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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended December 31, 1998.
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required) for the transition period
from ______________ to _______________
Commission file number: 0-14315
AEGIS COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
(State of Incorporation) (I.R.S. Employer Identification No.)
7880 BENT BRANCH DRIVE, SUITE 150, IRVING, TEXAS 75063
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (972) 830-1800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 26, 1999 was approximately $21.9 million.
As of March 26, 1999, 52,311,450 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders are incorporated by reference in Part III of this
report.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Aegis Communications Group, Inc. (hereinafter referred to as "Aegis" or
the "Company") is a leading provider of integrated marketing services. We
develop and implement customized communications programs designed to strengthen
our clients' relationships with their customers. We provide integrated marketing
services to our clients through our two business segments: teleservices and
marketing research. Our teleservices offerings include: telephone-based customer
service, help desk, and customer acquisition and retention; multilingual
communications programs; call center facilities management; order provisioning,
which is the transferring of data into our clients' billing systems and customer
records; and database management. Our Elrick & Lavidge marketing research
division ("E&L") provides our research clients, representing a broad range of
industries, with customized marketing research services including customer
satisfaction studies, quantitative and qualitative research, new product
development and data management. See "Notes to Consolidated Financial Statements
- - 18. Segments."
Aegis specializes in the execution and management of large volume call
handling requirements for major U.S. corporations in a variety of industries.
Aegis' operations are technology driven through our advanced data and
communications systems, which permit real-time interface with our clients' host
systems. Aegis believes it competes on the basis of four primary
differentiators: (1) consistency and quality of service; (2) implementing
advanced technology including predictive dialing, call blending and proprietary
front-end interfaces which enable real-time access to clients' host data;
(3) adaptability to changing client needs; and (4) cost effectiveness.
Aegis was incorporated in Delaware on August 2, 1985 under the name of
Kenneth Resources, Inc. and was known as National Reference Publishing, Inc.
until it changed its name to NRP, Inc. in July 1988; from July 1988 until April
1996, the Company was known as NRP, Inc.; and from April 1996 until July 1998,
the Company was known as ATC Communications Group, Inc. ("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").
Pursuant to the Merger Agreement, each former holder of common stock,
$.001 par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of IQI Common Stock and IQI stock options and warrants in
a tax-free exchange. The acquisition has been accounted for as a reverse
purchase, meaning that for accounting purposes, IQI is the surviving corporation
and is treated as having acquired ATC in a purchase accounting transaction.
Effective upon the Merger, the Company formally changed its name to Aegis
Communications Group, Inc. and its Nasdaq National Market System symbol to
"AGIS".
At the Company's annual meeting of stockholders held on July 9, 1998,
the stockholders elected a new board of directors comprised of six nominees of
ATC and six nominees of IQI, with Michael G. Santry of ATC and Paul G. Stern of
IQI as Co-Chairmen of the board. Effective with the Merger, the Company also
amended its bylaws to require the approval of seven directors for certain
transactions. Although management expects that the board of directors of Aegis
will be able to resolve major business issues, there can be no assurance that,
given the equal allocation of board seats to each party to the
2
Merger, deadlocks will not occur. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Outlook and
Uncertainties - New Management."
Certain stockholders who, in the aggregate, own more than a majority of
the voting stock of Aegis have entered into a Stockholders' Agreement whereby,
for a period of two years from the date of the Merger Agreement, each such
stockholder has agreed to vote its shares of Aegis capital stock in favor of the
nominees to the board of directors of Aegis selected by the representative of
the other party's stockholder group.
ADDITIONAL INFORMATION CONCERNING THE MERGER IS SET FORTH IN THE
ATC/IQI JOINT PROXY STATEMENT/PROSPECTUS (THE "PROXY STATEMENT") DATED JUNE 1,
1998.
Our headquarters are located at 7880 Bent Branch Drive, Suite 150,
Irving, Texas 75063, and our telephone number is (972) 830-1800. Unless the
context requires otherwise, references to the Company herein include its
consolidated subsidiaries.
SERVICES AND STRATEGY
TELESERVICES
Aegis designs, manages and conducts large, telephone-based marketing
and customer service programs ("teleservices"). We offer both outbound
teleservices, which involves making outgoing telephone calls, usually to market
a client's products or to acquire new customers, and inbound services, which
involves answering incoming telephone calls and responding to customer
inquiries. To illustrate, when one of our client's customers places a call to a
toll-free "800" customer service number it is directed to an Aegis client
service center and answered by one of our trained customer service
representatives ("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 call, the customer's record
is automatically updated in the client's database with any new information.
These programs feature live, knowledgeable operators provided on an
outsourced basis to large U.S. corporations in a wide variety of industries.
Additionally, Aegis manages both inbound and outbound client service centers for
clients under long-term arrangements, which usually require Aegis to develop and
license unique software systems for the client. We do not engage in any form of
outbound calling that uses computerized voice presentations or requires
unsolicited financial requests, nor is Aegis engaged in the "900" number
business.
Aegis seeks long-term relationships with major corporations that
utilize the telephone and the Internet as important, ongoing elements in their
core marketing and/or customer service strategies. By offering high quality,
customized, flexible and fully-integrated services designed to improve quality,
productivity and effectiveness, Aegis can enhance and add value to our clients'
existing marketing and customer service programs.
Our objective is to become the premier high-quality, full service
provider of outsourced client service center operations to large corporations
throughout the United States. We believe that the inbound segment of the
teleservices industry possesses the greatest long-term growth potential so we
are concentrating our efforts primarily on that industry segment. In order to
serve all of our clients' needs, however, we offer outbound services as well.
For the year ended December 31, 1998, approximately 59% of Aegis' revenues were
generated from outbound teleservices, 27% from inbound teleservices and 14% from
marketing research services. On a pro forma basis accounting for the Merger
3
as if it had occurred on January 1, 1998, approximately 52% of Aegis'
revenues for the year ended December 31, 1998 were generated from outbound
teleservices, 37% from inbound teleservices and the remaining 11% by
marketing research services.
MARKETING RESEARCH
E&L offers several information-based services designed to assist our
research clients in more effectively marketing their products and services to
their customers. E&L's data collection methods include telephone interviews,
in-store, in-person, on-line, focus group, and one-on-one interviews. Included
among E&L's offerings are the following: customer satisfaction studies; customer
value analysis (a more sophisticated customer satisfaction study approach which
determines, in addition to satisfaction, how a client's customers perceive
value); focus groups; strategic planning; new product development (primarily
with clients in the consumer packaged goods industry); data management; and
field marketing services (for example, taking recalled products off shelves,
distributing samples and posing as shoppers in client stores).
Elements of E&L's growth strategy include: developing new product and
service offerings such as point-of-sale research, product category management,
and Internet data collection; broadening our expertise to more client
industries, specifically healthcare and high technology; expanding our dedicated
sales force; and partnering with global organizations to increase our
international revenue.
OPERATIONS
As of December 31, 1998, Aegis operated or managed over 5,900
production workstations in its 25 teleservices client service centers and nine
marketing research facilities. A workstation includes a cubicle, personal
computer with monitor and keyboard, a headset and an automatic call distributor
console.
TELESERVICES
Three Lucent Technologies G-3 telecommunications switches and nine
Rockwell Galaxy GVS 3000 Automatic Call Distributors 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 a Rockwell Predictive Dialing System
based on a fault tolerant Tandem Platform. 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. In all our client services centers combined, we have dedicated
over 70,000 square feet of space to training and quality assurance. Our training
facilities are equipped with workstations for live role playing practice by
training classes. Currently, 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
4
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, 1998, E&L maintained full-service offices located in
five major cities throughout the United States. E&L also staffs four research
service centers at separate locations containing, in the aggregate, 254
computer-assisted telephone interview ("CATI") workstations.
As of December 31, 1998, E&L employed 185 full-time marketing research
professionals. In addition, the firm has a part-time staff of 768 associates in
its field and telephone interviewing centers. Knowing 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
TELESERVICES
The telecommunications-based marketing, customer service and call
center management services ("teleservices") industry is spread among many
competitors including a large number of in-house organizations and numerous
independent providers like Aegis. According to industry experts, spending on
domestic teleservices was approximately $90 billion in 1998 and is expected to
grow an average of 15% per year for the next several years due to the increased
use of call centers for customer care and the trend toward outsourcing. Aegis
believes that large corporations will increasingly outsource their teleservices
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.
The teleservices industry is very competitive. Competitors range
from very small firms offering specialized applications to large,
full-service companies with multiple, high volume call centers, including
APAC Teleservices, Inc., Convergys Corp., ICT Group, Inc., National TechTeam,
Inc., Precision Response Corp., RMH Teleservices, Inc., Sitel Corp., Sykes
Enterprises, Inc., TeleSpectrum Worldwide, Inc., TeleTech Holdings, Inc. and
West TeleServices, Inc. We also compete against the in-house call center
operations of clients and prospective clients. We believe we compete
primarily on the basis of: (1) consistency and quality of service; (2)
technological expertise; (3) flexibility in responding to our clients'
sales, marketing and customer service needs; and (4) cost effectiveness.
MARKETING RESEARCH
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. The 174 research companies in
the Council of American Survey Research Organizations reported total research
marketing revenue of $6.0 billion in 1997. The June 8, 1998 issue of
MARKETING NEWS ranked Elrick & Lavidge as the twenty-third largest marketing
research company in the United States.
5
E&L regularly experiences significant competition from numerous market
participants, including other marketing research firms, marketing and research
departments of various companies, advertising agencies and business consulting
firms. Other marketing research firms with which we regularly compete include
M/A/R/C Group, Inc., Maritz Marketing Research, Inc., Market Facts, Inc.,
Opinion Research Corp. and Total Research Corp., among others. We believe that
marketing research firms 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
Aegis seeks to differentiate itself from our competitors through our
emphasis on quality and service to the client, our technological capabilities
and our ability to meet and enhance the client's changing requirements. We seek
to develop and maintain long-term relationships with our clients and we focus
our marketing efforts on large corporations in selected industries that use
customer services and marketing research as important, ongoing elements in their
core marketing strategy. We believe these corporations present the greatest
potential for our 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 (the "FCC") rules under the Federal Telephone
Consumer Protection Act of 1991 prohibit telemarketing firms from initiating
telephone solicitations to residential telephone subscribers before 8:00a.m. or
after 9:00p.m., local time, and prohibit the use of automated telephone dialing
equipment to call certain telephone numbers. In addition, the FCC rules require
telemarketing firms to maintain a list of residential consumers who have stated
that they do not want to receive telephone solicitations and to avoid making
calls to such consumers.
The Federal Telemarketing and Consumer Fraud and Abuse Protection Act
of 1994 broadly authorized the Federal Trade Commission (the "FTC") to issue
regulations prohibiting misrepresentation in telephone sales. 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
cannot be final unless a written contract is delivered to and signed by the
buyer and may be canceled within three business days. At least one state also
prohibits telemarketers from requiring credit card payment, and several other
states require certain telemarketers to obtain licenses and post bonds. For
instance, persons selling insurance products are required to be licensed by
various state insurance commissions and participate in regular continuing
education programs. Some industries we serve are also subject to various state
government regulations with regard to selling practices and consumer disclosure
requirements.
6
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.
Consequently, we experience quarterly variations in revenues and operating
results.
PERSONNEL AND TRAINING
Our business depends on people. We are constantly trying to hire, train
and manage good people. We try to locate our client service centers where the
cost of living 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. Still, our attrition rate is
high compared to most other industries and it is difficult and costly to hire
and train new employees.
RELIANCE ON MAJOR CLIENTS
We have historically relied on a few major clients for the bulk of our
revenue. In 1998, AT&T accounted for approximately 27% of our revenues and
American Express for approximately 11%. In 1997, AT&T and American Express
accounted for approximately 41% and 0% of revenues, respectively. From time to
time, AT&T reorganizes and/or curtails its marketing programs, negotiates price
reductions in certain of its programs and significantly reduces its volumes with
its teleservices vendors, including Aegis, all of which negatively affect our
revenues. Although we try to build and improve our customer relationships, we
have tried 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 script and deliver quality and efficient service. We regularly measure
the quality of our services by benchmarking factors like 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 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 sales 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, 1998, Aegis employed approximately 7,344 persons
including 6,302 client service representatives and marketing research
interviewers. As of February 28, 1999, Aegis employed approximately 7,829
persons including 6,729 client service representatives and marketing research
7
interviewers. We believe our relationship with our employees is 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. Regional headquarters are
located in: Los Angeles, California in leased facilities adjacent to our Los
Angeles client service center operations and occupying approximately 7,000
square feet; and Tucker, Georgia in leased facilities adjacent to one of our
marketing research facilities and occupying 2,089 square feet. 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. Aegis also maintains office space in Dallas,
Texas containing approximately 4,170 square feet that is occupied pursuant to a
lease expiring November 30, 2001. All of our facilities are occupied pursuant to
various lease arrangements, except: the Dalton, Minnesota facility which Aegis
owns; the Browns Valley, Minnesota center which we occupy under an operating
lease arrangement at the end of which Aegis will own the building; and, six
additional facilities operated by independent third parties ("Managed Centers").
All our Managed Centers are required to have state-of-the-art predictive dialing
capabilities, and we conduct site visits to assess the technological
capabilities of all Managed Centers. We have used Managed Centers historically
as a method of expanding capacity without increasing fixed costs. Aegis
believes, however, that the development of additional Aegis-operated centers
should enhance our long-term profitability. Accordingly, Aegis continues to
implement its site strategy, which focuses on locating client service centers in
what we believe are more economically attractive labor markets. To that end, in
the fourth quarter of 1998, we closed centers in Fort Worth, Texas and Garland,
Texas, which were located in higher cost, higher turnover markets; and, in
January 1999, we announced plans to open new client service centers in St.
Joseph, Missouri and Sierra Vista, Arizona during the second quarter of 1999. As
of December 31, 1998, Aegis performed its services in the facilities listed
below:
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TELESERVICES CLIENT SERVICE CENTERS
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- ----------------------------- ------------------- ----------------------- ----------- ---------------
Addison, Texas July 1994 June 30, 1999 90,000 1,214
Arlington, Texas April 1990 August 31, 2002 11,600 146
Barrie, Canada April 1996 April 30, 1999 8,000 62
Browns Valley, Minnesota January 1996 N/A 4,000 47
Dalton, Minnesota April 1995 N/A 4,224 56
Elkins, West Virginia November 1998 October 31, 2008 20,125 204
Euless, Texas (a) July 1988 July 31, 2001 10,575 185
Fairmont, West Virginia October 1997 February 28, 2009 48,000 208
Hazleton, Pennsylvania April 1996 April 30, 2001 4,700 80
Irving, Texas (2 facilities) September 1985 December 31, 2003 97,126 1,254
Joplin, Missouri February 1998 February 1, 2008 33,055 338
Los Angeles, California October 1985 October 31, 2002 68,700 728
Mesquite, Texas November 1996 September 15, 2000 10,575 168
Newport News, Virginia April 1995 April 30, 2001 10,000 120
Port St. Lucie, Florida September 1997 July 23, 2007 44,000 232
Tucker, Georgia March 1993 May 31, 2000 43,347 311
Virginia Beach, Virginia March 1989 May 31, 1999 8,037 120
Managed Centers (b) N/A - 185
----------- ---------------
516,064 5,658
=========== ===============
- --------------
(a) Owned by Ed Blank and leased to Aegis at market rates.
(b) Represents approximate number of workstations in six managed centers located
in Iowa and Minnesota.
MARKETING RESEARCH FACILITIES
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- ----------------------------- ------------------- ----------------------- ----------- ---------------
Chicago, Illinois 1951 June 30, 2002 18,431 50
Cincinnati, Ohio #1 1985 April 30, 2001 7,900 64
Cincinnati, Ohio #2 1985 August 31, 2000 5,853 -
Clarksville, Tennessee 1985 December 31, 2003 7,500 84
Irving, Texas 1992 October 31, 2001 3,246 -
Kansas City, Missouri 1992 May 31, 2003 4,228 -
Paramus, New Jersey 1979 October 31, 2000 12,158 -
San Francisco, California 1985 December 31, 2001 5,180 -
Tucker, Georgia 1979 January 31, 2003 29,325 56
----------- ---------------
93,821 254
=========== ===============
Aegis believes it can extend the leases at these locations or relocate
the facilities, including the Addison facility, which lease expires on June 30,
1999, at 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.
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ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its businesses,
and as discussed below, neither Aegis nor its subsidiaries are parties to, nor
are their properties the subject of, any material pending legal proceedings.
From time to time, Aegis is involved in litigation incidental to its business.
Aegis believes that such litigation, individually or in the aggregate, is not
likely to have a material adverse effect on our results of operations or
financial condition.
On March 29, 1999, Dore Kreisler filed to dismiss the complaint filed
on April 14, 1998 in the Court of Chancery in Delaware against ATC, the
directors of ATC and IQI seeking "injunctive and other appropriate relief" in
connection with the proposed Merger.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock, $.01 par value per share (the "Common Stock"), trades
on the Nasdaq National Market System ("Nasdaq") under the symbol "AGIS". Until
July 13, 1998, our Common Stock traded under the symbol "ATCT". As of March 26,
1999, there were approximately 52,311,450 shares of Aegis common stock
outstanding held by approximately 786 holders of record.
The table below lists the range of high and low closing prices for our
Common Stock as reported by Nasdaq for the two-year period ended December 31,
1998 and the subsequent interim period.
Year ended December 31, 1997 High Low
- ---------------------------- ---- ---
First Quarter 15 5
Second Quarter 6 5/8 2 9/16
Third Quarter 5 9/16 4
Fourth Quarter 4 1/8 1 9/32
Year ended December 31, 1998 High Low
- ---------------------------- ---- ---
First Quarter 2 3/4 1 3/8
Second Quarter 3 3/16 1 19/32
Third Quarter 3 1 7/8
Fourth Quarter 1 7/8 25/32
Interim period from January 1, 1999 High Low
- ----------------------------------- ---- ---
through March 26, 1999 1 5/8 27/32
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. Under the Credit
Agreement, Aegis and its subsidiaries are prohibited from paying dividends on
our Common Stock until all the bank's commitments have terminated and all of
Aegis' and its subsidiaries' obligations under the Credit Agreement have been
satisfied.
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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.
FIVE MONTHS
ENDED
YEAR ENDED JULY 31, (1) DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------------- --------------- -------------------------------
1994 1995 1996 1996 (2) 1997 (3) 1998
------------ ------------ ----------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices $ 31,033 $ 56,179 $ 57,543 $ 26,756 $ 115,609 $ 195,355
Marketing research services - - - - 18,223 32,683
------------ ------------ ----------- --------------- -------------- --------------
Total revenues $ 31,033 $ 56,179 $ 57,543 $ 26,756 $ 133,832 $ 228,038
Gross profit 11,457 18,207 16,834 6,092 45,642 66,677
SG&A expenses 7,057 16,444 13,588 8,760 36,312 50,510
Depreciation 907 856 1,314 969 4,501 10,018
Acquisition goodwill amortization - - - 55 1,592 2,876
Restructuring and other non-
recurring charges - - - - - 8,395
------------ ------------ ----------- --------------- -------------- --------------
Operating income (loss) (4) 3,493 907 1,932 (3,692) 3,237 (5,122)
Other income, net 142 437 877 648 - -
Interest expense, net 112 72 190 450 3,626 5,578
------------ ------------ ----------- --------------- -------------- --------------
Income (loss) before income taxes 3,523 1,272 2,619 (3,494) (389) (10,700)
Income tax expense (benefit) (1) 109 314 17 1,794 595 (2,989)
------------ ------------ ----------- --------------- -------------- --------------
Net income (loss) (4) $ 3,414 $ 958 $ 2,602 $ (5,288) $ (984) $ (7,711)
============ ============ =========== =============== ============== ==============
Basic and diluted earnings (loss)
per share $ 0.14 $ 0.04 $ 0.11 $ (0.22) $ (0.04) $ (0.19)
============ ============ =========== =============== ============== ==============
Weighted average number of common
and common equivalent shares
outstanding 24,378 24,378 24,378 24,415 27,233 40,383
OPERATING DATA
EBITDA (4)(5) $ 4,542 $ 2,200 $ 4,123 $ (2,020) $ 9,330 $ 16,167
Net cash provided by (used in)
operating activities $ 1,098 $ 368 $ 2,915 $ (139) $ 2,016 $ 7,127
Net cash provided by (used in)
investing activities $ (237) $ (1,846) $ (5,858) $ 1,596 $(25,794) $ (16,213)
Net cash provided by (used in)
financing activities $ (209) $ 2,113 $ 1,652 $ 665 $ 26,805 $ 14,478
Client service centers at end of
period 19 20 25
Teleservices workstations at end
of period 2,238 2,462 5,658
Marketing research facilities at
end of period 10 10 9
Marketing research workstations
at end of period 371 360 254
AS OF DECEMBER 31,
--------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital $ 6,168 $ 17,624 $ 35,881
Total assets 52,014 101,736 180,544
Long-term obligations, less current portion 22,634 51,257 79,580
Total liabilities 41,464 71,163 108,715
Shareholders' equity 10,550 30,573 71,828
- --------------------------
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
12
(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:
FIVE MONTHS
ENDED
YEAR ENDED JULY 31, (1) DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------------- --------------- -------------------------
1994 1995 1996 1996 (2) 1997 (3) 1998
------------ ------------ ----------- --------------- -------------- ---------
(DOLLARS IN THOUSANDS)
Actual officer's salary $ 1,312 $ 7,063 $ 2,417 $ 116 $ - $ -
Lexi and IQI bonuses and compensation,
legal and audit fees, and software
licensing expenses - - 810 2,490 443 -
Restructuring and other non-recurring charges - - - - - 8,395
------------ ------------ ----------- --------------- -------------- ----------
Total non-recurring expenses $ 1,312 $ 7,063 $ 3,227 $ 2,606 $ 443 $ 8,395
============ ============ =========== =============== ============== ==========
(5) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization, 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.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. Reported
financial results reflect the Merger and are those of IQI for the year ended
July 31, 1996, the five months ended December 31, 1996 and the year ended
December 31, 1997, and for the year ended December 31, 1998, giving effect to
the Merger as of July 1, 1998. See "Notes to Consolidated Financial
Statements - 1. Basis of Presentation and Description of Business."
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and accompanying notes for the year ended July 31, 1996,
five months ended December 31, 1996 and the years ended December 31, 1997 and
1998.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as
a percentage of revenues for the periods indicated:
YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JULY 31, DECEMBER 31, ---------------------------------
1996 1996 1997 1998
------------- --------------- --------------- --------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services 70.7% 77.2% 65.9% 70.8%
------------- --------------- --------------- --------------
Gross margin 29.3% 22.8% 34.1% 29.2%
Selling, general and administrative expenses 23.6% 32.7% 27.1% 22.1%
Depreciation 2.3% 3.6% 3.4% 4.4%
Acquisition goodwill amortization - 0.2% 1.2% 1.3%
Restructuring and other charges - - - 3.7%
------------- --------------- --------------- --------------
Total expenses 25.9% 36.5% 31.7% 31.5%
------------- --------------- --------------- --------------
Operating income (loss) 3.4% (13.7%) 2.4% (2.3%)
Other income, net 1.5% 2.4% - -
Interest expense, net 0.3% 1.7% 2.7% 2.4%
------------- --------------- --------------- --------------
Income (loss) before income taxes 4.6% (13.0%) (0.3%) (4.7%)
Income tax expense (benefit) 0.0% 6.7% 0.4% (1.3%)
------------- --------------- --------------- --------------
Net income (loss) 4.6% (19.7%) (0.7%) (3.4%)
============= =============== =============== ==============
HISTORICAL YEAR ENDED DECEMBER 31, 1998 VS. HISTORICAL YEAR ENDED
DECEMBER 31, 1997
The Company experienced a net loss of approximately $7.7 million, or
3.4% of revenues, for the
14
year ended December 31, 1998. Excluding approximately $8.4 million ($5.2
million, net of taxes) in merger-related restructuring and other non-recurring
charges, the Company experienced a net loss of approximately $2.5 million, or
1.1% of revenues, in 1998 as compared to a net loss of approximately
$1.0 million, or 0.7% of revenues, in 1997.
Revenues generated during the year ended December 31, 1998 increased
70.4% to $228.0 million from $133.8 million in the year ended December 31,
1997. The increase in revenues was due primarily to the impact of revenues
contributed by ATC subsequent to the merger of IQI and ATC on July 9, 1998
(the "Merger") and by InterServ, which was acquired by IQI on July 12, 1997.
On a pro forma basis, revenues grew $27.2 million, or 10.9%, in 1998
as compared to 1997. The growth in revenues on a pro forma basis was primarily
attributable to growth in volumes from certain existing telecommunications
and financial services clients and services performed for new clients. This
growth was somewhat offset by a decrease in service volumes from the Company's
largest client of approximately 13.6% and a decline in marketing research
revenues of approximately 12.0%. See "Notes to Consolidated Financial
Statements - 3. Mergers and Acquisitions."
Approximately 27% of the Company's revenues during the year ended
December 31, 1998 were generated by the Company's largest telecommunications
client and approximately 11% by its largest financial services client as
compared to approximately 41% and 0%, respectively, in the year ended
December 31, 1997. On a pro forma basis, approximately 26% of the Company's
revenues during 1998 were generated by the Company's largest telecommunications
client and approximately 9% by its largest financial services client as
compared to approximately 33% and 9%, respectively, in 1997.
During the first quarter of 1998, the Company was awarded a renewal
of its agreement with Integrion Financial Network, a provider of interactive
banking and electronic commerce services to financial institutions in the
United States and Canada owned equally by 15 banks, Visa U.S.A. and IBM Corp.
The Company also signed a contract extension with one of its large
telecommunications clients. During the quarter ended March 31, 1998, the
Company entered into a new contract with and began providing customer
acquisition services to America Online, Inc., a world leader in branded
interactive services and content. Aegis is no longer providing services to
America Online. During the quarter ended June 30, 1998, the Company entered
into a new contract with and began providing inbound customer services to a
leading provider of rentable home entertainment. In addition, the Company was
chosen by VHA, Inc., a national healthcare alliance based in Irving, Texas,
to provide inbound customer service support for an 800 number which consumers
call to access healthcare information. During the quarter ended September 30,
1998, the Company was selected by Sony Computer Entertainment America as the
inbound technical support provider for its products. The Company was also
awarded a three-year renewal of ATC's long-standing relationship with American
Express. Under this agreement, Aegis continues to provide a variety of
services to American Express and its cardholders including customer care and
customer acquisition. During the quarter ended December 31, 1998, Aegis began
providing inbound customer services to State Communications, a provider of
telecommunications services primarily serving residential and small business
customers across the U.S.
The Company's objective is to secure recurring revenues from
long-term relationships with targeted, large corporate clients that utilize
telecommunications and marketing research strategies as integral, ongoing
elements in their marketing and customer service programs. In addition to
providing services on an outsourcing basis, in which the Company provides all
or a substantial portion of a client's teleservices and/or marketing research
needs, the Company also continues 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.
15
For the year ended December 31, 1998, gross profit earned on
revenues increased approximately $21.0 million, or 46.1%, from the year ended
December 31, 1997. The increase in gross profit is primarily due to the
addition of ATC's revenues as a result of the Merger. Gross profit as a
percentage of revenues ("gross margin") for 1998 was 29.2% as compared to
34.1% in 1997. The decrease in gross margin is primarily due to the impact of
the addition of ATC's revenues, which are characterized by lower gross
margins than those of IQI, and a decline in capacity utilization in the
fourth quarter of 1998 resulting from lower volumes of business from the
Company's two largest telecommunications clients.
Selling, general and administrative ("SG&A") expenses increased
$14.2 million, or 39.1%, in 1998 versus 1997. The increase in SG&A expenses
is primarily attributable to the Merger with ATC. As a percentage of
revenues, SG&A expenses were 22.1% in 1998 and 27.1% in 1997. The decrease in
SG&A expenses as a percentage of revenues was primarily the result of
efficiencies of scale derived from growth in business volumes.
Depreciation and amortization expenses increased $6.8 million, or
111.6%, in 1998 as compared to 1997. As a percentage of revenues,
depreciation and amortization expenses were a total of 5.7% in 1998 versus
4.6% in 1997. The increase in depreciation and amortization expenses as a
percentage of revenues was due to additional depreciation resulting from
investments in two new client service centers, information technology and
infrastructure, and additional goodwill amortization resulting from the
goodwill recorded in the Merger and in the InterServ acquisition.
In connection with the Merger, the Company recorded restructuring
and other non-recurring charges of approximately $8.4 million ($5.2 million,
net of taxes) in the year ended December 31, 1998. 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. Management expects the
remainder of restructuring efforts to be completed by March 31, 1999.
Net interest expense increased by $1.9 million, or 53.8%, in 1998
over 1997 due to increased utilization of the Company's revolving line of
credit and the assumption of additional subordinated indebtedness.
The Company's statutory state and federal income tax benefit rate
for 1998 was approximately 40.0%. The Company's effective tax rate on
reported taxable income or loss differs from the statutory rate due primarily
to the non-deductibility, for tax purposes, of the Company's amortization
expense of the cost in excess of net assets required ("goodwill"). The
non-deductibility of such costs resulted in income tax expense in 1997
despite a reported pre-tax loss.
Due to the factors described above, the net loss increased from
approximately $1.0 million in 1997 to approximately $7.7 million in 1998.
Management knows of no trends or uncertainties other than those
mentioned above that are expected to have a material favorable or unfavorable
impact on operating results.
HISTORICAL YEAR ENDED DECEMBER 31, 1997 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1996
Aegis' revenues increased $71.0 million, or 113.1%, from $62.8 million
in 1996 to $133.8 million in 1997. The increase was primarily due to the
acquisition of Lexi in November 1996 (the "Lexi Acquisition") and the InterServ
Acquisition in July 1997. In the period from November 22 to December 31,
1996, Lexi contributed revenues of $2.8 million, as compared to Lexi's 1997
revenue contribution of $40.2 million. In 1997, the five and one-half month
revenue contribution from InterServ was $26.4 million. Without Lexi's revenue
contribution in 1996 and 1997, and without InterServ's contribution in 1997,
revenues would have increased from approximately $60.0 million in 1996 to
$67.1 million in 1997, an increase of approximately $7.1 million, or 11.9%.
This telemarketing revenue growth was principally
16
caused by increased volume generated by existing clients including bank
credit card issuers, regional and long distance telephone service providers
and cable television service providers.
Gross profit earned on revenues increased approximately $28.1 million,
or 159.5%, from 1996. As a percentage of revenues, gross profit in 1997 was
34.1% versus 28.0% in 1996. The increase in gross profit was due in part to
increased revenues as well as: (i) operating efficiency improvements in the
pay-for-performance programs, especially certain programs for a large
telecommunications client, and (ii) the addition of higher margin inbound
telemarketing business as a result of the InterServ Acquisition. Partially
offsetting the margin improvements were: (i) price reductions granted to a
major telecommunications client, (ii) higher teleservices personnel costs in
competitive labor markets, and (iii) new facility start-up expenses in Port
St. Lucie, Florida, and Fairmont, West Virginia.
SG&A expenses increased approximately $18.4 million, or 102.6%, from
$17.9 million in 1996 to $36.3 million in 1997. The Lexi Acquisition and the
InterServ Acquisition contributed to this increase. In 1996, Lexi contributed
SG&A expenses of approximately $1.3 million, and in 1997, Lexi contributed
SG&A expenses of approximately $13.1 million. In 1997, InterServ contributed
SG&A of approximately $5.6 million. Without the addition of Lexi in 1996 and
1997, and InterServ in 1997, SG&A expenses would have increased from
$16.6 million in 1996 to approximately $17.7 million, an increase of
approximately $1.1 million, or 6.3%. In addition to the acquisitions of Lexi
and InterServ, the Company opened two new client service centers in 1997 in
Port St. Lucie, Florida and Fairmont, West Virginia, added to capacity in
existing client service centers, and added key corporate personnel to assist
with the management of the expanded business.
Depreciation and amortization expense increased from $1.8 million in
1996 to approximately $6.1 million in 1997, an increase of approximately
$4.3 million, or 235.7%. The increase was principally due to the addition of
depreciation and amortization of tangible and intangible assets acquired from
Lexi and InterServ and to added depreciation associated with $10.0 million of
capital expenditures. Goodwill amortization was approximately $0.1 million in
1996 and increased to approximately $1.6 million in 1997.
Other income, net, decreased from $0.3 million in 1996 to $0 in
1997. The 1996 amount was primarily interest income and management fee income.
Interest expense increased by $3.0 million, from approximately
$0.6 million in 1996 to $3.6 million in 1997, primarily due to increased
borrowings. Long-term debt rose from $22.6 million on December 31, 1996 to
approximately $51.3 million on December 31, 1997 primarily as a result of
debt associated with the InterServ Acquisition and the opening of two new
client service center facilities in September and October 1997.
Income taxes decreased by $1.6 million, from $2.2 million in 1996 to
approximately $0.6 million in 1997. In 1996, Aegis's change from an
S-corporation to a C-corporation resulted in tax charges of approximately
$3.0 million.
Due to the factors described above, the net loss decreased from $4.6
million in 1996 to approximately $1.0 million in 1997.
HISTORICAL FIVE MONTHS ENDED DECEMBER 31, 1996 VS. HISTORICAL FIVE MONTHS ENDED
DECEMBER 31, 1995
Aegis' revenues increased approximately $3.8 million, or 16.5%, from
approximately $23.0 million in 1995 to approximately $26.8 million in 1996.
These increased revenues relate primarily to the Lexi Acquisition. Without
the revenues of Lexi of $2.8 million for the period from November 22 to
17
December 31, 1996, revenues would have increased by approximately $1.0 million,
or 4.3%, from approximately $23.0 million in 1996 to approximately
$24.0 million in 1997. The increase in telemarketing revenue reflects volume
increases from major regional and long distance telecommunications companies.
Gross profit earned on revenues decreased approximately $0.8 million,
or 11.0%, from the comparable period in 1995. As a percentage of revenues,
gross profit in 1996 was 22.8% versus 29.8% in 1995. The decrease in gross
profit was principally due to: (i) operations and quality problems associated
with the start-up of Aegis's largest pay-for-performance program; (ii) start-up
expenses for a new client service center facility in Mesquite, Texas; and
(iii) price reductions granted to a large bank credit card client.
SG&A expenses increased by $4.0 million, or 85.0%, from $4.7 million
in 1995 to $8.7 million in 1996. Without the increase in SG&A expenses of
Lexi, totaling approximately $1.3 million for the period from November 22 to
December 31, 1996, this increase would have been $2.7 million, or 57.7%, from
$4.7 million in 1995 to $7.4 million in 1996. In 1996, the Company incurred
additional expenses associated with its recapitalization and the purchase of
Aegis shares by Thayer Equity Investors III, L.P. ("Thayer").
Depreciation and amortization increased $0.6 million, or 146.7%, from
$0.4 million in 1995 to $1.0 million in 1996. Without the Lexi depreciation
of approximately $0.2 million for the period from November 22 to December 31,
1996, the increase would have been from $0.4 million in 1995 to $0.8 million
in 1996, or 99.3%, primarily due to the addition of a new client service
center facility in Mesquite, Texas. Goodwill amortization was $0 in 1995 and
increased to approximately $0.1 million in 1996 as a result of the Lexi
Acquisition.
Other income, net, increased from $0 to approximately $0.6 million
from 1995 to 1996. The 1996 amount was comprised primarily of interest income
and management fee income.
Interest expense increased from approximately $0.1 million in 1995
to approximately $0.5 million in 1996, or approximately $0.4 million. Without
the Lexi interest for the period from November 22 to December 31, 1996, the
increase would have been approximately the same. This increase includes
interest on additional borrowings resulting from the recapitalization of Aegis
and the purchase of Aegis shares by Thayer.
Income taxes increased from approximately $0.7 million in 1995 to
approximately $1.8 million in 1996 due to the change in the Company's tax
status from a subchapter S-corporation to a C-corporation in November 1996.
Due to the factors described above, net income decreased from
approximately $1.0 million in 1995 to a loss of approximately $5.3 million in
1996.
HISTORICAL FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO HISTORICAL FISCAL YEAR
ENDED JULY 31, 1995
Revenues increased by approximately $1.4 million, or 2.4%, from
approximately $56.2 million in 1995 to approximately $57.6 million in 1996.
The increase in telemarketing revenue reflects volume increases from major
regional and long distance telecommunications companies.
Gross profit earned on revenues decreased approximately $1.4 million,
or 7.5%, from $18.2
18
million in 1995 to $16.8 million in 1996. As a percentage of revenues, gross
profit in 1996 was 29.3% versus 32.4% in 1995. The decrease in gross profit was
primarily due to price reductions granted to a large telecommunications client
and a large bank credit card issuer client.
Operating expenses decreased by approximately $2.9 million, or 17.3%,
from $16.4 million in 1995 to $13.5 million in 1996. Included in operating
costs and expenses were officer's salaries of approximately $7.1 million in
1995 as compared to $2.4 million in 1996. Offsetting this approximate
$4.7 million decrease in officer's salaries was an increase in operating
expenses of $0.9 million. Most of this increase was the result of the 1996
opening of three new call center facilities located in Pennsylvania, Minnesota
and Ontario, Canada.
Depreciation and amortization increased by $0.4 million, or 53.5%,
from approximately $0.9 million in 1995 to $1.3 million in 1996. This increase
was the result of capital spending related to the opening of three new client
service centers in 1996 and the full-year impact of two new client service
centers opened in 1995.
Other income, net, increased from $0.4 million to approximately
$0.9 million from 1995 to 1996. These amounts include primarily interest
income and management fee income.
Interest expense increased by $0.1 million, from approximately
$0.1 million in 1995 to approximately $0.2 million in 1996 as a result of
increased debt associated with the opening of the new call center facilities
in 1996.
Due to the factors described above, income taxes decreased by
approximately $0.3 million, from $0.3 million in 1995 to $0.0 million in 1996
and net income increased by $1.6 million, or 171.6%, from approximately
$1.0 million in 1995 to $2.6 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information from the
Company's statements of cash flows for the periods indicated:
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------- ------------ -----------------------
1996 1996 1997 1998
-------- ------------ -------- --------
Net cash provided by (used in) operating activities $ 2,915 $ (139) $ 2,016 $ 7,127
Net cash provided by (used in) investing activities (5,858) 1,596 (25,794) (16,213)
Net cash provided by financing activities 1,652 665 26,805 14,478
Effect of exchange rates on cash 3 1 11 21
-------- ------------ -------- --------
Net increase (decrease) in cash and cash equivalents $(1,288) $2,123 $ 3,038 $ 5,413
======== ============ ======== ========
The Company has historically utilized cash flow from operations,
available borrowing capacity under its credit facilities, and subordinated
indebtedness from its shareholders (primarily Thayer) to meet its liquidity
needs. Management believes the Company currently has the liquidity and access
to working capital to meet its near-term cash flow demands through operating
income and borrowings under the Credit Agreement.
19
During the year ended December 31, 1998, net cash provided by
operating activities increased $5.1 million, or 253.5%, versus the year ended
December 31, 1997, primarily due to positive cash flow from operations, an
increase in the Company's accounts payable and accrued liabilities, and
$2.0 million in collections of a related-party note receivable.
Cash used in investing activities during 1998 totaled $16.2 million,
representing an approximate $9.6 million, or 37.1% decrease from 1997. These
expenditures primarily consisted of new telecommunications equipment and
information technology hardware and software required in the maintenance,
upgrade and expansion of the Company's operations including the build-out of
new client service centers and the upgrade or replacement of workstations in
the Company's existing facilities. Capital expenditures during the last two
years totaled approximately $22.5 million (approximately $27.8 million on a
pro forma basis) and have been funded with proceeds from bank borrowings,
subordinated indebtedness and excess cash from operations.
During 1998, financing activities included borrowing activity under
the Company's credit facilities, bridge financing guaranteed by Thayer,
$13.6 million of subordinated indebtedness provided by Thayer and the securing
of capital lease obligations.
In connection with the Merger, IQI entered into a Second Amended and
Restated Credit Agreement dated as of July 9, 1998 (the "Credit Agreement")
with The Bank of Nova Scotia ("Scotiabank") and Credit Suisse First Boston
("CSFB") whereby Scotiabank and CSFB rolled over and continued their loan
commitments to IQI aggregating $53.0 million and Scotiabank committed to
provide IQI an additional $12.0 million in revolving loans, resulting in a
total facility of $65.0 million. The proceeds of the additional loan were used
to refinance the bank indebtedness of Advanced Telemarketing Corporation, a
wholly-owned subsidiary of ATC ("Advanced"), to pay transaction expenses, and
for general corporate and working capital needs of IQI and Advanced. As part
of the amendment of the Credit Agreement, the Company and Advanced agreed to
guarantee the IQI indebtedness and grant blanket security interests in their
assets to secure repayment of the banks' loans. The Company also pledged its
shares of Advanced common stock to the banks to secure repayment of the banks'
loans.
The Credit Agreement contains various covenants that limit, among
other things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the Company and requires the operating
subsidiaries to meet certain financial covenants. Similarly, under the terms of
the Company's guaranty of its operating subsidiaries' obligations, the Company
is subject to certain covenants limiting, among other things, its ability to
incur indebtedness, enter into guaranties, and acquire other companies. The
Credit Agreement is secured by liens on the operating subsidiaries' accounts
receivable, furniture and equipment, and is guaranteed by the Company.
At December 31, 1998, Aegis was in default under certain of its
financial covenants contained in the Credit Agreement. On March 31, 1999, the
Company entered into the First Amendment to the Credit Agreement (the "First
Amendment") whereby Scotiabank and CSFB waived the Company's defaults under
certain of the covenants at December 31, 1998 and provided for new levels for
existing covenants and a new covenant related to EBITDA.
In connection with the Merger, Thayer provided $6.8 million in
subordinated indebtedness (the "Subordinated Indebtedness") as well as a
guarantee for $2.0 million in bridge financing to assist in funding the
Company's working capital needs. In connection with the guarantee, and for
additional consideration of $110,000, the Company issued to Thayer warrants to
purchase 1,100,000 shares of the Company's Common Stock at an exercise price
of $1.96 (110% of the average of the high and low prices of ATC Common Stock
on April 7, 1998, the day before the announcement of the proposed Merger).
20
Prior to the Merger, on July 6, 1998, the Company received an
additional financing commitment from Thayer and certain other shareholders of
IQI. Under the commitment, the Thayer-led group agreed to lend the Company, at
its election, up to an additional $4.0 million in subordinated indebtedness at
any time within 90 days after the Merger. As of October 23, 1998, the Company
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 the Company's
Common Stock at an exercise price of $2.375 per share and provided certain
anti-dilution protection. This indebtedness is convertible into the Company's
Common Stock at a conversion price of $2.375 per share, the closing price of
such stock on July 2, 1998, the date the Thayer-led group committed to provide
this financing. This debt is in addition to, and on the same basic terms as,
the subordinated debt that Thayer had previously loaned to the Company.
Subsequent to the end of the fiscal year, on March 30, 1999, Thayer
provided approximately $5.7 million in additional subordinated indebtedness
to assist in funding the Company's working capital needs. The additional
indebtedness is convertible into the Company's Common Stock at a conversion
price of $1.15 per share, which represents a 26.9% premium to the closing
price of Aegis Common Stock on March 25, 1999, the date that Thayer committed
to provide the financing.
Michael G. Santry, the Company's Co-Chairman, owes the Company
approximately $1.9 million under a secured promissory note dated September
16, 1997. The Merger Agreement provided for a principal payment of
approximately $1.8 million on or before June 30, 1998 (which was made) and an
extension of the maturity date of the balance of the principal and accrued
but unpaid interest on the note to March 31, 1999. As of March 31, 1999, the
Company and Mr. Santry were discussing a further extension of the maturity
date of such amount, including terms relating to Mr. Santry delivering
additional security sufficient to adequately securing repayment of the note.
The Company primarily operates in the teleservices industry, which is
a fast-growing, highly competitive industry. As such, the Company continues to
implement its site strategy, which focuses on smaller client service centers
in what management believes are more economically attractive markets than those
in which the Company has traditionally operated. Company growth and continued
implementation of the site strategy will necessitate additional client service
centers and such facilities will have furniture, equipment and technological
requirements consistent with the Company's existing facilities. In 1998, the
Company opened new client service centers in Joplin, Missouri and Elkins,
West Virginia and expanded one of its newest centers in Port St. Lucie,
Florida. Management anticipates opening additional new centers and expanding
existing facilities in calendar 1999. To that end, in the first quarter of
1999, Aegis expanded its Fairmont, West Virginia facility and announced plans
to open new client service centers in St. Joseph, Missouri and Sierra Vista,
Arizona in the second quarter of 1999.
In addition to traditional growth strategies, management has been
pursuing opportunities for growth through merger with or acquisition of other
teleservices companies. From time to time, Aegis engages in discussions with
potential merger or acquisition candidates. Although there can be no assurances
that any proposed merger or acquisition will be successfully completed,
management requires that any candidate fit the Company's corporate and
operating strategies.
Although no assurances can be made in this regard, management
anticipates that, based on the Company's ability to secure such financing to
date, the Company should be able to secure debt or equity funding for its
future working capital needs, the capital equipment requirements of future
client service center facilities and potential acquisition opportunities.
YEAR 2000 UPDATE
GENERAL
Aegis' company-wide Year 2000 Project (the "Project") is proceeding on
schedule. The Project is
21
addressing the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000. In 1998, Aegis
began the Project to determine the level of Year 2000 compliance and to plan
for the remediation of any non-compliant systems or infrastructure. The
Project has focused most intensely on production systems upon which the
Company is dependent for the provision of services and the generation of
revenue. As of March 26, 1999, the Company has determined that approximately
60% of its production systems that required remediation were Year 2000
compliant and estimates that production systems will be fully Year 2000
compliant by June 30, 1999. Any remaining business software programs or
hardware systems are expected to be made Year 2000 compliant through the Year
2000 Project, including those supplied by vendors, or they will be retired or
supplanted by a contingency plan. In the fourth quarter of 1998, the Company
began contingency planning for that impact of the Year 2000 that may occur
despite efforts to remediate and mitigate that impact and expects contingency
planning to be complete by June 30, 1999. This contingency planning effort
includes the amendment of the Company's disaster recovery plans to include
Year 2000 contingencies. None of the Company's other information technology
projects have been delayed due to the implementation of the Year 2000 Project.
THE PROJECT
Aegis' Project is divided into four major categories: (i) production
systems and software applications (the "Production Platform"), (ii) support
systems and applications (the "Support Systems"), (iii) infrastructure and
facilities and (iv) suppliers and clients. The Company created a Year 2000
team and has assigned responsibility for each category requiring remediation.
The Company also has engaged third parties, including Year 2000 consultants,
to assist in the completion of various phases of the Project. The general
phases common to all categories of the Project are: (i) inventorying Year
2000 items, (ii) assigning priorities to identified items, (iii) assessing
the Year 2000 compliance of items determined to be material to the Company,
(iv) repairing or replacing material items that are determined not to be Year
2000 compliant, (v) testing material items and (vi) designing and implementing
contingency and business continuation plans for each organization and Company
location.
The inventory and priority assessment phases of each section of the
Project have been completed. The remediation phase, including repair and
replacement, is under way, and items are being addressed in the order
determined in the priority assessment based on materiality. Material items
are those believed by the Company to have a risk that may affect revenues.
The Company, its Year 2000 consultants and certain of its technology suppliers
are performing the testing phases of the Project.
The Production Platform category consists of hardware and systems
software used to directly produce revenue and are typically client specific.
The remediation of this category is on schedule, and the Company estimates
that approximately 60 percent of the planned activities related to this
category had been completed at March 26, 1999. The testing phase is ongoing
as hardware or system software is remediated, upgraded or replaced. Contingency
planning for this category commenced in the first quarter of 1999 and is
scheduled for completion by mid-1999. All activities related to the Production
Platform (consisting of definition, testing, and implementation of
Year-2000-ready products) are scheduled to be completed by June 30, 1999.
The Support Systems category includes hardware and software systems
and applications used administratively and in support of the production systems
and software applications described above. The remediation of the Support
Systems requires either the conversion of those systems and software that are
not Year 2000 compliant and, where available from the supplier, the replacement
of such software. The Company estimates that the software conversion phase was
50 percent complete at March 26, 1999, and the remaining conversions are on
schedule to be completed by mid-1999. The testing phase of this category,
scheduled for completion by mid-1999, is ongoing. The testing phase is
22
conducted as the software is replaced and is also scheduled to be completed by
mid-1999. Contingency planning for this category began in the first quarter
1999 and is scheduled for completion by mid-1999.
The infrastructure and facilities category consists of hardware and
systems software used in the networking and systems back-up infrastructure
and in the Company's physical facilities. The remediation of this category is
on schedule, and the Company estimates that approximately 90 percent of the
planned activities related to this category had been completed at March 26,
1999. The testing phase is ongoing as hardware or system software is
remediated, upgraded or replaced. Contingency planning for this category
commenced in the first quarter of 1999 and is scheduled for completion by
mid-1999. All activities related to infrastructure and facilities are scheduled
to be completed by June 30, 1999.
The suppliers and clients category includes the process of identifying
and prioritizing critical suppliers and clients at the direct interface level,
and communicating with them about their plans and progress in addressing the
Year 2000 problem. Detailed evaluations of the most critical third parties
have been initiated. The process of evaluating these suppliers and clients
began in third quarter 1998 and is scheduled for completion by mid-1999, with
follow-up reviews scheduled through the remainder of 1999. These evaluations
will be followed by the development of contingency plans as necessary, which
are scheduled to commence in the first quarter of 1999, with completion by
mid-1999. The Company has begun planning with its largest customers to conduct
full "end-to-end" testing of connected or shared systems where appropriate.
This testing is expected to be completed by the end of the third quarter 1999.
COSTS
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 Project is approximately
$2.1 million. This estimate does not include any estimates of liability for
non-compliance. The total amount expended on the Project through March 26,
1999, was $1.0 million.
RISKS
The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and clients,
the Company is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of
its material suppliers and clients. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The above contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements
contained in the Year 2000 Update should be read in conjunction with the
Company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE
PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995" beginning below.
23
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", the negative thereof and similar expressions are intended to identify
forward-looking statements. Such statements are by nature subject to
uncertainties and risks, including but not limited to those summarized below:
RISKS RELATED TO THE MERGER
IMPLEMENTATION OF BUSINESS STRATEGY
The success of the Merger continues to depend, to a large extent, on
the efficient and effective integration of ATC's and IQI's disparate
businesses. We continue to integrate each company's operating, administrative,
finance, sales and marketing organizations, as well as each company's
communication technologies and the coordination of sales efforts and
streamlining facilities and administrative operations. We continue to invest
time and money in the integration, which may detract from the basic operation
of the business and adversely impact revenue and operating results. A number
of factors beyond our control can negatively affect the integration as well,
such as losing people, increased competition and regulatory developments. We
cannot assure you that we will be able to implement successfully the strategies
that we intend to pursue and achieve profitable operations in the near and long
term.
NEW MANAGEMENT
Our future success depends in large part on the efforts and abilities
of management. The Chief Executive Officer of Aegis is Stephen A. McNeely (the
former President and Chief Executive Officer of IQI) and the Chief Financial
Officer of Aegis is Matthew S. Waller (the former Chief Financial Officer of
ATC). Although each has experience with his prior company, each officer
continues to acquaint himself with the specific operations of the other company
and the resulting combined operations of Aegis.
In addition, at our annual meeting of stockholders held on July 9,
1998, the stockholders elected a new board of directors comprised of six
nominees of ATC and six nominees of IQI, with Michael G. Santry of ATC and
Paul G. Stern of IQI as Co-Chairmen of the board. Two directors, one nominated
by each of ATC and IQI, have subsequently resigned from the Board. Effective
with the Merger, the Company also amended its bylaws to require the approval of
seven directors for certain transactions. 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.
Certain stockholders who together own more than a majority of Aegis'
voting stock entered into a Stockholders' Agreement under which, for a period
of two years from the date of the Merger Agreement, each party agreed to vote
its shares of Aegis capital stock in favor of the nominees to the
24
board of directors of Aegis selected by the representative of the other party's
stockholder group.
INCREASED LEVERAGE; FUTURE CAPITAL REQUIREMENTS
Following the Merger, we have substantially higher debt than
historical levels. We had approximately $67.7 million in senior debt and
approximately $14.7 million in subordinated indebtedness at December 31,
1998, which results in a total debt to total capitalization ratio of 48.5%.
Our tangible net book value was $0.5 million. Our leverage could 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 and cash
flows from operations are insufficient to meet current or planned operating
requirements, we will be required to obtain additional funds through equity
or debt financings or from other sources. 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 will 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 service operations, as well as
increased penetration of new and existing clients and markets will continue
to 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 and the recruitment, motivation and retention of
qualified personnel, 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.
CONTROL BY PRINCIPAL SHAREHOLDER
Thayer and its affiliates beneficially own approximately 37% of our
outstanding voting stock. As a result, Thayer can exercise significant
control over the outcome of substantially all matters that require a
shareholder vote. This fact may discourage, delay or prevent a change in
control of Aegis. Moreover, stockholders owning more than a majority of the
voting stock of Aegis (including Thayer) have entered into a Stockholders'
Agreement that says that for two years from the date of the Merger Agreement,
the parties have agreed to vote their shares of Aegis capital stock in favor
of the other party's nominees to the board of directors.
POSSIBLE VOLATILITY OF STOCK PRICE
Our stock price can be volatile, in response to:
25
- variations in quarterly operating results
- the depth and liquidity of the market for Aegis Common Stock
- investor perception of Aegis after the Merger and the
industry in which it competes
- the gain or loss of significant customer contracts
- changes in management
- changes in or new services by Aegis or competitors
- general trends in the industry
- 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 as reported on the Nasdaq National
Market System has ranged from $3.19 to $0.84. On March 26, 1999, the stock
closed at $1.00.
SHARES AVAILABLE FOR FUTURE SALE
Thayer and its affiliates hold approximately 37% of the outstanding
shares of Aegis Common Stock, and other stockholders hold significant blocks of
the stock. We cannot predict the effect that future sales of stock, especially
by former IQI stockholders, will have on the market price of Aegis Common Stock
prevailing from time to time. Sales of substantial amounts of Aegis Common Stock
(including shares issued upon the exercise of stock options), and even the
perception that such sales could occur, may adversely affect prevailing market
prices for Aegis Common Stock. Although Thayer, Edward Blank and other
affiliates of Aegis are restricted from reselling their respective shares of
Aegis common stock under Rule #144 and Rule #145 of the Securities Act until
July 1999, certain former IQI stockholders have the right to nominate half of
the directors to the Aegis board of directors per year for the next two years.
Upon a vote of seven directors, the board may elect to register shares of common
stock with the Commission for resale to the public.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We could experience quarterly variations in revenues and operating
income as a result of many factors, including:
- the timing of clients' marketing campaigns and customer service programs
- the timing of additional SG&A expenses incurred to acquire and support
new business
- changes in Aegis' revenue mix among its various service offerings
- 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
Our success of Aegis depends in large part on the abilities and
continued service of our executive officers and other key employees. We
cannot assure you that we will be able to retain these
26
people. Losing one or more of them could materially and adversely affect us.
GENERAL AND INDUSTRY RISKS
RELIANCE ON MAJOR CLIENTS
We have historically relied on a few major clients for the bulk of our
revenue. Relying on one or a few major clients includes a number of more
specific business risks that may adversely impact the ability of the provider,
such as Aegis, 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;
- 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.
Many of our clients are concentrated in the telecommunications,
financial services, insurance and publishing industries. A significant
downturn in any of these industries or a trend away from their use of
telephone-based sales, marketing or customer 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."
RISKS ASSOCIATED WITH OUR CONTRACTS
Our contracts 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 many of such contracts require
the client to pay a contractually agreed amount in the event of early
termination, 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,
insurance, entertainment or other industries, we could be materially and
adversely affected.
GOVERNMENT REGULATION
Additional Federal or state legislation could limit our activities
or increase the cost of doing business. See "Item 1. Business - Government
Regulation."
27
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, such as
insurance product sales, 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.
COMPETITION
Our industry is very competitive. We cannot assure you that, as the
teleservices 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 or customer service activities
internally. The development of new forms of direct sales and marketing
techniques, such as interactive home shopping through television, computer
networks and other media, could 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 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."
YEAR 2000 ISSUE
The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Update."
RELIANCE ON TECHNOLOGY; 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.
28
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.
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 even have to pay 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.
REVENUES AND SEASONAL NATURE OF BUSINESS
See "Item 1. Business - Revenues and Seasonal Nature of Business."
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.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have purchased an interest rate collar to hedge against the risk
that our interest rate under our Credit Agreement will rise beyond a
specified level. This collar costs the Company about $75,000 on an annualized
basis. With this exception, we do not 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. At December 31, 1998,
we had $7.9 million invested in money market funds. The rate of interest
earned on these investments varies with overall market rates. A hypothetical
100-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-33 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
30
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 1999 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 1999 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 1999 Annual Meeting of Stockholders under the caption
"Beneficial Ownership of Common Stock" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the definitive proxy statement of
the Company for the 1999 Annual Meeting of Stockholders under the captions
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" included on page F-1
of this Annual Report on Form 10-K for a listing of the financial statements and
schedules filed as a part of this Annual Report on Form 10-K.
The following exhibits are filed as a part of this Form 10-K Annual
Report:
2.1 Agreement and Plan of Merger dated April 7, 1998 between ATC
Communications Group, Inc., ATC Merger Sub, Inc., and IQI, Inc.
(Incorporated by reference from Exhibit 2.1 of the Company's Form 10-Q
for the quarterly period ended March 31, 1998).
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference from the Company's Form 10-K Annual Report for the year ended
June 30, 1998).
3.2 Amended and Restated Bylaws (Incorporated by reference from the
Company's Form 10-K Annual Report for the year ended June 30, 1998).
4.1 Specimen of Share Certificate of Company's Common Stock (Incorporated
by reference from 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 from Company's Form 10-K Annual Report
for the year ended June 30, 1994).
4.3 Form of Series C Preferred Stock certificate issued to Codinvest
Limited with attached designations. (Incorporated by reference from
Company's Form 8-K Current Report dated June 16, 1994).
4.4 1992 Stock Option Plan as amended (Incorporated by reference from
Company's Form S-8 Registration Statement - File No. 333-01131).
4.5 1996 Stock Option Plan as amended (Incorporated by reference from
Company's Form S-8 Registration Statement - File No. 333-01131).
4.6 1998 Stock Option Plan (Incorporated by reference from Company's Form
S-4 Registration Statement - File No. 333-53887 -- Appendix D to the
Joint Proxy/Prospectus).
4.7 Rights Agreement between Aegis Communications Group, Inc. and Harris
Trust and Savings Bank dated December 16, 1998 (Incorporated by
reference from the Company's Form 8-K filed with the Securities and
Exchange Commission on December 17, 1998).
10.1 Second Amended and Restated Credit Agreement dated as of July 9, 1998
by and among IQI, Inc., Aegis Communications Group, Inc. as guarantor,
the various financial institutions parties thereto, the Bank of Nova
Scotia, as documentation agent and administrative agent for the
lenders, and Credit Suisse First Boston, as syndication agent for the
lenders (Incorporated by reference from the Company's Form 8-K Current
Report dated July 24, 1998).
10.2 First Amendment to the Second Amended and Restated Credit Agreement
dated as of March 31, 1999
32
by and among IQI, Inc., Aegis Communications Group, Inc. as guarantor,
the various financial institutions parties thereto, the Bank of Nova
Scotia, as documentation agent and administrative agent for the
lenders, and Credit Suisse First Boston, as syndication agent for
the lenders (filed herewith).
10.3 Securities Purchase and Registration Rights Agreement by and between
ATC Communications Group, Inc. and Thayer Equity Investors III, L.P.
dated April 7, 1998 (Incorporated by reference from the Company's Form
10-Q for the quarter ended March 31, 1998).
10.4 Warrant to Purchase Shares of Common Stock of ATC Communications Group,
Inc. issued to Thayer Equity Investors III, L.P. dated April 7, 1998
(Incorporated by reference from the Company's Form 10-Q for the quarter
ended March 31, 1998).
10.5 Promissory Note by and among Advanced Telemarketing Corporation, ATC
Communications Group, Inc., and Thayer Equity Investors III, L.P. dated
May 4, 1998, (Incorporated by reference from the Company's Form 10-Q
for the quarterly period ended March 31, 1998).
10.6 Subordination and Intercreditor Agreement between Thayer Equity
Investors III, L.P. and Bank One, Texas, N.A. dated May 4, 1998,
(Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended March 31, 1998).
10.7 Second Warrant to Purchase Shares of Common Stock of ATC Communications
Group, Inc. dated May 4, 1998, (Incorporated by reference from the
Company's Form 10-Q for the quarterly period ended March 31, 1998).
10.8 Pledge Agreement between ATC Communications Group, Inc. and Thayer
Equity Investors III, L.P. dated May 4, 1998, (Incorporated by
reference from the Company's Form 10-Q for the quarterly period ended
March 31, 1998).
10.9 Registration Rights Agreement between ATC Communications Group, Inc.
and Thayer Equity Investors III, L.P. dated May 4, 1998, (Incorporated
by reference from the Company's Form 10-Q for the quarterly period
ended March 31, 1998).
10.10 Reimbursement and Indemnification Agreement by and among Advanced
Telemarketing Corporation, ATC Communications Group, Inc., and Thayer
Equity Investors III, L.P. dated May 4, 1998, (Incorporated by
reference from the Company's Form 10-Q for the quarterly period ended
March 31, 1998).
10.11 Stockholders Agreement dated July 9, 1998 by and among ATC
Communications Group, Inc., Thayer Equity Investors III, L.P., ITC
Services Company, Edward Blank, The Edward Blank 1995 Grantor Retained
Annuity Trust, Codinvest Limited, Michael G. Santry and Darryl D.
Pounds (Incorporated by reference from the Company's Form 10-K Annual
Report for the year ended June 30, 1998).
10.12 Escrow Agreement dated July 9, 1998 between ATC Communications Group,
Inc., the representative of the shareholders of IQI, Inc., and Harris
Trust and Savings Bank (Incorporated by reference from the Company's
Form 10-K Annual Report for the year ended June 30, 1998).
10.13 Loan and Security Agreement dated February 8, 1996 among Advanced
Telemarketing Corporation and Bank One, Texas, N.A. (Incorporated by
reference from the Company's Form 10-K Annual Report for the year ended
June 30, 1996).
10.14 Lease Agreement dated January 1, 1991 by and between Royal Tech
Properties, Ltd. and
33
Advanced Telemarketing Corporation. (Incorporated
by reference from Company's Form 10-K Annual Report for the year ended
June 30, 1991).
10.15 Investment Letter dated June 16, 1994 by Codinvest Limited.
(Incorporated by reference from Company's Form 8-K Current Report dated
June 16, 1994).
10.16 Promissory Note dated September 16, 1997 among Michael G. Santry and
ATC Communications Group, Inc. (Incorporated by reference from
Company's Form 10-K Annual Report for the year ended June 30, 1997).
10.17 Stock Pledge Agreement dated September 16, 1997 among Codinvest Limited
and ATC Communications Group, Inc (Incorporated by reference from
Company's Form 10-K Annual Report for the year ended June 30, 1997).
10.18 Letter of Amendment, dated April 7, 1998, of Promissory Note by Michael
G. Santry in favor of ATC Communications Group, Inc. (Incorporated by
reference from the Company's Form 10-Q for the quarterly period ended
March 31, 1998).
10.19 Stock Pledge Agreement between Michael G. Santry and ATC
Communications Group, Inc., dated April 7, 1998 (Incorporated by
reference from the Company's Form 10-Q for the quarterly period ended
March 31, 1998).
10.20 Release and Separation Agreement by and among Advanced Telemarketing
Corporation, ATC Communications Group, Inc. and Arthur Chavoya
(Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended December 31, 1997).
10.21 Promissory Note by and between Aegis Communications Group, Inc. and
Thayer Equity Investors III, L.P. dated July 9, 1998 in the original
principal amount of $6.8 million (Incorporated by reference from the
Company's Form 10-Q for the quarterly period ended September 30, 1998).
10.22 Promissory Note by and between Aegis Communications Group, Inc. and
Thayer Equity Investors III, L.P. dated July 29, 1998 in the original
principal amount of $1.9 million (substantially identical in all
material respects, except for dates and principal amount, to the
Promissory Note referred to in Exhibit 10.20).
10.23 Promissory Note by and between Aegis Communications Group, Inc. and
Thayer Equity Investors III, L.P. dated October 23, 1998 in the
original principal amount of $2.1 million (substantially identical in
all material respects, except for dates and principal amount, to the
Promissory Note referred to in Exhibit 10.20).
10.24 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 (filed herewith).
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).
27.1 Financial Data Schedule (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:
34
Aegis Communications Group, Inc.
Attention: Secretary
7880 Bent Branch Drive, Suite 150
Irving, Texas 75063
REPORTS ON FORM 8-K
On April 9, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", a definitive agreement for a stock-for-stock
merger of ATC and IQI. See "Item 1. Business - The Merger."
On June 29, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", that a summary judgment was entered against ATC
on June 25, 1998 in a breach of contract case filed by an ATC option holder in
the United States District Court, District of Kansas. See "Item 3. - Legal
Proceedings."
On July 7, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", that it had received an additional financing
commitment from Thayer Equity Investors III, L.P., a private investment fund and
majority shareholder of ATC's proposed merger partner, IQI, Inc., and certain
other shareholders of IQI. Under the commitment, the Thayer-led group agreed to
lend the combined company, at its election, up to an additional $4.0 million in
subordinated indebtedness at any time within 90 days after the merger.
On July 24, 1998, the Company filed a report on Form 8-K reporting: (i)
under "Item 2. - Acquisition or Disposition of Assets", that on July 9, 1998,
ATC completed the acquisition of IQI; (ii) under "Item 5. - Other Events", that
in connection with the consummation of the Merger, the Company changed its
corporate name to Aegis Communications Group, Inc., which became effective with
the filing of its Amended and Restated Certificate of Incorporation on July 9,
1998. In addition, the Company changed its Nasdaq National Market System ticker
symbol to "AGIS," effective July 13, 1998; and (iii) under "Item 5. -- Other
Events", that in connection with the Merger, IQI entered into a Second Amended
and Restated Credit Agreement dated as of July 9, 1998 with The Bank of Nova
Scotia and Credit Suisse First Boston. See "Item 1. Business - The Merger",
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" and "Notes to Consolidated
Financial Statements - 3. Mergers and Acquisitions."
On December 17, 1998, the Company filed a report on Form 8-K reporting,
under "Item 5. - Other Events", that its Board of Directors had adopted a
Shareholder Rights Plan in which Rights to purchase shares of a new series of
preferred stock would be distributed as a dividend, one Right per share, to
owners of record of Aegis Common Stock as of the close of business on December
28, 1998.
35
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 30, 1999 By: /s/ STEPHEN A. MCNEELY
---------------------------------------
Stephen A. McNeely
President and Chief Executive
Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Dated: March 30, 1999 By: /s/ Michael G. Santry
---------------------------------------
Michael G. Santry, Co-Chairman, Director
Dated: March 30, 1999 By: /s/ Paul G. Stern
---------------------------------------
Paul G. Stern, Co-Chairman, Director
Dated: March 30, 1999 By: /s/ Matthew S. Waller
---------------------------------------
Matthew S. Waller, Chief Financial Officer,
Director
Dated: March 30, 1999 By: /s/ Edward Blank
---------------------------------------
Edward Blank, Director
Dated: March 30, 1999 By: /s/ Daniel H. Chapman
---------------------------------------
Daniel H. Chapman, Director
Dated: March 30, 1999 By: /s/ Drew Lewis
---------------------------------------
Drew Lewis, Director
Dated: March 30, 1999 By: /s/ David L. Malcom
---------------------------------------
David L. Malcolm, Director
Dated: March 30, 1999 By: /s/ Frederic V. Malek
---------------------------------------
Frederic V. Malek, Director
Dated: March 30, 1999 By: /s/ Darryl D. Pounds
---------------------------------------
Darryl D. Pounds, Director
36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE (ITEM 14(A))
PAGE
----
Report of Independent Accountants F-2
Report of Independent Auditors F-3
Consolidated Statements of Operations for the Year Ended July 31, 1996, the Five
Months Ended December 31, 1996 and the Years Ended December 31, 1997 and
1998 F-4
Consolidated Balance Sheets at December 31, 1997 and 1998 F-5
Consolidated Statements of Shareholders' Equity for the Year Ended July 31,
1996, the Five Months Ended December 31, 1996 and the Years Ended December
31, 1997 and 1998 F-7
Consolidated Statements of Cash Flows for the Year Ended July 31, 1996, the Five
Months Ended December 31, 1996 and the Years Ended December 31, 1997 and
1998 F-8
Notes to Consolidated Financial Statements F-10
Schedule II - Valuation and Qualifying Accounts for the Five Months Ended
December 31, 1996 and the Years Ended December 31, 1997 and 1998 F-33
All other schedules are omitted since the required information is not
applicable or is not material or because the information required is included in
the consolidated financial statements and notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aegis Communications Group, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Aegis Communications Group, Inc. (formerly IQI, Inc.) and its
subsidiaries (the "Company") at December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 1999
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Aegis Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Aegis
Communications Group, Inc. and subsidiaries (formerly IQI, Inc.) as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997, the
five months ended December 31, 1996, and the year ended July 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Lexi
International, Inc., a wholly owned subsidiary which statements reflect total
revenues of $2,803,000 for the six weeks ended December 31, 1996. Those
statements were audited by other auditors whose report has been furnished to
us and, our opinion, insofar as it relates to data included for Lexi
International, Inc. for the six weeks ended December 31, 1996, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Aegis Communications Group,
Inc. (formerly IQI, Inc.) at December 31, 1997, and the consolidated results
of its operations and its cash flows for the year ended December 31, 1997,
the five months ended December 31, 1996, and the year ended July 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
April 17, 1998
F-3
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- --------------- --------------------------------
1996 1996 1997 1998
------------- --------------- ------------- --------------
Revenues $57,543 $ 26,756 $ 133,832 $228,038
Cost of services, excluding depreciation and
amortization shown below 40,709 20,664 88,190 161,361
------------- --------------- ------------- --------------
Gross profit 16,834 6,092 45,642 66,677
Selling, general and administrative expenses 13,588 8,760 36,312 50,510
Depreciation 1,314 969 4,501 10,018
Excess purchase price amortization - 55 1,592 2,876
Restructuring and other
non-recurring charges (Note 4) - - - 8,395
------------- --------------- ------------- --------------
Total expenses 14,902 9,784 42,405 71,799
------------- --------------- ------------- --------------
Operating income (loss) 1,932 (3,692) 3,237 (5,122)
Other income, net 877 648 - -
Interest expense, net (Notes 6, 7 and 8) 190 450 3,626 5,578
------------- --------------- ------------- --------------
Income (loss) before income taxes 2,619 (3,494) (389) (10,700)
Income tax expense (benefit) (Note 11) 17 1,794 595 (2,989)
------------- --------------- ------------- --------------
Net income (loss) $ 2,602 $ (5,288) $ (984) $ (7,711)
============= =============== ============= ==============
Basic and diluted earnings (loss) per common
and common equivalent share (Note 10): $ 0.11 $ (0.22) $ (0.04) $ (0.19)
============= =============== ============= ==============
Basic and diluted weighted average common
and common equivalent shares
outstanding (Note 10): 24,378 24,417 27,233 40,383
See accompanying notes.
F-4
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,288 $ 10,701
Accounts receivable - trade, less allowance for doubtful
accounts of $550 in 1997 and $1,337 in 1998. 25,576 49,585
Notes receivable -- related parties (Note 17) - 2,185
Current deferred tax assets (Note 11) 1,415 884
Prepaid expenses and other current assets 2,720 1,662
--------- ---------
Total current assets 34,999 65,017
Property and equipment (Notes 2, 5 and 8):
Equipment & software 24,429 41,262
Leasehold improvements 4,569 6,112
Furniture and fixtures 4,232 7,827
Construction in progress -- computer software 206 -
--------- ---------
33,436 55,201
Accumulated depreciation and software amortization 11,813 19,924
--------- ---------
21,623 35,277
Cost in excess of net assets acquired, net of accumulated
amortization of $1,647 in 1997 and $4,523 in 1998
(Notes 2 and 3) 43,558 71,325
Deferred tax assets (Note 11) - 6,502
Deferred financing costs, net (Note 2 and 6) 1,242 2,099
Other assets 314 324
--------- ---------
$ 101,736 $ 180,544
========= =========
See accompanying notes.
F-5
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1998
--------- ---------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of long-term obligations $ 1,101 $ 2,758
Due to shareholders 1,908 -
Accounts payable 867 7,059
Accrued compensation expense and related liabilities 4,543 6,414
Accrued interest expense 579 1,263
Other accrued expenses 4,089 9,417
Other current liabilities 4,288 2,225
--------- ---------
Total current liabilities 17,375 29,136
Revolving line of credit (Note 6) 15,000 28,100
Long-term obligations, net of current portions (Note 6) 35,257 36,829
Subordinated indebtedness due to affiliates (Note 7) 1,000 14,651
Deferred income taxes 2,331 -
Other long-term liabilities 200 -
Commitments and contingencies (Notes 8 and 13) - -
Shareholders' equity (Notes 9 and 15):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative Series B
shares issued and outstanding in 1998 - 0
Common stock, $.01 par value, 100,000,000 shares
authorized; 29,865,950 and 52,311,450 shares issued
and outstanding in 1997 and 1998, respectively 299 523
Additional paid-in capital 28,025 78,167
Treasury shares, at cost - (1,421)
Cumulative translation adjustment 13 34
Retained earnings (deficit) 2,236 (5,475)
--------- ---------
Total shareholders' equity 30,573 71,828
--------- ---------
$ 101,736 $ 180,544
========= =========
See accompanying notes.
F-6
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock
---------------
Series C Common Stock Treasury Stock
--------------- ------------------- -------------------
Par Par Par
Shares Value Shares Value Shares Value
------ ------ ----------- ----- -------- --------
BALANCE AT
JULY 31, 1995 - $ - 24,378,250 $ 244 - $ -
Foreign currency
translation adjustment - - - - - -
Net income - - - - - -
------ ------ ----------- ----- -------- --------
BALANCE AT
JULY 31, 1996 - $ - 24,378,250 $ 244 - $ -
Cash contributions
by shareholder - - - - - -
Issuance of common
stock in exchange
for contribution of
affiliates - - 1,092,146 11 - -
Repurchase of common
stock in connection
with IQI agreement - - (10,050,567) (101) - -
Issuance of common
stock in connection
with Lexi acquisition - - 10,002,571 100 - -
Foreign currency
translation adjustment - - - - - -
Reclassification of
undistributed S-corporation
earnings - - - - - -
Net loss - - - - - -
------ ------ ----------- ----- ------- --------
BALANCE AT
DECEMBER 31, 1996 - $ - 25,422,400 $ 254 - $ -
Repurchase of
common stock - - (42,993) - - -
Issuance of common
stock in connection
with InterServ merger - - 3,832,972 39 - -
Exercise of stock options - - 40,858 - - -
Capital contributions - - - - - -
Issuance of common
stock pursuant to
exercise of warrants - - 612,713 6 - -
Return of capital to
shareholder - - - - - -
Foreign currency
translation adjustment - - - - - -
Net loss - - - - - -
------ ------ ----------- ----- ------- --------
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 - 21,839,625 218 361,000 (1,421)
Exercise of stock options - - 353,055 4 - -
Purchase of
subsidiary
minority interest - - 1,334 - - -
Foreign currency
translation adjustment - - - - - -
Net loss - - - - - -
------ ------ ----------- ----- ------- --------
BALANCE AT
DECEMBER 31, 1998 29,778 $ - 52,311,450 $ 523 361,000 $ (1,421)
====== ====== =========== ===== ======= ========
Total
Additional Cumulative Retained Share-
Paid-In Translation Earnings holders'
Capital Adjustment (Deficit) Equity
---------- ----------- -------- --------
BALANCE AT
JULY 31, 1995 $ (241) $ - $ 9,172 $ 9,175
Foreign currency
translation adjustment - 1 - 1
Net Income - - 2,602 2,602
---------- ----------- ------- --------
BALANCE AT
JULY 31, 1996 $ (241) $ 1 $11,774 $ 11,778
Cash contributions
by shareholder 4,675 - - 4,675
Issuance of common
stock in exchange
for contribution of
affiliates (11) - - -
Repurchase of common
stock in connection
with IQI agreement (21,683) - - (21,784)
Issuance of common
stock in connection
with Lexi acquisition 21,068 - - 21,168
Foreign currency
translation adjustment - 1 - 1
Reclassification of
undistributed S-corporation
earnings 3,266 - (3,266) -
Net loss - - (5,288) (5,288)
-------- -------- ------- --------
BALANCE AT
DECEMBER 31, 1996 $ 7,074 $ 2 $ 3,220 $ 10,550
Repurchase of
common stock (90) - - (90)
Issuance of common
stock in connection
with InterServ merger 14,754 - - 14,793
Exercise of stock options 5 - - 5
Capital contributions 4,475 - - 4,475
Issuance of common
stock pursuant to
exercise of warrants 1,994 - - 2,000
Return of capital to
shareholder (187) - - (187)
Foreign currency
translation adjustment - 11 - 11
Net loss - - (984) (984)
-------- -------- ------- --------
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 49,876 - - 48,673
Exercise of stock options 266 - - 270
Purchase of
subsidiary
minority interest - - - -
Foreign currency
translation adjustment - 21 - 21
Net loss - - (7,711) (7,711)
-------- -------- ------- --------
BALANCE AT
DECEMBER 31, 1998 $ 78,167 $ 34 $(5,475) $ 71,828
======== ======== ======= ========
F-7
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------- ------------ -----------------------
1996 1996 1997 1998
-------- ------------ -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,602 $ (5,288) $ (984) $ (7,711)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,314 1,024 6,093 12,895
Assets written-off - - - 5,807
Deferred income taxes - 1,782 (796) (2,889)
Other 2 (116) (30) 21
Changes in operating assets and liabilities:
Bank overdrafts 1,236 (1,476) (313) -
Accounts and notes receivable -- related parties - - - 1,958
Accounts and notes receivable -- other (2,586) 1,664 818 (3,375)
Prepaid and other current assets (258) 26 1,836 1,127
Other assets (450) 458 (138) 306
Due to related parties - 2,384 (249) -
Accounts payable and other accrued liabilities 485 (877) (2,597) 2,208
Other current liabilities 570 280 (1,624) (3,220)
-------- ------------ -------- --------
Net cash provided by (used in) operating activities 2,915 (139) 2,016 7,127
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,488) (3,866) (10,018) (12,520)
Acquisition costs, ATC - - - (3,989)
Net cash acquired from acquisition of ATC - - - 296
Net cash acquired from acquisition of Lexi - 5,462 - -
Acquisition of InterServ, net of cash acquired - - (15,776) -
Loans and advances to affiliate (2,370) - - -
-------- ------------ -------- --------
Net cash provided by (used in) investing activities (5,858) 1,596 (25,794) (16,213)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,600 19,600 30,225 4,477
Proceeds from affiliate debt - - - 13,650
Principal payments on long-term debt (3,657) (3,967) (6,200) (1,572)
Payments on capital lease obligations - (59) (773) (1,380)
Proceeds from sale leaseback 1,688 - - -
Repurchase of common stock - (18,784) (90) -
Return of capital to shareholder - - (187) -
Proceeds from shareholder 63 - - -
Principal payments to shareholder (42) - - -
Proceeds from exercise of stock options - - 5 269
Deferred financing costs - (800) (650) (966)
Capital contributions - 4,675 4,475 -
-------- ------------ -------- --------
Net cash provided by financing activities 1,652 665 26,805 14,478
Effect of exchange rates on cash 3 1 11 21
-------- ------------ -------- --------
Net increase (decrease) in cash and cash equivalents (1,288) 2,123 3,038 5,413
Cash and cash equivalents at beginning of period 1,415 127 2,250 5,288
-------- ------------ -------- --------
Cash and cash equivalents at end of period $ 127 $ 2,250 $ 5,288 $ 10,701
======== ============ ======== ========
See accompanying notes.
F-8
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------- ------------ -----------------------
1996 1996 1997 1998
-------- ------------ -------- --------
Supplemental disclosure of cash paid during the periods for:
Interest $ 177 $ 218 $ 3,046 $ 4,886
Income taxes 88 458 1,206 894
Supplemental information on non-cash investing and
financing activities:
Issuance of stock to effect acquisition of ATC $ - $ - $ - $ 45,320
Issuance of stock to effect acquisition of Interserv - - 13,321 -
Issuance of stock to effect acquisition of Lexi - 21,168 - -
Capital lease obligations entered into - 2,356 37 1,299
Contribution of capital - - 2,000 -
NON-CASH INVESTING AND FINANCING ACTIVITIES
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 1996, 1997 and 1998, the Company purchased equipment and
furniture under financing leases totaling $2,356, $37 and $1,299,
respectively.
During 1997, a shareholder forgave $2,000 of subordinated notes
payable by the Company, which was treated as a contribution of capital.
On July 12, 1997, the Company acquired the outstanding stock of
InterServ Services Corporation in exchange for cash of $15,415, common stock
valued at $13,321 and options valued at $1,472. In accordance with the
InterServ purchase agreement, the Company 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 November 22, 1996, the Company acquired the common stock of Lexi
International, Inc. in exchange for common stock valued at $21,168.
See accompanying notes.
F-9
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 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.
Effective November 18, 1996, IQI, certain of its affiliates, Edward
Blank, the sole shareholder of IQI and The Edward Blank 1995 Grantor Retained
Annuity Trust (collectively, "Edward Blank") and Thayer Equity Investors III,
L.P. ("Thayer") entered into a stock purchase agreement, ("the IQI
Agreement"), whereby: i) IQI redeemed 10,050,567 shares of its common stock
held by Edward Blank for cash, notes and a warrant, aggregating $21,168 and
ii) Thayer acquired additional common shares for cash from Edward Blank such
that Thayer owned approximately 80% of the outstanding shares of common stock
of IQI, after giving effect to i) above. The consideration paid for the
redemption of the 10,050,567 shares was recorded as treasury stock, including
related expenses of $783. Prior to November 18, 1996, the Company was treated
as an S-corporation for tax purposes. On November 18, 1996, the Company
became a C-corporation and became subject to income taxes on that basis. As a
result of the Company's change from an S-corporation, undistributed retained
earnings of $3,266 on November 17, 1996 have been reclassified to additional
paid in capital.
The Company provides outsourced telecommunications-based marketing
and customer service to large companies in various industries through
strategically located client service centers throughout the United States and
Canada. The Company also provides, through its InterServ subsidiary, customer
service, client service center management, and marketing research services.
At December 31, 1998, Aegis had the following operating subsidiaries:
F-10
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
State of Date Percentage
Name incorporation acquired ownership Principal business activity
- ---------------------------------------- ---------------- ---------- ------------- ------------------------------------
Advanced Telemarketing Nevada Jul-98 98.9% Client service center management
Corporation (d/b/a ATC
Communications) ("Advanced")
InterServ Services Corporation Delaware Jul-97 100.0% Client service center management
and marketing research services
Lexi International, Inc. California Nov-96 100.0% Client service center management
IQI, Inc. New York N/A 100.0% Client service center management
EBA Direct, Inc. Canada N/A 100.0% Client service center management
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. Teleservices 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. Teleservices revenues
earned under contracts based on successful sales are recognized on the
date such sale is verified by the customer. Marketing research services
revenue is recognized when services are performed in accordance with
contract terms. 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.
(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
five-year to eight-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. 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-11
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
(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. Any
gain or loss for early termination of such agreement, if terminated,
will be recognized as an adjustment to interest expense over the
remaining portion of the original life of the terminated contract.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting the reporting
standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. A company may also implement SFAS No.
133 as of the beginning of any fiscal quarter after issuance. SFAS
No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 and, at the
company's election, before January 1, 1998. Based on the Company's
current operations, SFAS No. 133 will not materially impact the
Company's disclosure or reporting.
(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.
(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 tax 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 prior year balances have been reclassified
to conform to the 1998 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 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".
F-12
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
(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.
(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 statement for entities with complex capital structures and
requires a reconciliation of the numerator and the denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic and diluted EPS are computed by dividing net
income applicable to common stock by the weighted average number of
shares of common stock and common stock equivalents outstanding during
the period. Basic EPS excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised, converted into or resulted in the issuance of common stock.
Common stock equivalents consist of common stock issuable under the
assumed exercise of stock options and warrants, computed based on the
treasury stock method, and the assumed conversion of the Company's
issued and outstanding preferred stock. Common stock equivalents are
not included in diluted EPS calculations to the extent their inclusion
would be anti-dilutive.
(q) COMPREHENSIVE INCOME. 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.
F-13
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
(r) SEGMENT REPORTING. In December 1997, Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131") was issued. This statement
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements. In fiscal 1998, the Company adopted SFAS No. 131 and
applied the standard to the previous fiscal periods reported. See "Note
18. Segments".
3. MERGERS AND ACQUISITIONS
LEXI INTERNATIONAL, INC.
Effective November 22, 1996, Lexi entered into a purchase agreement
with Thayer whereby: i) Lexi issued common stock to Thayer for approximately
$9,000 and ii) certain former Lexi shareholders sold shares in Lexi to
Thayer for approximately $6,600. After giving effect to such transactions,
Thayer owned approximately 73% of Lexi.
On January 3, 1997, Lexi entered into a merger with a newly formed
subsidiary of IQI, whereby: i) the issued and outstanding shares of Lexi owned
by Thayer were acquired by the newly formed subsidiary for 748,194 shares of IQI
common stock, ii) the remaining 27% of Lexi not previously acquired by Thayer
was acquired by IQI in exchange for 277,574 shares of IQI common stock, and iii)
the newly formed subsidiary was merged into IQI and Lexi became a wholly owned
subsidiary of IQI (collectively, the Lexi Merger). The consolidated financial
statements give effect to the Lexi Merger on November 22, 1996, the date of
purchase by Thayer.
INTERSERV SERVICES CORPORATION
Effective July 12, 1997, IQI, certain of its affiliates and ITC Holding
Company (ITC) the former owner of InterServ, entered into a stock purchase
agreement, (the InterServ Agreement), whereby IQI purchased all of the
outstanding common shares of InterServ for a combination of stock and cash,
based on a formula, valued at $32,142, including the assumption of approximately
$6,200 of InterServ indebtedness. Included in the purchase price is additional
performance-based consideration of $1,908 to the former shareholders of
InterServ based on a formula contained in the InterServ Agreement. The
additional consideration is payable in cash and stock in the same proportion as
the initial transaction and was paid in 1998 in cash and stock in the same
proportion as the initial transaction.
F-14
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
THE MERGER OF ATC COMMUNICATIONS GROUP, INC. AND IQI, INC.
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, $.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 Nasdaq National
Market System symbol to "AGIS".
The Merger Agreement also contains a provision extending the
maturity date of one-half of the principal amount of the promissory note
payable to the Company by an officer of the Company to March 31, 1999. At
December 31, 1998, the principal and accrued but unpaid interest on the note
totaled approximately $1,900. See "Note 17. Related Party Transactions."
The acquisitions of Lexi and InterServ and the merger of ATC and IQI
were 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:
LEXI INTERSERV ATC
------------- ------------- --------------
Purchase Price:
Issuance of common stock $21,168 $14,793 $45,320
Additional common stock issued in 1998 - 874 -
Cash purchase price - 15,415 -
Additional cash consideration paid in 1998 - 1,034 -
Debt assumed - 6,200 -
Other liabilities assumed 5,340 4,754 -
Intrinsic value of ATC stock options - - 2,090
Transaction costs 1,140 1,342 4,177
------------- ------------- --------------
27,648 44,412 51,587
Fair Market Value of Assets Acquired and
Liabilities Assumed 12,140 14,693 20,966
------------- ------------- --------------
Excess of Purchase Price over Fair Value of Assets
Acquired and Liabilities Assumed ("Goodwill") $15,508 $29,719 $30,621
============= ============= ==============
F-15
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
In 1997 and 1998, the Company recorded additional excess purchase
price relating to the Lexi acquisition of $283 and $22, respectively,
pertaining to the resolution of certain pre-acquisition contingencies.
The following unaudited condensed consolidated pro forma statements
of operations data present the consolidated results of operations of the
Company as if the ATC and the Interserv acquisitions had occurred on January
1, 1997 and are 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,
---------------------------
1997 1998
-------- --------
(Unaudited)
Total revenues $248,763 $275,984
Cost of services 170,685 196,066
-------- --------
Gross profit 78,078 79,918
Operating expenses 81,770 77,970
Restructuring and other non-recurring charges -- 8,395
-------- --------
Operating income (loss) (3,692) (6,447)
Interest expense, net 5,786 6,176
Litigation settlement -- 1,900
-------- --------
Income (loss) before income taxes (9,478) (14,523)
Income tax expense (benefit) (1,473) (4,190)
-------- --------
Net loss $ (8,005) $(10,333)
-------- --------
-------- --------
Pro forma net loss per share:
Basic and diluted $ (0.16) $ (0.20)
-------- --------
-------- --------
Weighted average shares
outstanding (in thousands) 50,164 51,882
F-16
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On July 29, 1998, the Company announced that it would record a
pre-tax restructuring reserve 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") criterion for accrual have
been referred to herein as "restructuring" charges, and a restructuring
accrual has been recorded to the extent the related amounts have not been
paid. Expenses related to the restructuring decision which do not meet the
specific GAAP criterion 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, 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. At December 31,
1998 approximately $100 of the restructuring and other non-recurring charges
had been accrued but remained unpaid. The Company expects to recognize
additional restructuring and other charges, as previously announced, through
the first quarter of 1999 as restructuring related efforts continue.
The following table details the restructuring and other non-recurring
charges related to the Merger as of December 31, 1998:
YEAR ENDED
DECEMBER 31,
1998
------------
Write-offs of redundant hardware and software $ 4,713
Severance costs and consolidation of certain administrative functions 661
Other non-recurring charges 3,021
------------
Total $ 8,395
============
5. PROPERTY AND EQUIPMENT
Construction in progress includes capitalized software costs of $206 at
December 31, 1997. Such capitalized software costs were written-off as redundant
software in the restructuring and other non-recurring charges associated with
the Merger. See "Note 4. Restructuring and Other Non-recurring Charges".
F-17
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
6. LONG-TERM DEBT
In connection with the original IQI Agreement, the Company obtained a
$19,600 term loan and a revolving loan commitment for a maximum principal amount
of $10,000, including a $2,000 letter of credit subfacility and a $2,000 swing
line loan subfacility (the "Bank Loan"). The Bank Loan originally matured in
November 2002. The swing line subfacility provided the Company with the ability
to obtain immediate borrowing. In connection with the IQI Agreement, the Company
borrowed $19,600 under the term loan commitment. The term loan requires
quarterly principal payments through December 2002. IQI incurred $800 of costs
related to the Bank Loan.
In May 1997, the Bank Loan was amended whereby, among other matters,
borrowings under the Bank Loan are available for Lexi and Lexi's results are
included in the determination of the aforementioned covenants, as amended.
In June 1997, the Bank Loan was amended again to provide financing for
the acquisition of InterServ. The Bank Loan was increased to a $35,000 term loan
and a revolving loan commitment for a maximum amount of $18,000. The $2,000
letter of credit subfacility and $2,000 swing line loan subfacility which are
part of the revolving loan commitment were unchanged. The Company paid
additional loan costs of $650 for the amendments in 1997.
In July 1998, the Bank Loan was amended again to provide financing
for the Merger and to include Aegis as a guarantor of the Bank Loan (the
"Amended Bank Loan"). The revolving loan commitment under the Bank Loan was
increased to a maximum amount of $30,000. At December 31, 1998, $1,900
remained undrawn on the revolving loan commitment. The term loan letter of
credit sub-facility and swing line loan sub-facility were unchanged. The
Company paid additional loan costs of $911 for the amendment in 1998.
IQI may elect that the loans accrue interest at a fluctuating rate per
annum -- Base Rate Loans, as defined, equal to the sum of the Alternate Base
Rate, as defined, plus the Applicable Margin for Base Rate loans, as defined
(which is dependent on IQI's Debt to EBITDA Ratio, as defined, and ranges from
0.25% to 1.5% for the Revolving Loan and 1.5% and 2.0% for the Term Loan).
Alternatively, IQI may elect that the loans accrue interest on a fixed rate
basis, as defined.
Interest on swing line loans is at the aforementioned base rate and is
not entitled to be converted into LIBO rate loans. Interest is payable quarterly
for Base Rate Loans, and on the last day of each applicable Interest Period, as
defined, for LIBO Rate Loans. At December 31, 1997 and 1998, amounts outstanding
for accrued interest based on the LIBO Rate were $482 and $474, respectively.
IQI is to pay commitment fees equal to 0.5% or 0.375% if the Debt to
EBITDA Ratio as defined, is greater than or equal to 3:1 or less than 3:1,
respectively, based on the average daily unused portion of the revolving loan
commitment amount.
IQI is subject to various covenants, as defined, including, among
others, Debt to EBITDA ratios, Interest Coverage Ratios, Cash Flow Coverage
ratios and restricted Capital Expenditure amounts. At December 31, 1997, IQI was
in default of certain covenants and, on March 30, 1998, obtained from its bank
an amendment to its Bank Loan regarding these covenants. Under the amended
terms, IQI was in compliance with these covenants at December 31, 1997. IQI was
in compliance with all other covenants at December 31, 1997.
F-18
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
At December 31, 1998, IQI was in default of certain covenants and on
March 30, 1999, obtained from its bank an amendment to its Amended Bank Loan
regarding these covenants. Under the amended terms, management believes that it
was in compliance with these covenants at December 31, 1998 and that it was in
compliance with all other covenants at December 31, 1998.
The Company has granted to the banks a security interest in all of the
assets of the Company including, without limitation, the pledge of all the
capital stock of Lexi, InterServ and Advanced owned by the Company. In addition,
Lexi, InterServ and Advanced 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, 1997 and 1998, the Company had an interest rate
collar agreement with an original notional principal amount of $19,600
whereby the Company pays interest at LIBO rates, subject to a floor of 5.6%
and a cap of 8.0%. The agreement terminates on March 31, 2000. The effect of
this agreement on interest expense for the years ended December 31, 1997 and
1998, was immaterial.
Long-term debt at December 31, 1997 and 1998, is summarized below:
1997 1998
-------------- --------------
Bank revolving loan $ 15,000 $ 28,100
Bank term loan 34,825 33,475
Capital lease obligations (see Note 8) 1,533 6,112
Subordinated indebtedness due to affiliates (See Note 7) 1,000 14,651
-------------- --------------
52,358 82,338
Less current maturities (1,101) (2,758)
-------------- --------------
$ 51,257 $ 79,580
============== ==============
Future maturities of long-term debt at December 31, 1998 are as
follows:
Years ending December 31,
- -------------------------
1999 $ 2,758
2000 2,500
2001 1,781
2002 474
2003 and thereafter 74,826
----------------
$ 82,339
================
F-19
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. SUBORDINATED INDEBTEDNESS
In connection with the redemption of shares of common stock in 1996,
IQI issued a subordinated note payable to a shareholder aggregating $3,000, due
November 2003. In December 1997, the Company and the shareholder consummated an
agreement to settle outstanding issues between the shareholder, the Company and
Thayer (the Company's principal shareholder). As part of such settlement, the
aggregate principal balance of the notes was reduced to $1,000, the interest
rate increased from 8% to 12% on the remaining note and the shareholder waived
the right to receive interest in the total amount of $30, but shall retain the
right to receive all other accrued but unpaid interest. The $2,000 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, 1998, the balance due on
the note payable was approximately $2,224 and IQI recognized $224 in interest
expense during 1998 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. At December 31, 1998, the balance due on the note payable was
approximately $7,279 and the Company recognized $407 in interest expense during
1998 pursuant to the note payable.
Also in connection with the Merger, the Company obtained a
commitment from Thayer and a Thayer-led group of shareholders to 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. At December 31, 1998, the balance due on the note payable was
approximately $4,148 and the Company recognized $148 in interest expense
during 1998 pursuant to the notes payable. The notes payable are also
convertible into shares of the Company's Common Stock at a conversion price
of $2.375 per share.
F-20
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
8. LEASES
The Company has capital leases covering certain equipment. Capital
leases are included in the accompanying consolidated balance sheet under the
following captions at December 31, 1998:
Equipment $ 8,584
Less accumulated depreciation (4,256)
-----------------
$ 4,328
=================
Future minimum lease payments for all noncancelable leases with initial
or remaining terms of one year or more at December 31, 1998 are as follows:
Capital Operating
Years ending December 31, Leases Leases
- ------------------------- ---------------- ---------------
1999 $ 2,409 $ 4,852
2000 2,150 4,136
2001 1,430 3,679
2002 124 3,115
2003 and thereafter - 4,746
---------------- ---------------
Total minimum future lease payments $ 6,113 $ 20,528
===============
Less: amounts representing interest (808)
----------------
Present value of future lease payments $ 5,305
================
In July 1996, IQI entered into a sale leaseback transaction related to
certain telecommunication and computer equipment under a Master Lease Agreement.
The note was secured by a first security interest in the equipment acquired with
the proceeds of the note. Payments, including interest at 8.05% per annum, were
due monthly in the amount of $53. In connection with the IQI Agreement, the note
was prepaid in full on November 19, 1996.
Rent expense on operating leases for the year ended July 31, 1996, the five
months ended December 31, 1996, and the years ended December 31, 1997 and 1998
was $1,199, $470, $3,455, and $7,792, respectively.
9. SHAREHOLDERS' EQUITY
In connection with the IQI Agreement, all of the issued and
outstanding common shares of stock were automatically changed into $.001 par
value common shares at a rate of 100,000 shares for each share issued and
outstanding. The accompanying consolidated financial statements and footnotes
show the retroactive effect of such recapitalization. In connection with the
IQI Agreement, Ed Blank contributed all of the shares he owned of CEPC and
Direct, two affiliated entities, to IQI in
F-21
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
exchange for 1,092,146 common shares of IQI.
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. The warrants were valued
at $186.
In December 1997, the Company and one of its shareholders settled a
dispute whereby the shareholder would i) reduce the principal balance of the
notes payable -- shareholder from $3,000 to $1,000 and ii) purchase two-thirds
of the common shares subject to warrants (612,714 shares) by paying the exercise
price of $2,000. The balance of the warrants remains outstanding and subject to
their original terms. As part of the settlement, the entire escrow fund of
approximately $2,475 held under the Escrow Agreement entered into pursuant to
the IQI Agreement was returned to Thayer who, in turn, contributed the amounts
released to the Company.
As a result of the Merger, each share of IQI Common Stock was
converted into 9.7513 shares of the Company's Common Stock. In order to
provide the consistency in reporting, historical share information for years
prior to 1998 was converted on this basis.
At December 31, 1998, 29,778 shares of $0.01 par value Series B
preferred stock were issued and outstanding. Such shares were previously
issued by ATC, are converible 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.
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 7. Subordinated
Indebtedness."
10. 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. 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 year
ended July 31, 1996, the five month period ended December 31, 1996 and the years
ended December 31, 1997 and 1998 were computed as follows:
F-22
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- -------------- ---------------------------------
1996 1996 1997 1998
------------- -------------- -------------- --------------
Basic and Diluted (1)(2)
Weighted average common
shares outstanding 24,378 24,417 27,233 40,744
------------- -------------- -------------- --------------
24,378 24,417 27,233 40,744
Weighted average treasury shares - - - (361)
------------- -------------- -------------- --------------
Shares used in EPS calculation 24,378 24,417 27,233 40,383
============= ============== ============== ==============
- -------------
(1) For the five month period ended December 31, 1996 and the years ended
December 31, 1997 and 1998, common stock equivalents are not included in diluted
EPS calculations because their inclusion would have an anti-dilutive effect.
(2) The weighted average shares outstanding for IQI have been adjusted to
reflect the effects of the Merger by multiplying the historical weighted average
shares by the Merger exchange ratio of 9.7513. For the five month period ended
December 31, 1996 and the years ended December 31, 1997 and 1998, weighted
average shares do not include common stock equivalents because their effect
would be anti-dilutive.
11. INCOME TAXES
F-23
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
The components of the income tax expense (benefit) applicable to
continuing operations for the year ended July 31, 1996, the five month period
ended December 31, 1996 and the years ended December 31, 1997 and 1998 are as
follows:
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- -------------- --------------------------------
1996 1996 1997 1998
------------- -------------- ------------- --------------
Current
Federal $ - $ 10 $ 1,175 -
State 17 2 216 -
Deferred
Federal - 1,492 (672) (2,617)
State - 290 (124) (372)
------------- -------------- ------------- --------------
Total income tax expense (benefit)
per the statements of operations $ 17 $ 1,794 $ 595 $(2,989)
============= ============== ============= ==============
A reconciliation of the expected statutory federal income tax
provision (benefit) to the actual provision (benefit) based on pre-tax income
(loss) for the year ended July 31, 1996, the five month period ended December
31, 1996 and the years ended December 31, 1997 and 1998 is as follows:
YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- -------------- ------------------------------
1996 1996 1997 1998
------------- -------------- ------------- --------------
Expected federal tax (benefit) at the
statutory rate $ - $ (822) $ (217) (3,638)
State taxes, net of federal benefit 17 (336) (225) (535)
Goodwill amortization and acquisition costs - 123 798 1,151
Valuation allowance - - 103 -
Termination of S-corporation status - 3,043 - -
Other items - (214) 136 33
------------- -------------- ------------- --------------
$ 17 $ 1,794 $ 595 $(2,989)
============= ============== ============= ==============
F-24
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
The components of deferred taxes included in the accompanying
consolidated balance sheets as of December 31, 1997 and 1998 are as follows:
1997 1998
-------------- --------------
Deferred tax assets:
Bad debt reserve $ 764 674
Accrued expenses 523 910
Net operating loss carryforwards 103 8,407
Deferred income 60 60
Tax credits - 1,142
Other 68 79
-------------- --------------
Gross deferred tax assets 1,518 11,272
Deferred tax liabilities:
Effect of cash to accrual accounting change (2,222) (1,502)
Depreciation (496) (1,550)
Other (125) (125)
-------------- --------------
Gross deferred tax liabilities (2,843) (3,177)
Valuation allowance (103) (709)
-------------- --------------
Net deferred tax asset (liability) $ (1,428) $ 7,386
============== ==============
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $21,000 and tax credits of approximately
$1,100. Due to an ownership change and the 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 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.
IQI was taxed as an S-corporation through November 17, 1996, when its
election to be taxed as such terminated. Therefore, no provision for federal and
certain state income taxes was provided for any periods prior to November 17,
1996. The current tax provisions for the year ended July 31, 1996 and for the
period from August 1, 1996 to November 17, 1996 consist of state income taxes
for the jurisdictions in which the Company did not have S-corporation status.
In 1996, Lexi recorded reserves of $2,400 for liabilities related to
tax, interest and penalties with respect to deductions claimed in previous
tax return filings for certain payments to, and on behalf of, shareholders.
During 1997, Lexi's tax return for the year ended September 30, 1995, was
examined by the Internal Revenue Service and the Company reached a settlement
agreement with the IRS. As part of the settlement, the Company agreed to
amend its returns for the years ended September 30, 1994 and September 30,
1996. At December 31, 1997, the $2,400 reserve was reduced to $200 and
the escrow receivable was eliminated due to the resolution of these matters.
These items were both charged to goodwill.
12 BILLING SETTLEMENT
In 1995, Lexi entered into an agreement to reimburse its principal
customer for billing discrepancies in the amount of $2,700. Reimbursements
commenced in 1995 and concluded in March 1997.
The consolidated financial statements at December 31, 1996, reflect $1,198
of obligations to four customers relating to billing discrepancies. During 1997,
management settled these matters for a total amount of $1,114.
13. COMMITMENTS AND CONTINGENCIES
As a result of the Merger, the Company assumed certain commitments
of ATC including: (a) Advanced renegotiated the employment agreement with a
former officer of ATC and entered into a consulting agreement with the former
officer through December 1998. The agreement specified 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.
F-25
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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 1997, the Company incurred $1,162 of additional
compensation related to these agreements, which is included in corporate
selling, general and administrative expenses.
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 1997 1998
- ----------------------------- --------------- ---------------
AT&T:
Teleservices revenues $56,221 $61,242
Marketing research services
revenues 1,327 1,451
------- -------
Total AT&T revenues $57,548 $62,693
------- -------
------- -------
American Express:
Teleservices revenues $ -- $26,071
Marketing research services
revenues -- --
------- -------
Total American Express
revenues $ -- $26,071
------- -------
------- -------
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.
F-26
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
In September 1998, the Company initiated the Aegis Communications
Group, Inc. 1998 Stock Option and Restricted Stock Plan (the "1998 Plan") which
provides for the granting of options to purchase up to a maximum of 7,500,000
shares of Common Stock to key employees, officers and directors of the Company
and its operating 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 (information for periods prior to 1998 includes activity for
the IQI Plan only):
IQI PLAN/ATC PLANS 1998 PLAN
------------------------------------------------------------------------
PRICE PER PRICE PER
SHARES SHARE SHARES SHARE
--------------- --------------- -------------- ----------------
Outstanding at July 31, 1996 - - - -
Granted 1,408,224 $2.09 - -
--------------- --------------- -------------- ----------------
Outstanding at December 31, 1996 1,408,224 $2.09 - -
Granted 2,580,886 $0.85 - $2.72 - -
Forfeited (207,527) $2.09 - -
Exercised (40,858) $0.85 - $2.72 - -
--------------- --------------- -------------- ----------------
Outstanding at December 31, 1997 3,740,725 $0.85 - $2.72 - -
Granted 134,666 $2.08 1,063,000 $1.25 - $2.81
ATC Options 3,384,000 $1.00 - $4.00 - -
Forfeited (248,604) $0.85 - $2.72 - -
Exercised (353,055) $0.85 - $1.50 - -
--------------- --------------- -------------- ----------------
Outstanding at December 31, 1998 6,657,732 $0.85 - $4.00 1,063,000 $1.25 - $2.81
=============== ==============
Included in options granted in 1997 are 69,915 options granted to
certain former option holders of InterServ which were issued at exercise prices
below the fair market value of IQI common stock. These options were issued as
replacements for similarly valued options held by such option holders prior to
the acquisition of InterServ by IQI. As a result of these arrangements, the
Company recorded additional goodwill of $1,472.
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
(information for periods prior to 1998 includes activity for the IQI Plan only):
F-27
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
Weighted average exercise price per share $2.09 $1.96 $1.97
Exercisable options 345,128 1,378,005 5,141,003
Options available for future grants 341,471 143,802 6,437,000
Weighted average remaining contractual life 9.9 years 9.0 years 8.3 years
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-sholes option pricing model, respectively, with the following
assumptions:
DECEMBER 31,
----------------------------------------------
1996 1997 1998
------------- -------------- -------------
Expected life in years 5.0 years 5.0 years 6.0 years
Risk-free interest rate 6.30% 6.30% 5.40%
Dividend yield - - -
Volatility factor - - 63.9%
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:
FIVE MONTHS
ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------- ------------------------------
1996 1997 1998
---------------- ------------- --------------
Net loss, as reported $ (5,288) $ (984) $ (7,711)
Amortization of stock options' fair value 128 178 695
---------------- ------------- --------------
Pro forma net loss $ (5,416) $ (1,162) $ (8,406)
================ ============= ==============
Net loss per share, basic and diluted $ (0.04) $ (0.22) $ (0.21)
================ ============= ==============
F-28
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
In April 1993, Advanced initiated the Advanced Telemarketing
Corporation 1993 Stock Option Plan which provides for the granting of options to
Advanced's key employees, officers, and directors to purchase shares of
Advanced'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 Advanced
Common to exchange shares of Advanced Common received upon exercise of such
options for shares of Common Stock. The shares exchanged pursuant to the Rights
Plan are exchanged on the ratio of two shares of Common Stock for one share of
Advanced Common. At December 31, 1998, fully vested options to purchase 11,668
shares of Advanced Common were outstanding. The options to purchase Advanced
Common outstanding at December 31, 1998 are subject to the Rights Plan as
discussed above.
16. EMPLOYEE BENEFIT PLANS
During 1991, Advanced 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.
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 year ended July 31, 1996, the five months ended December 31,
1996, and the years ended December 31, 1997 and 1998, were approximately
$103, $108, $231 and $84, respectively.
Subsequent to December 31, 1998, Aegis adopted a defined
contribution 401(k) plan (the "Plan") covering all eligible employees of
Aegis. Under the Plan, which replaces the Advanced 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 contributes.
17. RELATED PARTY TRANSACTIONS
At December 31, 1998, an executive officer of the Company had
outstanding borrowings and accrued interest of approximately $1,888. The
borrowing bears 6% annual interest and is due in full on March 31, 1999. In
connection with the Merger discussed in "Note 3. Mergers and Acquisitions",
the executive officer paid one-half of the principal amount of the note. The
remaining balance on the note is secured by shares of the Company's Common
Stock and options to purchase shares of the Company's Common Stock held by
the executive officer. Reported interest income from the receivable amounted
to approximately $58 in 1998. As of March 31, 1999, the Company and the
executive officer were discussing a further extension of the maturity date of
such amount, including terms relating to the executive officer delivering
additinal security sufficient to adquately securing repayment of the note.
F-29
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
Effective January 1, 1997, IQI entered into an agreement with an
affiliate of Thayer pursuant to which such affiliate provided IQI certain
management and consulting services. As consideration for the management and
consulting services provided, IQI was obligated to pay a quarterly fee of
$138, plus certain direct expenses. Effective with the Merger, this agreement
with Thayer was terminated.
The Company provides services to certain clients, including its most
significant client, who, directly or through affiliates, have an ownership
interest in Thayer.
During the year ended July 31, 1996, an affiliate of IQI purchased a
building in which the Company is leasing space. IQI funded the purchase of
this building by lending the affiliate approximately $2,203. This loan earned
interest at the prime rate plus 1% and was due on November 30, 1996. In
connection with the IQI Agreement, the loan, including accrued interest, was
repaid in full on November 18, 1996. Total rent expense relating to this
space and additional space leased from this affiliate amounted to
approximately $172, $115, $300, and $395 for the year ended July 31, 1996,
five months ended December 31, 1996, the year ended December 31, 1997, and
the year ended December 31, 1998, respectively. Interest income on the
amounts due from this affiliate amounted to approximately $109 for the year
ended July 31, 1996 and $107 for the five months ended December 31, 1996.
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, teleservices and marketing research, 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 teleservices segment provides large corporations with outsourced inbound
and outbound call handling services including customer service, help desk,
customer acquisition and retention, multilingual communications programs,
facilities management, order provisioning, and database management. The
marketing research segment provides its clients, representing a broad range
of industries, with customized marketing research services including customer
satisfaction studies, quantitative and qualitative research, new product
development, data management and field marketing services such as mystery
shopping. Business segment information is as follows:
F-30
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998
--------------- --------------
REVENUES:
Teleservices $ 115,609 $ 195,355
Marketing research services 18,223 32,683
--------------- --------------
Total $ 133,832 $ 228,038
=============== ==============
OPERATING INCOME (LOSS):
Teleservices $ 1,160 $ 1,361
Marketing research services 2,077 1,912
Restructuring and other charges - (8,395)
--------------- --------------
Total $ 3,237 $ (5,122)
=============== ==============
TOTAL ASSETS:
Teleservices $ 85,455 $ 161,699
Marketing research services 16,281 18,845
--------------- --------------
Total $ 101,736 $ 180,544
=============== ==============
DEPRECIATION AND AMORTIZATION:
Teleservices $ 4,092 $ 9,316
Marketing research services 409 702
Acquisition goodwill amortization 1,592 2,876
--------------- --------------
Total $ 6,093 $ 12,894
=============== ==============
19. SUBSEQUENT EVENTS
At December 31, 1998, Aegis was in default under certain of its
covenants contained in Credit Agreement. On March 31, 1999, the Company
entered into the First Amendment to the Credit Agreement (the "First Amendment")
whereby Scotiabank and CSFB waived the Company's defaults under certain of the
covenants at December 31, 1998 and provided for new levels for existing
covenants and a new covenant related to EBITDA.
On March 30, 1999, Thayer provided $5,667 in subordinated
indebtedness to assist in funding the Company's working capital needs. The
additional indebtedness is convertible into the Company's Common Stock at a
conversion price of $1.15 per share, which represents a 26.9% premium to the
closing price of Aegis Common Stock on March 25, 1999, the date that Thayer
agreed to the financing. The indebtedness bears an annual interest rate of
12% and matures on August 31, 2003. As payments under the indebtedness are
subordinate to the Bank Loan, quarterly accrued interest will be rolled into
the principal balance.
F-31
AEGIS COMMUNICATIONS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
Charged To
Earnings -
Balance at Balance General and Balance at
Beginning of Acquired Administrative Net End
Description Year in Merger Expenses Write-Off of Year
- ---------------------------------------- -------------- --------- ---------------- ------------- --------------
FIVE MONTHS ENDED JULY 31, 1996
Allowance for doubtful accounts $ - $ - $ 102 $ - $ 102
Deferred tax asset valuation allowance $ - $ - $ - $ - $ -
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 102 $ - $ 486 $ (38) $ 550
Deferred tax asset valuation allowance $ - $ - $ 103 $ - $ 103
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $ 550 $ 334 $ 747 $ (294) $ 1,337
Deferred tax asset valuation allowance $ 103 $ - $ 606 $ - $ 709
F-32