<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended MARCH 31, 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 May 7, 1999
--------------
COMMON STOCK $.01 PAR VALUE 52,434,206
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 and March 31, 1999 (unaudited).............. 3-4
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 1998 and March 31, 1999............ 5
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and March 31, 1999............ 6
Notes to Unaudited Consolidated Financial Statements................7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................11-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................19
Item 6. Exhibits and Reports on Form 8-K..................................... 19
SIGNATURES............................................................................ 20
</TABLE>
2
<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, MARCH 31,
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,701 $ 8,106
Accounts receivable, less allowance for doubtful accounts 49,585 52,295
Notes receivable -- related parties 2,185 2,212
Current deferred tax assets 884 884
Prepaid expenses and other current assets 1,662 2,210
---------------- ----------------
Total current assets 65,017 65,707
Property and equipment, net of accumulated depreciation
of $19,924 in 1998 and $22,824 in 1999 35,277 35,389
Goodwill, net of accumulated amortization of $4,523 in
1998 and $3,612 in 1999 71,325 50,053
Deferred tax assets 6,502 8,073
Deferred financing costs, net 2,099 1,949
Other assets 324 331
---------------- ----------------
$ 180,544 $ 161,502
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
3
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of long-term obligations $ 2,758 $ 2,634
Accounts payable 7,059 7,006
Accrued compensation expense and related liabilities 6,414 6,324
Accrued interest expense 1,263 526
Other accrued expenses 9,417 13,321
Other current liabilities 2,225 1,343
---------------- ------------------
Total current liabilities 29,136 31,154
Revolving line of credit 28,100 28,100
Long-term obligations, net of current portions 36,829 33,500
Subordinated indebtedness due to affiliates 14,651 20,743
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 - -
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
March 31, 1999, respectively 523 523
Additional paid-in capital 78,167 78,167
Treasury shares, at cost (1,421) (1,421)
Cumulative translation adjustment 34 41
Retained earnings (deficit) (5,475) (29,305)
---------------- ------------------
Total shareholders' equity 71,828 48,005
---------------- ------------------
$ 180,544 $ 161,502
---------------- ------------------
---------------- ------------------
</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 MARCH 31,
--------------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
Revenues $ 42,213 $ 61,815
Cost of services, excluding depreciation
and amortization shown below 26,541 43,827
-------------- ---------------
-------------- ---------------
Gross profit 15,672 17,988
Selling, general and administrative expenses 12,279 16,695
Depreciation 1,806 3,140
Acquisition goodwill amortization 571 873
Asset impairment charge - 20,399
Restructuring and other non-recurring charges - 541
-------------- ---------------
-------------- ---------------
Total operating expenses 14,656 41,648
-------------- ---------------
-------------- ---------------
Operating income (loss) 1,016 (23,660)
Interest expense, net 1,216 1,741
-------------- ---------------
-------------- ---------------
Income (loss) before income taxes (200) (25,401)
Income tax expense (benefit) 260 (1,571)
-------------- ---------------
Net loss $ (460) $ (23,830)
-------------- ---------------
-------------- ---------------
Basic and diluted loss per common share $ (0.02) $ (0.46)
-------------- ---------------
-------------- ---------------
Basic and diluted weighted average
common shares outstanding 29,869 51,950
</TABLE>
See accompanying notes.
5
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (460) $ (23,830)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 2,377 4,013
Deferred income taxes - (1,571)
Asset impairment charge - 20,399
Other 510 8
Changes in operating assets and liabilities:
Accounts receivable (4,732) (2,710)
Notes receivable - (27)
Other current assets 208 (548)
Other assets (86) (97)
Accounts payable 3,667 (53)
Accrued liabilities 986 3,077
Other current liabilities (1,353) (882)
--------------- ---------------
Net cash provided by (used in) operating activities 1,117 (2,221)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,158) (3,012)
--------------- ---------------
Net cash used in investing activities (2,158) (3,012)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from affiliate debt - 6,092
Principal payments on long-term debt (88) (2,921)
Payments on capital lease obligations (265) (533)
Deferred financing costs 65 -
--------------- ---------------
Net cash provided by (used in) financing activities (288) 2,638
Net decrease in cash and cash equivalents (1,329) (2,595)
Cash and cash equivalents at beginning of period 5,288 10,701
--------------- ---------------
Cash and cash equivalents at end of period $ 3,959 $ 8,106
--------------- ---------------
--------------- ---------------
</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
months ended March 31, 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 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".
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.
7
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1998 1999
--------------- ----------------
(PRO FORMA)
<S> <C> <C>
Total revenues $ 63,338 $ 61,815
Cost of services, excluding depreciation
and amortization shown below 42,804 43,827
--------------- ----------------
Gross profit 20,534 17,988
Selling, general and administrative expenses 17,234 16,695
Depreciation 2,877 3,140
Acquisition goodwill amortization 873 873
Asset impairment charge - 20,399
Restructuring and other non-recurring charges - 541
--------------- ----------------
Operating loss (450) (23,660)
Interest expense, net 1,560 1,741
--------------- ----------------
Loss before income taxes (2,010) (25,401)
Income tax benefit (404) (1,571)
--------------- ----------------
Net loss $ (1,606) $ (23,830)
--------------- ----------------
--------------- ----------------
Pro forma net loss per share -- basic and diluted $ (0.03) $ (0.46)
--------------- ----------------
--------------- ----------------
Weighted average shares outstanding 51,347 51,950
</TABLE>
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 or other
non-recurring charges in 1999.
8
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
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, the Company has 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. The asset impairment
charge has reduced the amount of goodwill on the Company's balance sheet to
$50.1 million. This reduction is expected to result in a decrease in the
Company's goodwill amortization expense of approximately $1.1 million
annually.
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:
9
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
REVENUES:
Teleservices $ 34,194 $ 56,108
Marketing research services 8,019 5,707
-------------- ---------------
Total $ 42,213 $ 61,815
-------------- ---------------
-------------- ---------------
OPERATING INCOME (LOSS):
Teleservices $ 455 $ (2,186)
Marketing research services 561 (534)
Asset impairment charge - (20,399)
Restructuring and other charges - (541)
-------------- ---------------
Total $ 1,016 $ (23,660)
-------------- ---------------
-------------- ---------------
TOTAL ASSETS:
Teleservices $ 89,990 $ 145,618
Marketing research services 14,909 15,884
-------------- ---------------
Total $ 104,899 $ 161,502
-------------- ---------------
-------------- ---------------
DEPRECIATION AND AMORTIZATION:
Teleservices $ 1,606 $ 2,970
Marketing research services 200 170
Acquisition goodwill amortization 571 873
-------------- ---------------
Total $ 2,377 $ 4,013
-------------- ---------------
-------------- ---------------
</TABLE>
10
<PAGE>
ITEM 2. 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 period ending March 31,
1998 and of the combined company on a purchase accounting basis for the period
ending March 31, 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 quarter ended
March 31, 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 MARCH 31,
-------------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of services, excluding depreciation
and amortization shown below 62.9% 70.9%
-------------- --------------
Gross profit 37.1% 29.1%
Selling, general and administrative expenses 29.1% 27.0%
Depreciation 4.3% 5.1%
Acquisition goodwill amortization 1.4% 1.4%
Asset impairment charges - 33.0%
Restructuring and other non-recurring charges - 0.9%
-------------- --------------
Total expenses 34.7% 67.4%
-------------- --------------
Operating income (loss) 2.4% (38.3%)
Interest expense, net 2.9% 2.8%
-------------- --------------
Income (loss) before income taxes (0.5%) (41.1%)
Income tax expense (benefit) 0.6% (2.5%)
-------------- --------------
Net income (loss) (1.1%) (38.6%)
-------------- --------------
-------------- --------------
</TABLE>
The Company experienced a net loss of $23.8 million, or 38.6% of
revenues, for the quarter ended March 31, 1999. Excluding a $20.4 million asset
impairment charge and $0.5 million ($0.3 million, net of taxes) in
Merger-related restructuring and other non-recurring charges, the Company
11
<PAGE>
experienced a net loss of $3.1 million, or 5.0% of revenues, in the quarter
ended March 31, 1999 as compared to a net loss of approximately $0.5 million, or
1.1% of revenues ($1.6 million, or 2.5% of revenues, on a pro forma basis), in
the corresponding period in 1998.
Revenues generated during the quarter ended March 31, 1999 increased
$19.6 million, or 46.4%, to $61.8 million from $42.2 million in the quarter
ended March 31, 1998. 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").
On a pro forma basis, revenues declined $1.5 million, or 2.4%, in the
quarter ended March 31, 1999 as compared to the prior year period. The decrease
in revenues on a pro forma basis was primarily attributable to decreases in
service volumes from the Company's two largest telecommunications clients of
17.4% and 33.2%, respectively. This decrease is also attributable to a decline
in marketing research revenues of 28.8%. These declines were partially offset by
an increase in revenues from the Company's largest financial services client of
51.2%.
Approximately 22% of the Company's revenues during the quarter ended
March 31, 1999 were generated by the Company's largest telecommunications client
and approximately 15% by its largest financial services client as compared to
approximately 20% and 0% (26% and 10%, on a pro forma basis), respectively, in
the quarter ended March 31, 1998.
During the first quarter of 1999 and subsequent to the end of the
quarter, the Company signed two significant new contracts with its largest
client under which the Company will provide inbound customer service to the
client's consumer and small business customers. The Company also entered into an
agreement to provide inbound customer service and technical help-desk support
for a de novo Internet-based virtual bank, which is backed by a leading
financial institution. Also during the quarter, the Company's largest client
reduced its marketing spending and, as a result, discontinued agreements with
the Company for two customer acquisition programs under which the Company was
providing both outbound and inbound services. Subsequent to the end of the
quarter, the Company was notified by its historically second largest financial
services client that the client would curtail its outbound customer acquisition
spending with the Company in the second quarter of 1999. However, the client
also has awarded the Company an inbound customer service program, the revenues
from which are expected to exceed those from the client's curtailed outbound
programs in 1999. The Company expects to commence providing services under this
agreement at the beginning of the third quarter of 1999.
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.
For the quarter ended March 31, 1999, gross profit earned on revenues
increased $2.3 million, or 14.8%, from the quarter ended March 31, 1998. The
increase in gross profit is 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 first quarter of
1999 was 29.1% as compared to 37.1% in the first quarter of 1998. The decrease
in gross margin is primarily due to a decline in capacity utilization from the
prior year period resulting from lower volumes of business
12
<PAGE>
from the Company's three largest telecommunications clients and second
largest financial services client.
Selling, general and administrative ("SG&A") expenses increased $4.4
million, or 36.0%, in the first quarter of 1999 versus the first quarter of
1998. The increase in SG&A expenses is primarily attributable to the Merger with
ATC. As a percentage of revenues, SG&A expenses were 27.0% in the three months
ended March 31, 1999 as compared to 29.1% in the comparable 1998 period. The
decrease in SG&A expenses as a percentage of revenues was primarily the result
of efficiencies of scale derived from Merger-related restructuring efforts. On a
pro forma basis, SG&A expenses decreased $0.5 million, or 3.1%, and decreased as
a percentage of revenues from 27.2% to 27.0%, as a result of Merger-related
restructuring efforts.
Depreciation and amortization expenses increased $1.6 million, or
68.8%, in the first quarter of 1999 as compared to the first quarter of 1998. As
a percentage of revenues, depreciation and amortization expense was 6.5% in the
1999 period versus 5.6% in the 1998 period. The increase in depreciation and
amortization expense as a percentage of revenues is due to the addition of ATC's
depreciation and amortization expenses subsequent to the Merger, additional
goodwill amortization resulting from the goodwill recorded in the Merger, and
additional depreciation resulting from investment in one new client service
center built 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 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, the Company has 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 reduces the amount of goodwill on
the Company's balance sheet to $50.1 million. This reduction is expected to
result in a decrease in the Company's goodwill amortization expense of
approximately $1.1 million annually.
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 quarter ended March 31, 1999, as 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. Management believes that all Merger-related
restructuring efforts have been completed and all related charges recorded.
Net interest expense increased by $0.5 million, or 43.2%, in the first
quarter of 1999 versus the same period 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 first quarter of 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 first
quarter 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.
13
<PAGE>
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>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,117 $ (2,221)
Net cash used in investing activities (2,158) (3,012)
Net cash provided by (used in) financing activities (288) 2,638
---------------- ----------------
Net change in cash and cash equivalents $ (1,329) $ (2,595)
---------------- ----------------
---------------- ----------------
</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.
During the quarter ended March 31, 1999, net cash provided by operating
activities decreased $3.3 million, or 298.8%, versus the quarter ended March 31,
1998, primarily due to a loss from operations and increases in the Company's
accounts receivable.
Cash used in investing activities during the first quarter of 1999
totaled $3.0 million, representing an $0.8 million, or 39.6%, increase from the
first quarter 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 new client service centers and the upgrade or
replacement of workstations in the Company's existing facilities. Capital
expenditures during the last twelve months totaled approximately $13.4 million
($14.8 million, on a pro forma basis) and have been funded with proceeds from
bank borrowings, subordinated indebtedness and excess cash from operations.
During the quarter ended March 31, 1999, financing activities included
payment activity under the Company's credit facilities and the receipt of
approximately $5.7 million of subordinated indebtedness provided by Thayer. (See
discussion of credit facilities and subordinated indebtedness below).
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'
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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 31, 1999, the Company entered into the First Amendment to the
Credit Agreement (the "First Amendment), which provided for new levels for
existing financial covenants and a new covenant related to earnings before
interest, taxes, depreciation and amortization ("EBITDA").
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, 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. 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 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. 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).
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.
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. 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.
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
15
<PAGE>
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.
Management anticipates opening additional new centers and expanding existing
facilities in calendar 1999. To that end, Aegis expanded its Fairmont, West
Virginia facility in the first quarter of 1999, and anticipates the
completion and opening of two 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 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 May 7, 1999, the Company has determined that
approximately 95% 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)
16
<PAGE>
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 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 are typically client specific. The
remediation of this category is on schedule, and the Company estimates that
approximately 95% of the planned activities related to this category had been
completed at May 7, 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 95%
complete at May 7, 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 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 of 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 95% of the planned
activities related to this category had been completed at May 7, 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 clients 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 of 1999.
17
<PAGE>
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 May 7, 1999, was $1.7 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: "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 successful combination of revenue growth with
operating expense reduction to result in improved profitability and cash flow;
realizing anticipated synergies as a result of the Merger; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 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
for the year ended December 31, 1998.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 30, 1999, the lawsuit filed by Dore Kreisler 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, was dismissed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 27.1 Financial Data Schedule (filed herewith).
(B) Reports on Form 8-K
None.
19
<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: May 14, 1999 By: /s/ Matthew S. Waller
------------------------------------
Matthew S. Waller
Chief Financial Officer
3/31/99 Quarter
20
<PAGE>
EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
Exhibit 27.1 Financial Data Schedule (filed herewith).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,106
<SECURITIES> 0
<RECEIVABLES> 54,507
<ALLOWANCES> (1,041)
<INVENTORY> 0
<CURRENT-ASSETS> 65,707
<PP&E> 58,213
<DEPRECIATION> 22,824
<TOTAL-ASSETS> 161,502
<CURRENT-LIABILITIES> 31,154
<BONDS> 82,343
0
0
<COMMON> 523
<OTHER-SE> 47,482
<TOTAL-LIABILITY-AND-EQUITY> 161,502
<SALES> 0
<TOTAL-REVENUES> 61,815
<CGS> 0
<TOTAL-COSTS> 43,827
<OTHER-EXPENSES> 41,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,741
<INCOME-PRETAX> (25,401)
<INCOME-TAX> (1,571)
<INCOME-CONTINUING> (23,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,830)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
