
waived its right to this contingent warrant.
In consideration of the conversion of the subordinated debt into preferred
stock on June 30, 1999, the Company issued the Thayer-led group warrants to
purchase an additional 1,000,000 shares of Company Common Stock at $0.90625 per
share, the closing price of such stock on the date the debt was converted into
equity.
16. EMPLOYEE BENEFIT PLANS
In 1999, Aegis adopted a defined contribution 401(k) plan (the "Plan")
covering all eligible employees of Aegis. Under the Plan, which replaces the ATC
Plan and the IQI Plans, the Company contributes up to 3% of eligible employee
salaries at the rate of $0.50 for every dollar the employee
F-25
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
contributes. Employer matching contributions to the Plan for the year ended
December 31, 1999 and 2000, were approximately $138 and $486, respectively.
During 1991, ATC adopted a defined contribution 401(k) plan (the "Advanced
Plan") covering all eligible employees, as defined. Eligible employees could
elect to contribute up to 20% of their compensation, not to exceed $10 per year.
The Company could, at its discretion, match employee contributions. There was no
employer matching contribution made in 1998, 1999 or 2000.
IQI has two qualified defined contribution 401(k) plans (the "IQI Plans")
covering all eligible employees of IQI. Under the IQI Plan which covered EBA and
Lexi employees, IQI contributed up to 4% of eligible employee salaries at the
rate of $0.50 for every dollar the employee contributed ($0.25 for every dollar,
for fiscal years ended July 31, 1996 and prior). Under the IQI Plan which
covered InterServ employees, IQI contributed amounts on a discretionary basis
equal to a percentage of each eligible employee's salary deferral, subject to
amounts allowed by the Internal Revenue Service. Contributions to the IQI Plans
for the years ended December 31, 1998 and 1999, were approximately $84 and $290,
respectively.
F-26
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
17. RELATED PARTY TRANSACTIONS
As of December 31, 2000, Michael G. Santry, a director of the Company, owes
the Company approximately $2,200, including accrued interest, under a secured
promissory note dated September 16, 1997. The note bears interest at an annual
rate of 7% and is secured by 7,000 shares of Aegis Common Stock, options to
purchase 1,750,000 shares of Aegis Common Stock held by Mr. Santry and other
collateral. On May 26, 2000, under the terms of an amended and restated
promissory note and an amended pledge agreement, the Company extended the term
of the loan until March 31, 2001 and Mr. Santry agreed to pay accrued but unpaid
interest on the loan for the period October 1, 1999 through September 30, 2000,
pay rent on office space sub-leased from the Company, and make certain other
payments to the Company. In July 2000, October 2000, and January 2001,
Mr. Santry defaulted on certain payment conditions of the amended and restated
secured promissory note. As a result, the Company exercised its rights under the
amended and restated secured promissory note to cancel options to purchase
1,312,500 shares of our Common Stock held by Mr. Santry. Mr. Santry resigned as
a director of the Company on August 9, 2000. Mr. Santry remains obligated under
the promissory note, which remains secured by the collateral described above,
less the cancelled options. Because Mr. Santry was an affiliate of the Company
and the amount of the loan had been outstanding for more than one year, the
balance of the note receivable was reclassified as a reduction to additional
paid-in capital in shareholders' equity in the fourth quarter of 1999.
During the year ended July 31, 1996, an affiliate of IQI purchased a
building in which the Company is leased space. Total rent expense relating to
this space and additional space leased from this affiliate amounted to
approximately $395 and $262 for the years ended December 31, 1998 and 1999,
respectively. The Company did not renew the lease on this space and did not
occupy this space during 2000.
On occasion from 1997 through 1999, Thayer and a Thayer-led group have
provided financing and financing assistance to the Company. See further
discussion in "Note 8. Subordinated Indebtedness" and "Note 15. Stock Options
and Warrants."
As previously noted, on December 10, 1999, we completed the sale of 46,750
shares of newly issued Preferred F Shares to the Questor Investors for an
aggregate purchase price of $46.75 million. The Company used this money to repay
outstanding bank debt and to pay transaction costs, including a $1,700
transaction fee to Questor Management Company. The Preferred F Shares are
entitled to receive dividends, in preference to all other capital stock of the
Company, except for the Company's Series B Voting Convertible Preferred Stock,
par value $0.01 per share (the "Preferred B Shares"), at the rate of 9.626% per
annum, which accrue and cumulate from their original issue date. The dividends
on the Preferred F Shares accrue on each share from its issuance on a daily
basis, whether or not earned or declared. To the extent that dividends have not
been paid in-cash on any March 31, June 30, September 30 or December 31 of any
year, all such dividends are added to the investment value of such share. The
Preferred F Shares also participate, on an as-converted basis, with the Common
Stock in any dividends that may be declared and paid after the payment of
preferential dividends. The Preferred F Shares vote on an as-converted basis. We
used the proceeds from the sale of the Preferred F Shares to repay outstanding
bank debt and pay transaction expenses. For the year ended December 31, 2000,
accrued dividends on the Preferred F Shares were added to the investment value
of such shares.
F-27
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
As a result of the sale of the Preferred F Shares and subsequent increases
to the investment value of such shares, on an as-converted basis, the Questor
Investors collectively beneficially own approximately 49.9% of the Company's
voting issued and outstanding Common Stock and approximately 39.2% of the
Company's Common Stock and Common Stock equivalents outstanding at December 31,
2000.
In addition, we granted the Questor Investors certain registration rights
with respect to the shares of Common Stock underlying the Series F Preferred
Stock. We agreed that, upon written request from the holders of more than 50% of
the Series F Preferred Stock, we would file and cause to become effective one
registration on a form other than Form S-3 and up to three registrations on
Form S-3 covering the Common Stock issued or issuable upon exercise or
conversion of the Series F Preferred Stock held by the Questor Investors. The
Questor Investors may require a "shelf" registration that would remain effective
for at least one year. The Company further agreed to provide the Questor
Investors with certain "incidental", or "piggyback" registration rights, subject
to rights of the Company's underwriters to "cut back" the number of shares to be
included in such registrations. At the same time the Company granted these
rights to the Questor Investors, the Company also granted the same rights to the
Thayer Investors. Previously, the Company had granted the Thayer Investors
certain demand and piggyback registration rights, but with respect only to
certain shares issued in the subordinated debt and warrant transactions
described above. The new grant extends these rights to all shares of Common
Stock held by the Thayer Investors, including shares issued in connection with
the merger with IQI.
18. SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company classifies its operations into
two segments, CRM solutions and marketing research services, which are managed
separately because each provides different services. The accounting policies of
the operating segments are the same as described in the summary of significant
accounting policies. See "Note 2. Summary of Significant Accounting Policies."
The CRM solutions segment provides large corporations with customized
multi-channel contact programs designed to strengthen our clients' relationships
with their customers. CRM solutions consist primarily of telephone-based
customer service and marketing programs as well as e-care capabilities, which
comprise handling a variety of customer contacts through our clients' Internet
web-sites, with our phone-based customer service offerings. The marketing
research segment provides its clients, representing a broad range of industries,
with marketing research measuring customer satisfaction, likelihood of customer
F-28
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
18. SEGMENTS (CONTINUED)
retention, point-of-sale research, full service quantitative and qualitative
research, segmentation and market structure, and marketing services. Business
segment information is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
REVENUES:
CRM solutions............................... $195,355 $219,066 $267,496
Marketing research.......................... 32,683 27,202 27,868
-------- -------- --------
Total..................................... $228,038 $246,268 $295,364
======== ======== ========
OPERATING INCOME (LOSS):
CRM solutions............................... $ 3,535 $(11,138) $ 1,384
Marketing research.......................... (262) (850) (808)
Non-cash asset impairment charge............ -- (20,399) --
Restructuring and other charges............. (8,395) (541) (3,539)
-------- -------- --------
Total..................................... $ (5,122) $(32,928) $ (2,963)
======== ======== ========
TOTAL ASSETS:
CRM solutions............................... $161,699 $142,491 $157,847
Marketing research.......................... 18,845 18,094 17,135
-------- -------- --------
Total..................................... $180,544 $160,585 $174,982
======== ======== ========
DEPRECIATION AND AMORTIZATION:
CRM solutions............................... $ 9,316 $ 12,366 $ 13,446
Marketing research.......................... 702 588 447
Acquisition goodwill amortization........... 2,876 2,723 2,378
-------- -------- --------
Total..................................... $ 12,894 $ 15,677 $ 16,271
======== ======== ========
F-29
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
19. UNAUDITED QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
Revenues........................................ $72,569 $ 70,014 $74,142 $78,639
Operating income (loss)......................... 944 (13,929) 4,231 5,791
Income (loss) before income taxes............... (249) (15,285) 2,717 4,128
Net income (loss)............................... (397) (10,592) 1,853 2,752
Preferred stock dividends....................... 1,612 1,658 1,733 1,772
Net income (loss) after preferred stock
dividends..................................... $(2,009) $(12,250) $ 120 $ 980
Basic and diluted income (loss) per common
share......................................... $ (0.04) $ (0.24) $ 0.00 $ 0.02
Weighted average common shares:
Basic......................................... 51,754 52,002 52,086 52,171
Diluted....................................... 51,754 52,002 52,157 52,204
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
Revenues......................................... $61,815 $58,024 $61,069 $65,360
Operating loss................................... (23,660) (5,039) (4,207) (22)
Loss before income taxes......................... (25,401) (6,878) (6,118) (1,992)
Net loss......................................... (23,830) (4,467) (4,022) (1,857)
Preferred stock dividends........................ -- 11 455 742
Net loss after preferred stock dividends......... (23,830) (4,478) (4,477) (2,599)
Basic and diluted loss per common share.......... $ (0.46) $ (0.09) $ (0.09) $ (0.05)
Weighted average common shares:
Basic and diluted.............................. 51,950 52,403 52,227 51,949
20. SUBSEQUENT EVENT
On March 1, 2001, the Company received an offer from an acquisition group
made up of its principal shareholders for the purchase of all of the outstanding
shares of Common Stock not already owned by the acquisition group at a price of
$1.00 per share in cash. Questor and certain affiliated funds are leading the
acquisition group and are expected to fund the transaction. The acquisition
group will include Thayer and certain affiliated funds and is expected to
include certain other significant shareholders. It is anticipated that Thayer
and certain other significant shareholders would receive approximately
$10 million of cash in exchange for certain of the Company's securities held by
such shareholders.
The offer was made to the Company's Board of Directors. On March 15, 2001,
the Board established a special committee of two independent directors to
consider the offer. The special committee is expected to engage its own
financial advisor and legal counsel in connection with the proposed transaction.
F-30
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEUDLE
To the Board of Directors and Shareholders of
Aegis Communications Group, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 2, 2001, except for Note 20, as to which the date is March 15, 2001,
appearing in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 2, 2001
F-31
AEGIS COMMUNICATIONS GROUP, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ADDITIONS
BALANCE AT BALANCE CHARGED TO BALANCE AT
BEGINNING ACQUIRED COSTS AND NET END
DESCRIPTION OF YEAR IN MERGER EXPENSES WRITE-OFF OF YEAR
- ----------- ---------- --------- ---------- --------- ----------
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts............ $ 550 $334 $747 $(294) $1,337
Deferred tax asset valuation allowance..... $ 103 $ -- $606 $ -- $ 709
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts............ $1,337 $ -- $697 $(976) $1,058
Deferred tax asset valuation allowance..... $ 709 $ -- $ -- $ -- $ 709
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts............ $1,058 $ -- $790 $(609) $1,239
Deferred tax asset valuation allowance..... $ 709 $ -- $ -- $ -- $ 709
F-32
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: March 23, 2001 By: /s/ HUGH E. SAWYER
--------------------------------------------
Hugh E. Sawyer
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: March 23, 2001 By: /s/ HUGH E. SAWYER
--------------------------------------------
Hugh E. Sawyer
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
DIRECTOR
Dated: March 23, 2001 By: /s/ MICHAEL J. GRAHAM
--------------------------------------------
Michael J. Graham
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Dated: March 23, 2001 By: /s/ JOHN R. BIRK
--------------------------------------------
John R. Birk
CHAIRMAN OF THE BOARD, DIRECTOR
Dated: March 23, 2001 By: /s/ DEAN ANDERSON
--------------------------------------------
Dean Anderson
DIRECTOR
Dated: March 23, 2001 By: /s/ EDWARD BLANK
--------------------------------------------
Edward Blank
DIRECTOR
Dated: March 23, 2001 By: /s/ STANTON D. ANDERSON
--------------------------------------------
Stanton D. Anderson
DIRECTOR
Dated: March 23, 2001 By: /s/ HENRY L. DRUKER
--------------------------------------------
Henry L. Druker
DIRECTOR
Dated: March 23, 2001 By: /s/ PETER D. FITZSIMMONS
--------------------------------------------
Peter D. Fitzsimmons
DIRECTOR
II-1
Dated: March 23, 2001 By: /s/ FREDERIC V. MALEK
--------------------------------------------
Frederic V. Malek
DIRECTOR
Dated: March 23, 2001 By: /s/ KEVIN J. PROKOP
--------------------------------------------
Kevin J. Prokop
DIRECTOR
Dated: March 23, 2001 By: /s/ PAUL G. STERN
--------------------------------------------
Paul G. Stern
DIRECTOR
Dated: March 23, 2001 By: /s/ DAVID M. WATHEN
--------------------------------------------
David M. Wathen
DIRECTOR
Dated: March 23, 2001 By: /s/ JOSH S. WESTON
--------------------------------------------
Josh S. Weston
DIRECTOR
II-2