<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to _____________.
Commission File Number: 0-14315
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
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
ON AUGUST 13, 1999
COMMON STOCK $.01 PAR VALUE 52,492,616
REASON FOR AMENDMENT
As discussed in the Form 10-K/A Amendment No.3, the Company has restated its
1998 consolidated financial statements to account for the beneficial
conversion feature related to certain convertible subordinated debt that was
issued in 1998. In addition, the Company has restated its June 30, 1999
consolidated financial statements to reflect the long-term portion of debt
under a credit agreement as a current liability as the Company was in
violation of certain financial covenants contained in such agreement at June
30, 1999. The accompanying consolidated balance sheets as of December 31,
1998 and June 30, 1999 have been adjusted to give effect to the restatements.
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 (Restated) and June 30, 1999
(Restated) (unaudited)....................................................... 3-4
Unaudited Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and June 30, 1999..................... 5
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and June 30, 1999............................... 6
Notes to Unaudited Consolidated Financial Statements.............................. 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 11-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................22
Item 6. Exhibits and Reports on Form 8-K.................................................... 22
SIGNATURES.................................................................................................. 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---------------- ----------------
(RESTATED) (UNAUDITED)
(RESTATED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,701 $ 829
Accounts receivable, less allowance for doubtful accounts 49,585 50,159
Notes receivable -- related parties 2,185 2,212
Current deferred tax assets 884 884
Prepaid expenses and other current assets 1,662 3,006
---------------- ----------------
Total current assets 65,017 57,090
Property and equipment, net of accumulated depreciation
of $19,924 in 1998 and $25,843 in 1999 35,277 36,473
Goodwill, net of accumulated amortization of $4,523 in
1998 and $4,208 in 1999 71,325 49,457
Deferred tax assets 6,502 10,485
Deferred financing costs, net 2,099 1,946
Other assets 324 432
---------------- ----------------
$ 180,544 $ 155,883
================ ================
</TABLE>
See accompanying notes.
3
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---------------- ------------------
(RESTATED) (UNAUDITED)
(RESTATED)
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit (Restated-Note 8) $ - $ 30,000
Current portions of long-term obligations (Restated-Note 8) 2,758 32,749
Accounts payable 7,059 6,582
Accrued compensation expense 6,414 4,212
Accrued interest expense 1,263 1,361
Other accrued expenses 9,417 11,551
Other current liabilities 2,225 1,425
---------------- ------------------
Total current liabilities 29,136 87,880
Revolving line of credit 28,100 -
Long-term obligations, net of current portions 36,829 2,830
Subordinated indebtedness due to affiliates 14,651 9,238
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778, $.36 cumulative Series B shares
issued and outstanding in 1998 and 1999; 77,300, 15% - 2
cumulative Series D shares issued and outstanding at
June 30, 1999; and, 44,018, 15% cumulative Series E
shares issued and outstanding at June 30, 1999
Common stock, $.01 par value, 100,000,000 shares authorized;
52,311,450 and 52,434,206 shares issued and outstanding
at December 31, 1998 and June 30, 1999, respectively 523 524
Additional paid-in capital (Restated-Note 8) 81,259 93,523
Treasury shares, at cost (1,421) (1,321)
Cumulative translation adjustment 34 52
Retained earnings (deficit) (Restated-Note 8) (8,567) (36,845)
---------------- ------------------
Total shareholders' equity 71,828 55,935
---------------- ------------------
$ 180,544 $ 155,883
================ ==================
</TABLE>
See accompanying notes.
4
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 46,843 $ 58,023 $ 89,056 $ 119,839
Cost of services, excluding depreciation
and amortization shown below 30,561 43,136 57,631 86,726
------------ ------------ ------------ ------------
Gross profit 16,282 14,887 31,425 33,113
Selling, general and administrative expenses 11,710 16,246 23,460 33,178
Depreciation 1,975 3,066 3,781 6,206
Acquisition goodwill amortization 646 596 1,217 1,469
Asset impairment charge - - - 20,399
Restructuring and other non-recurring charges - - - 541
------------ ------------ ------------ ------------
Total operating expenses 14,331 19,908 28,458 61,793
------------ ------------ ------------ ------------
Operating income (loss) 1,951 (5,021) 2,967 (28,680)
Interest expense, net 1,213 1,838 2,429 3,580
------------ ------------ ------------ ------------
Income (loss) before income taxes 738 (6,859) 538 (32,260)
Income tax expense (benefit) 397 (2,411) 657 (3,982)
------------ ------------ ------------ ------------
Net income (loss) $ 341 $ (4,448) $ (119) $ (28,278)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ 0.01 $ (0.08) $ - $ (0.54)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 29,869 52,403 29,869 52,358
Diluted 34,246 52,403 29,869 52,358
</TABLE>
See accompanying notes.
5
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (119) $ (28,278)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 4,998 7,675
Deferred income taxes - (3,982)
Asset impairment charge - 20,399
Other 1,385 25
Changes in operating assets and liabilities:
Accounts receivable (6,521) (574)
Notes receivable - (27)
Other current assets 193 (1,344)
Other assets (718) (124)
Accounts payable 6,628 (477)
Accrued liabilities 1,864 30
Other current liabilities (1,489) (800)
-------------- --------------
Net cash provided by (used in) operating activities 6,221 (7,477)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,616) (7,115)
-------------- --------------
Net cash used in investing activities (5,616) (7,115)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net 3,000 1,900
Proceeds from affiliated debt 2,063 6,719
Principal payments on long-term debt (1,180) (2,921)
Payments on capital lease obligations (477) (1,088)
Payments on affiliated debt (2,066) -
Proceeds from issuance of common stock - 100
Proceeds from exercise of stock options - 129
Deferred financing costs (20) (119)
-------------- --------------
Net cash provided by financing activities 1,320 4,720
Net decrease in cash and cash equivalents 1,925 (9,872)
Cash and cash equivalents at beginning of period 5,288 10,701
-------------- --------------
Cash and cash equivalents at end of period $ 7,213 $ 829
============== ==============
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS:
Conversion of affiliated debt to preferred stock $ - $ 12,132
</TABLE>
See accompanying notes.
6
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unconsolidated financial statements of Aegis
Communications Group, Inc. and its subsidiaries (the "Company") for the three
and six month periods ended June 30, 1998 and 1999 have been prepared in
accordance with generally accepted accounting principles. Significant accounting
policies followed by the Company were disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K as
amended for the year ended December 31, 1998.
2. THE MERGER
On July 9, 1998, Aegis, formerly known as ATC Communications Group,
Inc. ("ATC"), completed the acquisition of IQI, Inc., a New York corporation
("IQI"). The acquisition was effected through the merger (the "Merger") of ATC
Merger Sub, Inc., a New York corporation and wholly-owned subsidiary of the ATC
("Sub"), with and into IQI pursuant to an Agreement and Plan of Merger dated as
of April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.
Pursuant to the Merger Agreement, each former holder of common stock,
$.001 par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of IQI Common Stock and IQI stock options and warrants in
a tax-free exchange. The acquisition has been accounted for as a reverse
purchase, meaning that for accounting purposes, IQI is the surviving corporation
and is treated as having acquired ATC in a purchase accounting transaction.
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".
7
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
The following unaudited condensed consolidated pro forma statements of
operations data present the consolidated results of operations of the Company as
if the Merger had occurred on January 1, 1998 and are not necessarily indicative
of what would have occurred had the Merger been completed as of that date or of
the results which may occur in the future:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1998 1999 1998 1999
-------------- -------------- -------------- -------------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Total revenues $ 73,663 $ 58,023 $ 137,001 $ 119,839
Cost of services, excluding depreciation
and amortization shown below 49,532 43,136 92,336 86,726
-------------- -------------- -------------- -------------
Gross profit 24,131 14,887 44,665 33,113
Selling, general and administrative expenses 17,996 16,246 35,230 33,178
Depreciation 3,084 3,066 5,960 6,206
Acquisition goodwill amortization 873 596 1,746 1,469
Asset impairment charge - - - 20,399
Restructuring and other non-recurring charges - - - 541
-------------- -------------- -------------- -------------
Total operating expenses 21,953 19,908 42,936 61,793
-------------- -------------- -------------- -------------
Operating income (loss) 2,178 (5,021) 1,729 (28,680)
Interest expense, net 1,560 1,838 3,120 3,580
Litigation settlement 1,900 - 1,900 -
-------------- -------------- -------------- -------------
Loss before income taxes (1,282) (6,859) (3,291) (32,260)
Income tax benefit (145) (2,411) (550) (3,982)
-------------- -------------- -------------- -------------
Net loss $ (1,137) $ (4,448) $ (2,741) $ (28,278)
============== ============== ============== =============
Pro forma net loss per share -- basic and diluted $ (0.02) $ (0.08) $ (0.05) $ (0.54)
============== ============== ============== =============
Weighted average shares outstanding 51,600 52,403 51,474 52,358
</TABLE>
8
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
3. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On July 29, 1998, the Company announced that it would record pre-tax
restructuring charges of $13,000 related to the Merger. Current and future
expenses related to the restructuring decision which meet the specific
generally accepted accounting principles ("GAAP") 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 and approximately $541 ($330, net of taxes) in the quarter
ended March 31, 1999, as a part of the total restructuring. These charges are
primarily attributable to one-time write-offs of redundant hardware and
software, severance costs and the consolidation of certain administrative
functions including costs to relocate offices and employees. The Company does
not anticipate recognizing additional Merger-related restructuring charges in
1999 and none were recorded in the quarter ended June 30, 1999.
4. ASSET IMPAIRMENT CHARGE
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No.
121"), which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the estimated future
cash flows (undiscounted and without interest charges) estimated to be generated
by those assets are less than the assets' carrying value. SFAS No. 121 also
requires that when a group of assets being tested for impairment was acquired as
part of a business combination that was accounted for using the purchase method
of accounting, any goodwill that arose as part of the transaction must be
included as part of the asset grouping. In accordance with SFAS No. 121, the
Company reviews long-lived assets whenever events or changes in facts and
circumstances indicate that the carrying value of the assets may not be
recoverable. As a result of the performance of the Company's Elrick & Lavidge
("E&L") marketing research division since its acquisition (in a purchase
accounting transaction) by IQI in July 1997, the Company has performed an
analysis (based on E&L's estimated future cash flows) of the carrying value of
the goodwill associated with the purchase of E&L. As a result of this
evaluation, it was determined that the carrying value of the goodwill associated
with the purchase of E&L has been impaired. Accordingly, in the quarter ended
March 31, 1999, the Company adjusted the carrying value of E&L's long-lived
assets to their fair value resulting in a non-cash asset impairment charge of
$20.4 million, which reduced the amount of goodwill on the Company's balance
sheet. This reduction is expected to result in a decrease in the Company's
goodwill amortization expense of approximately $1.1 million annually.
9
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
5. 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 disclosed in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Teleservices $ 38,891 $ 52,070 $ 73,085 $ 108,179
Marketing research services 7,952 5,953 15,971 11,660
------------- ------------- ------------- -------------
Total $ 46,843 $ 58,023 $ 89,056 $ 119,839
============= ============= ============= =============
OPERATING INCOME (LOSS):
Teleservices $ 1,514 $ (4,473) $ 2,017 $ (6,658)
Marketing research services 437 (548) 950 (1,082)
Asset impairment charge - - - (20,399)
Restructuring and other charges - - - (541)
------------- ------------- ------------- -------------
Total $ 1,951 $ (5,021) $ 2,967 $ (28,680)
============= ============= ============= =============
DEPRECIATION AND AMORTIZATION:
Teleservices $ 1,812 $ 2,911 $ 3,419 $ 5,880
Marketing research services 163 155 362 326
Acquisition goodwill amortization 646 596 1,217 1,469
------------- ------------- ------------- -------------
Total $ 2,621 $ 3,662 $ 4,998 $ 7,675
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
TOTAL ASSETS:
Teleservices $ 75,767 $ 140,615
Marketing research services 35,744 15,268
------------- -------------
Total $ 111,511 $ 155,883
============= =============
</TABLE>
10
<PAGE>
6. CONVERSION OF SUBORDINATED INDEBTEDNESS
In an effort to reduce debt and improve the Company's balance sheet,
on June 30, 1999, Thayer Equity Investors III, L.P. ("Thayer Equity" and
together the "Thayer-led group") agreed to convert approximately $12.1
million of its subordinated debt into two new series of convertible preferred
stock. The 77,300 shares of new Series D Preferred Stock ($.01 par value per
share, $100 per share liquidation preference) are convertible into Company
Common Stock at $2.00 per share, and the 44,018 shares of new Series E
Preferred ($.01 par value per share, $100 per share liquidation preference)
are convertible into Company Common Stock at $2.375 per share. Both series
earn cumulative dividends (payable-in-kind in additional shares of the
respective series of Preferred Stock) at the annual rate of 15%, and are
non-voting except on specified matters. In consideration of the conversion of
the subordinated debt into preferred stock, the Company issued the Thayer-led
group warrants to purchase an additional 1,000,000 shares of Company Common
Stock at $0.90625 per share, the closing price of such stock on the
conversion date. The Company may, at its option, redeem the Series D and E
Preferred shares in cash or by the issuance of a convertible promissory note
bearing interest at a rate of 12%.
7. AMENDMENTS TO CREDIT FACILITY
On March 30, 1999, the Company entered into the Third Amendment to
its Credit Agreement (the "Third Amendment") with The Bank of Nova Scotia
("Scotiabank") and Credit Suisse First Boston ("CSFB") 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 financial covenants and a
new covenant related to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). At June 30, 1999, Aegis was in not in compliance
with certain of its financial covenants contained in the Third Amendment.
Accordingly, the long-term portion of this debt has been restated as
current at June 30, 1999. See note 8 for further discussion.
On August 6, 1999, the Company entered into the Fourth Amendment to
its Credit Agreement (the "Fourth Amendment") with Scotiabank and CSFB
whereby Scotiabank and CSFB committed to provide the Company an additional
$7.5 million in term debt, resulting in a total facility of approximately
$68.0 million, and waived the Company's defaults under certain of the
covenants through August 31, 1999. The proceeds of the additional loan have
been used for the Company's general corporate and working capital needs. As
part of the Fourth Amendment, Thayer Equity agreed to guarantee the Company's
additional $7.5 million of indebtedness. In consideration of such guarantee,
the Company issued Thayer Equity a warrant to purchase up to 800,000 shares
of the Company's Common Stock, exercisable only if the guarantee is drawn
upon and at an exercise price based on the then market price of such stock.
As part of its settlement of an indemnification claim made by the Company
related to the Merger, Thayer Equity waived its right to this contingent
warrant. The Company is currently negotiating an amendment of its Credit
Agreement, which management expects would cure the Company's defaults.
8. EFFECT OF RESTATEMENTS
The Company has restated its September 30, 1998 and subsequent
financial statements in accordance with Emerging Issues Task Force Topic No.
D-60 to reflect a beneficial conversion feature contained in the subordinated
debt issued to Thayer Equity in July 1998. This beneficial conversion
feature, which was not originally recognized, resulted in a non-cash interest
expense charge of $3.1 million at the issuance date of the debt.
In connection with the restatement, the Company recorded $8.7
million in net proceeds from the subordinated debt. The Company determined
the fair value of the beneficial conversion feature to be $3.1 million based
on its fair value at the issuance date and recorded the discount for the
beneficial conversion feature as paid-in capital. As the $8.7 million in
subordinated debt was immediately convertible upon issuance, the Company
recognized $3.1 million in non-cash interest expense in the quarter ended
September 30, 1998. There was no impact to the Company's tax provision for
the quarter ended September 30, 1998 as the beneficial conversion feature
represents a permanent difference for tax purposes.
The Company has also restated it June 30, 1999 consolidated
financial statements to reflect the long-term portion of debt under a credit
agreement (Note 7) as a current liability as the Company was in violation of
certain financial covenants contained in such agreement at June 30, 1999. The
restatement to the June 30, 1999 financial statements for the matters
described above had no effect on the Company's total assets, total
liabilities and shareholders' equity, or net loss as of September 30, 1999
and for the nine months ended. The restatement affected total current
liabilities, which increased by $62.7 million and total long-term
liabilities, which decreased by $62.7 million from the previously reported
amounts.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Restated)
On July 9, 1998, Aegis, formerly known as ATC Communications Group,
Inc. ("ATC"), completed the acquisition of IQI, Inc., a New York corporation
("IQI"). The acquisition was effected through the merger (the "Merger") of ATC
Merger Sub, Inc. ("Sub"), a New York corporation and wholly-owned subsidiary of
ATC, with and into IQI pursuant to an Agreement and Plan of Merger dated as of
April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.
The Merger has been accounted for as a reverse purchase, meaning
that for accounting purposes, IQI is the surviving corporation and is treated
as having acquired ATC in a purchase accounting transaction. Reported
financial results reflect the Merger and are those of IQI for the periods
ended June 30, 1998 and of the combined company on a purchase accounting
basis for the periods ended June 30, 1999. See "Notes to Unaudited
Consolidated Financial Statements - 2. The Merger."
The accompanying consolidated financial statements, in the opinion of
the Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the consolidated financial condition of the
Company and the consolidated results of its operations for the periods ended
June 30, 1999. The consolidated results of operations for the periods reported
are not necessarily indicative of the results to be experienced for the entire
current year.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as
a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services, excluding depreciation
and amortization shown below 65.2% 74.3% 64.7% 72.4%
------------ ------------ ------------ ------------
Gross profit 34.8% 25.7% 35.3% 27.6%
Selling, general and administrative expenses 25.0% 28.0% 26.3% 27.7%
Depreciation 4.2% 5.3% 4.3% 5.2%
Acquisition goodwill amortization 1.4% 1.0% 1.4% 1.2%
Asset impairment charge - - - 17.0%
Restructuring and other non-recurring charges - - - 0.4%
------------ ------------ ------------ ------------
Total operating expenses 30.6% 34.3% 32.0% 51.5%
------------ ------------ ------------ ------------
Operating income (loss) 4.2% (8.6%) 3.3% (23.9%)
Interest expense, net 2.6% 3.2% 2.7% 3.0%
------------ ------------ ------------ ------------
Income (loss) before income taxes 1.6% (11.8%) 0.6% (26.9%)
Income tax expense (benefit) 0.9% (4.1%) 0.7% (3.3%)
------------ ------------ ------------ ------------
Net income (loss) 0.7% (7.7%) (0.1%) (23.6%)
============ ============ ============ ============
</TABLE>
The Company experienced a net loss of $4.4 million, or 7.7% of
revenues, for the quarter ended June 30, 1999 as compared to net income of $0.1
million, or 0.7% of revenues, (a net loss of $1.1 million, or 1.5% of revenues,
on a pro forma basis) in the corresponding period in 1998.
11
<PAGE>
Revenues generated during the quarter increased approximately 24% to
$58.0 million from $46.8 million in the second quarter a year ago. The net
loss for the quarter was $4.4 million, or $0.08 per share, as compared to net
income of $0.3 million, or $.01 per share, in the previous year quarter.
Revenues increased $30.8 million, or approximately 35%, to $119.8 million
during the six months ended June 30, 1999 as compared to revenues of $89.0
million generated in the prior year period. Including a non-cash asset
impairment charge of $20.4 million, or $0.39 per share, and restructuring and
other non-recurring charges of $0.5 million ($0.3 million, net of taxes, or
$0.01 per share), the Company experienced a net loss of $28.3 million, or
$0.54 per share, for the six months ended June 30, 1999 as compared to a net
loss of $0.1 million, or nil per share, in the prior year period. Excluding
these charges, the net loss for the six month period of 1999 was
approximately $7.7 million, or $0.14 per share. Increases in revenues for the
quarter and six months ended June 30, 1999 were due to the impact of revenues
contributed by ATC subsequent to the merger of IQI and ATC completed on July
9, 1998 (the "Merger").
On a pro forma basis, revenues decreased 21% for the quarter and
approximately 13% for the six month period ended June 30, 1999 versus the prior
year periods. These decreases were primarily the result of the curtailment of
certain outbound programs by the Company's largest telecommunications client and
a large financial services client, and a decline in marketing research revenues.
Outbound teleservices revenues declined 38% and 24% for the quarter and six
months ended June 30, 1999, respectively, while marketing research revenues
dropped 25% and 27% in the same periods. These declines were offset somewhat by
6% and 11% increases in inbound teleservices revenues for the three and six
month periods, respectively.
For the three and six month periods ended June 30, 1998 and 1999, the
Company's mix of revenues was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outbound teleservices 72.4% 43.2% 71.0% 46.9%
Inbound teleservices 10.6% 46.5% 11.1% 43.4%
------------ ------------ ------------ ------------
Teleservices total 83.0% 89.7% 82.1% 90.3%
Marketing research services 17.0% 10.3% 17.9% 9.7%
------------ ------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
</TABLE>
On a pro forma basis, the Company's mix of revenues, for the three and
six month periods ended June 30, 1998 and 1999, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Outbound teleservices 54.5% 43.2% 54.0% 46.9%
Inbound teleservices 34.7% 46.5% 34.3% 43.4%
------------ ------------ ------------ ------------
Teleservices total 89.2% 89.7% 88.3% 90.3%
Marketing research services 10.8% 10.3% 11.7% 9.7%
------------ ------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
</TABLE>
12
<PAGE>
Approximately 18% of the Company's revenues during the quarter ended
June 30, 1999 were generated by the Company's largest telecommunications client
and approximately 17% by its largest financial services client as compared to
approximately 33% and nil (27% and 9%, on a pro forma basis), respectively, in
the quarter ended June 30, 1998. For the six months ended June 30, 1999,
approximately 20% of the Company's revenues were generated by the Company's
largest telecommunications client and approximately 16% by its largest financial
services client as compared to approximately 32% and nil (27% and 9%, on a pro
forma basis), respectively, in the same period in 1998.
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.
As part of the Company's site migration plan, Aegis opened two new
client service centers in St. Joseph, Missouri and Sierra Vista, Arizona during
the second quarter. These centers perform work that was being done in the
Company's Addison, Texas facility, which was closed in August 1999. Also during
the quarter, Aegis transitioned business and employees from its Euless, Texas
center to existing facilities in Arlington, Texas and Irving, Texas. The
Company's site strategy and center migration plan focuses on locating client
service centers in what management believes are more economically attractive
markets than those in which the Company has traditionally operated.
During the second quarter, the Company expanded its inbound customer
service relationship with its largest client. Under this addition to an
existing master agreement, Aegis has begun performing critical customer care
functions, including the handling of inbound orders and inquiries, for this
client's growing consumer customer base. This new offering is expected to
require the use of more than 500 workstations, which will be located in Aegis
client service centers in Irving and Los Angeles, and is in addition to the
inbound teleservices Aegis recently began providing for this client's small
business customers from its Fairmont, West Virginia facility. The Company no
longer furnishes traditional, hourly-rate outbound telemarketing for this
client. As such, all services now provided to this client are either inbound
or pay-for-performance outbound. Under an exclusive arrangement, the Company
also began providing 24-hours-a-day, 7-days-a-week inbound customer service
and order
13
<PAGE>
processing for WingspanBank.com, a major financial institution's Internet-based,
one-stop suite of financial services.
Also during the quarter, Aegis' Elrick & Lavidge Marketing Research
("E&L") division introduced a series of syndicated information products that
will feature the role of e-commerce in both consumer and business purchasing.
E&L also entered into an alliance with Digital Marketing Services, a firm
specializing in online data collection and majority owned by America Online.
Through this arrangement, E&L now offers clients access to America Online's
representative subscriber base of 17 million members.
For the quarter ended June 30, 1999, gross profit earned on revenues
decreased approximately $1.4 million, or 8.6%, from the quarter ended June
30, 1998. The decrease in gross profit is primarily due to one-time costs
associated with the migration of business (the "migration costs") from the
Addison, Texas client service center to new centers in Sierra Vista, Arizona
and St. Joseph, Missouri. Gross profit for the six months ended June 30, 1999
increased approximately $1.7 million, or 5.4%, primarily due to the addition
of ATC's revenues and gross profit, on a purchase accounting basis, as a
result of the Merger. Gross profit as a percentage of revenues ("gross
margin") for the quarter and six months ended June 30, 1999 was 25.7% and
27.6%, respectively, as compared to 34.8% and 35.3% in the comparable prior
year periods. The decreases in gross margin are primarily due to a decline in
capacity utilization from the prior year periods resulting from lower volumes
of business from the Company's two largest telecommunications clients, a
large financial services client and our marketing research division, and the
impact of migration costs incurred in the second quarter of 1999. The site
migration associated with these costs is now complete.
Selling, general and administrative ("SG&A") expenses increased $4.5
million, or 38.7%, in the quarter and $9.7 million, or 41.4%, in the six months
ended June 30, 1999 versus the comparable periods of 1998. As a percentage of
revenues, SG&A expenses for the quarter and six months ended June 30, 1999 were
28.0% and 27.7%, respectively, versus 25.0% and 26.3% in the comparable three
and six month periods of 1998, respectively. The increases in SG&A expenses and
SG&A expenses as a percentage of revenues are primarily attributable to the
Merger with ATC. On a pro forma basis, SG&A expenses decreased approximately
$1.8 million, or 9.7%, in the quarter and approximately $2.1 million, or 5.8%,
in the six months ended June 30, 1999 as compared to the previous year periods.
These decreases were primarily due to post-Merger reductions in redundant
overhead and lower than anticipated business volumes.
Depreciation and amortization expenses increased $1.0 million, or
39.7%, in the quarter and approximately $2.7 million, or 53.6%, in the six
months ended June 30, 1999 as compared to the prior year periods. As a
percentage of revenues, depreciation and amortization expense was 6.3% in the
quarter and 1999 and 6.4% in the first six months of 1999 versus 5.6% in the
prior year periods. The increases in depreciation and amortization expense as a
percentage of revenues are due to the addition of ATC's depreciation and
amortization expenses subsequent to the Merger, additional amortization expense
resulting from the goodwill recorded in the Merger, and additional depreciation
resulting from investments in three new client service centers completed since
the first quarter of 1998.
As a result of the performance of the Company's Elrick & Lavidge
("E&L") marketing research division since its acquisition by IQI in July
1997, the Company performed an analysis (based on E&L's estimated future cash
flows) of the carrying value of the goodwill associated with the purchase of
E&L. As a result of this evaluation, it was determined that the carrying
value of the goodwill associated with the purchase of E&L has been impaired.
Accordingly, in the first quarter of 1999, the Company adjusted the carrying
value of E&L's long-lived assets to their fair value resulting in a non-cash
asset impairment charge of $20.4 million, which reduced the amount of
goodwill on the Company's balance sheet by a corresponding amount. This
reduction is expected to result in a decrease in the Company's goodwill
amortization expense of approximately $1.1 million annually.
14
<PAGE>
On July 29, 1998, the Company announced that it would record pre-tax
restructuring charges of $13.0 million related to the Merger. Restructuring
and other related non-recurring charges must be matched to the time periods
in which associated restructuring actions are taken. Accordingly, the Company
recorded pre-tax charges of $8.4 million ($5.2 million, net of taxes) in the
year ended December 31, 1998 and $0.5 million ($0.3 million, net of taxes) in
the first quarter of 1999, as part of the total restructuring. These charges
were primarily attributable to one-time write-offs of redundant hardware and
software, severance costs and the consolidation of certain administrative
functions including costs to relocate offices and employees. Management
believes that all Merger-related restructuring efforts have been completed
and all related charges recorded. The Company does not anticipate recognizing
additional Merger-related restructuring charges in 1999 and none were
recorded in the quarter ended June 30, 1999.
Net interest expense increased $0.6 million, or 51.5%, in the second
quarter and $1.2 million, or 47.4%, in the first six months of 1999 versus the
same periods in 1998, 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
the quarter and six months ended June 30, 1999 was approximately 39.0%. 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 goodwill amortization expense and the asset impairment charge. The
non-deductibility of goodwill amortization expense resulted in income tax
expense in the second quarter and first six months of 1998 despite a reported
pre-tax loss.
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.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information from the Company's
statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 6,221 $ (7,477)
Net cash used in investing activities (5,616) (7,115)
Net cash provided by financing activities 1,320 4,720
-------------- ---------------
Net change in cash and cash equivalents $ 1,925 $ (9,872)
============== ===============
</TABLE>
The Company has historically utilized cash flow from operations, available
borrowing capacity under its credit facilities, and subordinated indebtedness
from its shareholders (primarily Thayer Equity Investors III, L.P. ("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 as amended
on August 6, 1999 (see discussion of credit facility below).
During the six months ended June 30, 1999, net cash provided by
operating activities decreased approximately $13.7 million, or 220.2% versus the
prior year period primarily due to losses from operations and increases in the
Company's accounts receivable.
15
<PAGE>
Cash used in investing activities during the first six months of 1999
totaled $7.1 million, representing a $1.5 million, or 26.7%, increase from the
first six months of 1998. 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 two new client service centers in the second quarter
of 1999 and the upgrade or replacement of workstations in the Company's existing
facilities. Capital expenditures during the last twelve months totaled $14.0
million and have been funded primarily with proceeds from bank borrowings and
subordinated indebtedness provided by Thayer.
During the six months ended June 30, 1999, financing activities
included net payment activity under the Company's credit facility and the
receipt of approximately $5.7 million of additional subordinated indebtedness
provided by Thayer. (See discussion of credit facility and subordinated
indebtedness below).
CREDIT FACILITY
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.
On March 30, 1999, the Company entered into the Third Amendment to
the Credit Agreement (the "Third Amendment"), which provided for new levels
for existing financial covenants and a new covenant related to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). At June 30,
1999, Aegis was in not in compliance with certain of its financial covenants
contained in the Third Amendment. Accordingly, this debt has been restated as
current at June 30, 1999.
On August 6, 1999, the Company entered into the Fourth Amendment to
its Credit Agreement (the "Fourth Amendment") with Scotiabank and CSFB
whereby Scotiabank and CSFB committed to provide the Company an additional
$7.5 million in term debt, resulting in a total facility of approximately
$68.0 million, and waived the Company's defaults under certain of the
covenants through August 31, 1999. The Company is currently negotiating an
amendment of its Credit Agreement, which Management believes would cure the
Company's defaults and extend the Credit Agreement's term beyond August 31,
1999. The proceeds of the additional loan will be used for the Company's
general corporate and working capital needs. As part of the
16
<PAGE>
Fourth Amendment, Thayer agreed to guarantee the Company's indebtedness. As
part of the Fourth Amendment, Thayer agreed to guarantee the Company's
additional $7.5 million of indebtedness. In consideration of such guarantee,
the Company issued Thayer a warrant to purchase up to 800,000 shares of the
Company's Common Stock, exercisable only if the guarantee is drawn upon and
at an exercise price based on the then market price of such stock.
SUBORDINATED INDEBTEDNESS
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. This debt is in addition to, and on the same basic terms as, the
subordinated debt that Thayer had previously loaned to the Company. See Note
8 to the Unaudited Consolidated Financial Statements regarding the existence
of a beneficial conversion feature related to this debt.
In connection with the Merger, Thayer provided the Company with $6.8
million in subordinated indebtedness as well as a guarantee for $2.0 million in
bridge financing to assist in funding the Company's working capital needs.
This indebtedness is convertible into the Company's Common Stock at a
conversion price of $2.00 per share. In connection with the guarantee, and
for additional consideration of $110,000, the Company issued to Thayer
warrants to purchase 1,100,000 shares of the Company's Common Stock at an
exercise price of $1.96. See Note 8 to the Unaudited Consolidated Financial
Statements regarding the existence of a beneficial conversion feature related
to this debt.
On March 30, 1999, Thayer provided the Company with approximately $5.7
million in additional subordinated indebtedness. Approximately one-half of the
proceeds from this financing were used to pay down bank debt and the remainder
for working capital purposes. The additional indebtedness is convertible into
the Company's Common Stock at a conversion price of $1.15 per share. This debt
is in addition to, and on the same basic terms as, the subordinated debt that
Thayer had previously loaned to the Company.
In an effort to reduce debt and improve the Company's balance sheet,
effective June 30, 1999, a group led by the Company's largest shareholder,
Thayer Equity, agreed to convert approximately $12.1 million of its
subordinated debt into two new series of convertible preferred stock. The
77,300 shares of new Series D Preferred Stock ($.01 par value per share, $100
per share liquidation preference) are convertible into Company Common Stock
at $2.00 per share, and the 44,018 shares of new Series E Preferred ($.01 par
value per share, $100 per share liquidation preference) are convertible into
Company Common Stock at $2.375 per share. Both series earn cumulative
dividends (payable-in-kind in additional shares of the respective series of
Preferred Stock) at the annual rate of 15%, and are non-voting except on
specified matters. In consideration of the conversion of the subordinated
debt into preferred stock, the Company issued the Thayer-led group warrants
to purchase an additional 1,000,000 shares of Company Common Stock at
$0.90625 per share, the closing price of such stock on the conversion date.
NOTE RECEIVABLE
Michael G. Santry, the Company's Co-Chairman, owes the Company
approximately $1.9 million under a secured promissory note dated September 16,
1997. As provided for in the Merger Agreement, Mr. Santry made a principal
payment of approximately $1.8 million on June 30, 1998.
17
<PAGE>
The Merger Agreement also provided for an extension of the maturity date of
the balance of the principal and accrued but unpaid interest on the note to
March 31, 1999. The Company subsequently has agreed to extend the maturity
date of the note to March 31, 2000, and Mr. Santry has agreed to pledge
additional collateral as security for repayment of the note.
GROWTH STRATEGIES
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. Subsequent to the end of the quarter, on July 30, 1999, the Company
announced that it had engaged Merrill Lynch & Co. to assist the Company's Board
of Directors in conducting a comprehensive review of strategic alternatives to
enhance shareholder value. Aegis is evaluating various possibilities, including
a private placement of preferred or common stock to raise equity for working
capital and other purposes, a merger, the sale of a division or assets, a joint
venture or strategic alliance, or other business combination.
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 and center migration plan, which
focuses on locating 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 this
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. To that end, Aegis opened
two new client service centers in St. Joseph, Missouri and Sierra Vista,
Arizona in the second quarter of 1999. Management does not anticipate opening
additional new centers in 1999.
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 addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 (the "Year 2000 Issue"). In 1998, Aegis began the Project to determine the
level of its Year 2000 compliance and to plan for the remediation of any
non-compliant systems or infrastructure. The Project has focused most intently
on production systems upon which the Company is dependent for the provision of
services and the generation of revenue. As of August 13, 1999, the Company has
determined that remediation of its production systems is substantially complete,
except for the full "end-to-end" testing of systems connected to or shared with
suppliers and clients. (See discussion of the suppliers and clients category
below). The Company anticipates that its production systems will be fully Year
2000 compliant by the end of the third quarter of 1999. Any remaining business
software programs or hardware systems are expected to be made Year 2000
compliant through the 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
18
<PAGE>
contingency planning for the impact of the Year 2000 Issue that may occur
despite efforts to remediate and mitigate such impact. Such contingency
planning was complete as of August 13, 1999. The contingency planning effort
included 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 substantially complete. Material items are those believed by the
Company to have a risk that may affect revenues and related cash flows. 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 is typically client specific.
The remediation of this category is complete. The testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced. In addition,
in the normal course of operations, production systems may require frequent
modifications to conform to changing client specifications. At such times,
regression testing is performed. All activities related to the Production
Platform, including definition, testing and implementation of Year 2000-ready
products, were complete as of August 13, 1999. Contingency planning for this
category commenced in the first quarter of 1999 and was complete as of
August 13, 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 of this
category was complete as of June 30, 1999. The testing phase was conducted as
the software was replaced and was also complete as of June 30, 1999. Contingency
planning for this category began in the first quarter of 1999 and was complete
as of August 13, 1999.
The infrastructure and facilities category consists of hardware and
systems software used in the Company's networking and systems back-up
infrastructure and Aegis' physical facilities. The remediation of this category
was complete as of August 13, 1999. The testing phase is ongoing as hardware or
systems software is remediated, upgraded or replaced. All activities related to
the infrastructure and facilities category were complete as of August 13, 1999.
Contingency planning for this category commenced in the first quarter of 1999
and was complete as of August 13, 1999.
19
<PAGE>
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 Issue. Detailed evaluations of the most critical
third parties have been initiated. The process of evaluating these suppliers
and clients began in the third quarter of 1998 and was complete as of August
13, 1999, with follow-up reviews scheduled through the remainder of 1999.
These evaluations were followed by the development of contingency plans as
necessary. Contingency planning for this category commenced in the first
quarter of 1999 and was complete as of August 13, 1999. The Company has begun
planning with its largest clients to conduct full "end-to-end" testing of
connected or shared systems where appropriate. This testing is expected to be
complete by the end of the third quarter of 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 total does not include estimates of liability for non-compliance, if any.
The total amount expended on the Project through August 13, 1999, was
approximately $2.0 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
Issue 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: "FORWARD LOOKING STATEMENTS" beginning below.
FORWARD LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Statements contained in this document that are
not based on historical facts are "forward-looking statements". 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: the Company's reliance on
certain major clients; the ability of new contracts or products to produce
material revenues; realizing cost reductions as a result of the Company's site
migration plan and renegotiated telecommunications tariff; the successful
combination of anticipated revenue growth with operating expense reduction to
result in improved profitability and cash flow; government regulation and tax
policy; economic conditions; competition and pricing; dependence on the
Company's labor force; reliance on technology; telephone service dependence;
and other operational, financial or legal risks or uncertainties detailed in
the Company's SEC filings from time to time.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended June 30, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's Annual Report on Form 10-K
as amended for the year ended December 31, 1998.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its businesses
neither Aegis nor its subsidiaries are parties to, nor are their properties the
subject of, any material pending legal proceedings. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (filed herewith).
4.10 Series D and E Preferred Stock Certificate of Designation (filed
herewith).
10.25 Securities Exchange Agreement entered into as of June 30, 1999 by and
among Aegis Communications Group, Inc., Thayer Equity Investors III,
L.P., Edward Blank, The Edward Blank 1995 Grantor Retained Annuity
Trust and ITC Service Company (filed herewith).
10.26 Amendment, dated as of June 30, 1999, to the Registration Rights
Agreement, dated as of July 9, 1998, by and among Aegis Communications
Group, Inc., Thayer Equity Investors III, L.P., Edward Blank, The
Edward Blank 1995 Grantor Retained Annuity Trust and ITC Service
Company (filed herewith).
10.27 Series Four Warrant to Purchase Shares of Common Stock of Aegis
Communications Group, Inc. issued to Thayer Equity Investors III, L.P.,
Edward Blank, The Edward Blank 1995 Grantor Retained Annuity Trust and
ITC Service Company dated June 30, 1999 (filed herewith).
10.28 Series Five Warrant to Purchase Shares of Common Stock of Aegis
Communications Group, Inc. issued to Thayer Equity Investors III, L.P.
dated June 30, 1999 (filed herewith).
10.29 Fourth Amendment, dated as of August 6, 1999, to the 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 (filed
herewith).
10.30 Parent Guaranty, dated as of August 6, 1999, made by Thayer Equity
Investors III, L.P. pursuant to the Fourth Amendment to the Second
Amended and Restated Credit Agreement, in favor of each of the Bank of
Nova Scotia, as documentation agent and administrative agent for the
lenders, and Credit Suisse First Boston, as syndication agent for the
lenders (filed herewith).
27.1 Financial Data Schedule (Restated) (filed herewith).
(B) Reports on Form 8-K
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AEGIS COMMUNICATIONS GROUP, INC.
(The Registrant)
Dated: November 8, 1999 By: /s/ MATTHEW S. WALLER
-------------------------------------
Matthew S. Waller
Chief Financial Officer
23
<PAGE>
EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
Exhibit 3.3 Certificate of Amendment to Amended and Restated
Certificate of Incorporation (filed herewith).
Exhibit 4.10 Series D and E Preferred Stock Certificate of
Designation (filed herewith).
Exhibit 10.25 Securities Exchange Agreement entered into as of
June 30, 1999 by and among Aegis Communications Group,
Inc., Thayer Equity Investors III, L.P., Edward Blank,
The Edward Blank 1995 Grantor Retained Annuity Trust
and ITC Service Company (filed herewith).
Exhibit 10.26 Amendment, dated as of June 30, 1999, to the
Registration Rights Agreement, dated as of July 9,
1998, by and among Aegis Communications Group, Inc.,
Thayer Equity Investors III, L.P., Edward Blank, The
Edward Blank 1995 Grantor Retained Annuity Trust and
ITC Service Company (filed herewith).
Exhibit 10.27 Series Four Warrant to Purchase Shares of Common Stock
of Aegis Communications Group, Inc. issued to Thayer
Equity Investors III, L.P., Edward Blank, The Edward
Blank 1995 Grantor Retained Annuity Trust and ITC
Service Company dated June 30, 1999 (filed herewith).
Exhibit 10.28 Series Five Warrant to Purchase Shares of Common Stock
of Aegis Communications Group, Inc. issued to Thayer
Equity Investors III, L.P. dated June 30, 1999 (filed
herewith).
Exhibit 10.29 Fourth Amendment, dated as of August 6, 1999, to the
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 (filed herewith).
Exhibit 10.30 Parent Guaranty, dated as of August 6, 1999, made by
Thayer Equity Investors III, L.P. pursuant to the
Fourth Amendment to the Second Amended and Restated
Credit Agreement, in favor of each of the Bank of Nova
Scotia, as documentation agent and administrative agent
for the lenders, and Credit Suisse First Boston, as
syndication agent for the lenders (filed herewith).
Exhibit 27.1 Financial Data Schedule (Restated) (filed herewith).
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<PAGE>
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<INCOME-PRETAX> (32,260)
<INCOME-TAX> (3,982)
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