<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 SEPTEMBER 30, 2000.
/ / 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 /X/
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.
NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS ON NOVEMBER 10, 2000
------------------- ----------------------------
COMMON STOCK $.01 PAR VALUE 52,171,051
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1999 and September 30, 2000 (unaudited)........................... 3
Unaudited Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and September 30, 2000.......... 5
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and September 30, 2000.................... 6
Notes to Unaudited Consolidated Financial Statements................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................20
Item 5. Other Information....................................................................20
Item 6. Exhibits and Reports on Form 8-K.................................................... 20
SIGNATURES.................................................................................................. 22
</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, SEPTEMBER 30,
1999 2000
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,043 $ 4,786
Accounts receivable - trade, less allowance for doubtful
accounts of $1,058 in 1999 and $1,239 in 2000 54,839 62,007
Current deferred tax assets 715 715
Prepaid expenses and other current assets 2,417 2,513
----------------- -----------------
Total current assets 64,014 70,021
Property and equipment, net of accumulated depreciation
of $32,175 in 1999 and $41,208 in 2000 33,488 36,850
Cost in excess of net assets acquired, net of accumulated
amortization of $5,461 in 1999 and $7,244 in 2000 48,203 46,420
Deferred tax assets 12,884 16,565
Deferred financing costs, net 1,762 1,381
Other assets 234 228
----------------- -----------------
$ 160,585 $ 171,465
================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------------- -----------------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY (unaudited)
Current liabilities:
Current portions of long-term obligations $ 2,243 $ 1,990
Accounts payable 6,332 6,440
Accrued compensation expense and related liabilities 5,629 8,725
Accrued interest expense 250 900
Other accrued expenses 10,464 14,563
Other current liabilities 2,380 1,769
----------------- -----------------
Total current liabilities 27,298 34,387
Revolving line of credit 32,334 44,000
Long-term obligations, net of current portions 1,554 1,513
Subordinated indebtedness due to affiliates 9,801 10,677
Commitments and contingencies - -
Redeemable convertible preferred stock
46,750, 9.626% cumulative Series F shares issued and outstanding in 1999
and 2000 41,970 45,433
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; 29,778
convertible, $.36 cumulative Series B shares issued and outstanding in
1999 and 2000; 83,206 and 92,904, 15% cumulative Series D shares issued
and outstanding in 1999 and 2000, respectively; and, 47,381 and 52,904,
15% cumulative Series E shares issued and
outstanding in 1999 and 2000, respectively 2 2
Common stock, $.01 par value, 100,000,000 shares
authorized; 52,492,616 and 52,646,651 shares issued
in 1999 and 2000, respectively 525 526
Additional paid-in capital 92,882 94,143
Treasury shares, at cost, 761,000 and 475,600 in 1999
and 2000, respectively (1,918) (1,199)
Cumulative translation adjustment 88 74
Retained deficit (43,951) (58,091)
----------------- -----------------
Total shareholders' equity 47,628 35,455
----------------- -----------------
$ 160,585 $ 171,465
================= =================
</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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ------------------------------
1999 2000 1999 2000
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 61,069 $ 74,142 $ 180,908 $ 216,725
Cost of services, excluding depreciation
and amortization shown below 44,083 48,415 130,809 151,036
------------- ------------- ------------- --------------
Gross profit 16,986 25,727 50,099 65,689
Selling, general and administrative expenses 16,964 17,745 50,161 58,965
Depreciation 3,485 3,157 9,691 10,156
Acquisition goodwill amortization 744 594 2,213 1,783
Non-cash asset impairment charge - - 20,399 -
Restructuring and other non-recurring charges - - 541 3,539
------------- ------------- ------------- --------------
Total operating expenses 21,193 21,496 83,005 74,443
------------- ------------- ------------- --------------
Operating income (loss) (4,207) 4,231 (32,906) (8,754)
Interest expense, net 1,911 1,514 5,491 4,063
------------- ------------- ------------- --------------
Income (loss) before income taxes (6,118) 2,717 (38,397) (12,817)
Income tax expense (benefit) (2,096) 864 (6,078) (3,681)
------------- ------------- ------------- --------------
Net income (loss) (4,022) 1,853 (32,319) (9,136)
Preferred stock dividends 455 1,733 466 5,003
------------- ------------- ------------- --------------
Net income (loss) after preferred stock dividends $ (4,477) $ 120 $ (32,785) $ (14,139)
============= ============= ============= ==============
Basic and diluted income (loss) per share of common stock $ (0.09) $ 0.00 $ (0.63) $ (0.27)
============= ============= ============= ==============
Weighted average shares of common stock
outstanding:
Basic 52,227 52,086 52,075 51,948
Diluted 52,227 52,157 52,075 51,948
</TABLE>
See accompanying notes.
5
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (32,319) $ (9,136)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 11,904 11,939
Asset write-offs 64 -
Deferred income taxes (6,080) (3,681)
Interest on subordinated debt due to affiliates 1,317 890
Non-cash asset impairment charge 20,399 -
Other 27 (30)
Changes in operating assets and liabilities:
Accounts receivable (6,844) (7,168)
Notes receivable -- related parties (27) -
Prepaid and other current assets (1,427) (96)
Other assets 16 -
Accounts payable 2,041 108
Other accrued expenses (18) 7,845
Other current liabilities (792) (611)
-------------- ---------------
Net cash provided by (used in) operating activities (11,739) 60
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,618) (11,361)
-------------- ---------------
Net cash used in investing activities (8,618) (11,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net 1,900 11,666
Proceeds from bank term debt 7,500 -
Proceeds from affiliate debt 5,667 -
Principal payments on long-term debt (3,008) -
Payments on capital lease obligations (2,133) (2,082)
Proceeds from issuance of common stock 100 276
Proceeds from exercise of stock options 179 184
Deferred financing costs (189) -
-------------- ---------------
Net cash provided by financing activities 10,016 10,044
-------------- ---------------
Net decrease in cash and cash equivalents (10,341) (1,257)
Cash and cash equivalents at beginning of period 10,701 6,043
-------------- ---------------
Cash and cash equivalents at end of period $ 360 $ 4,786
============== ===============
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Fixed assets acquired under capital leases $ 497 $ 1,774
Conversion of affiliate debt to preferred stock $ 12,132 $ -
Conversion of dividends into preferred instruments $ 455 $ 4,993
Conversion of accrued interest on subordinated debt
due to affiliates into principal $ 1,317 $ 890
</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 unaudited consolidated financial statements of Aegis
Communications Group, Inc. and its subsidiaries (the "Company") for the three
and nine-month periods ended September 30, 1999 and 2000, have been prepared in
accordance with generally accepted accounting principles and, 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
indicated. 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, 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. Certain
prior year balances have been reclassified to conform to the 2000 presentation.
2. SALE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
On December 10, 1999, the Company completed the sale of 46,750 shares
of newly issued Preferred F senior voting convertible preferred stock (the
"Preferred F Shares") to Questor Partners Fund II, L.P., Questor Side-by-Side
Partners II, L.P., and Questor Side-by-Side Partners II 3(c)(1), L.P.
(collectively the "Questor Investors") for an aggregate purchase price of $46.75
million (the "Questor Transaction"). The Company used the net proceeds from the
sale of the Preferred F Shares to repay outstanding bank debt and pay
transaction expenses. The dividends on the Preferred F Shares, to the extent not
paid, are added to the investment value of such shares. Through September 30,
2000, no cash payments of dividends had been paid by the Company on the
Preferred F Shares; and accordingly, dividends totaling $3,742 were added to the
investment value of such shares. The Preferred F Shares are convertible into
shares of Common Stock on the basis of one share of Common Stock per $1.00 of
investment value of the Preferred F Shares. The Preferred F Shares have a
liquidation preference equal to the investment value of such shares. As a result
of the sale of the Preferred F Shares and subsequent increases to the investment
value of such shares, on an as-converted basis at September 30, 2000, the
Questor Investors collectively beneficially own approximately 49% of the
Company's issued and outstanding Common Stock and approximately 39% of the
Company's Common Stock and Common Stock equivalents outstanding. The Preferred F
Shares vote on an as-converted basis and represent approximately 49% of the
voting equity stock. Because the Preferred F Shares are redeemable at the option
of the Questor Investors in the event of a change of control, the Series F
Preferred Stock is classified as neither a debt nor an equity instrument on the
balance sheet at September 30, 2000 but instead as "Redeemable convertible
preferred stock."
3. PREFERRED STOCK DIVIDENDS
Shares of the Company's Series B Voting Convertible Preferred Stock (the
"Preferred B Shares") earn dividends payable in cash at the annual rate of $0.36
per share. The Company's Series D and E Preferred Stock earn cumulative
dividends payable in cash or in-kind in additional shares of the respective
series of Preferred Stock at the annual rate of 15%. The Preferred F Shares are
entitled to receive dividends, in preference to all other capital stock of the
Company, except for the Preferred B Shares, at the rate of 9.626% per annum,
which accrue and cumulate from their original issue date. The dividends on the
Preferred F Shares accrue on each share from its issuance on a daily basis,
whether or not earned or declared. To the extent that dividends have not been
paid on the Preferred F Shares in cash on any March 31, June 30, September 30 or
December 31 of any year, all such dividends are added to the investment value of
each share. The Preferred F Shares also participate, on an as-converted basis,
with the Common Stock in any dividends that may be declared and paid after the
payment of preferential dividends.
7
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AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
3. PREFERRED STOCK DIVIDENDS (CONTINUED)
For the nine months ended September 30, 2000, accrued dividends
totaling $1,522 on the Series D and E Preferred Stock were paid in-kind and
accrued dividends totaling $3,471 on the Preferred F Shares were added to the
investment value of such shares.
4. EARNINGS PER SHARE
Basic income (loss) per share is computed by dividing net income (loss)
available to common shareholders (that is, after preferred stock dividends) by
the weighted average number of common shares outstanding for the period. Diluted
income (loss) per share is computed giving effect to all dilutive potential
common shares, including options, warrants, convertible debt, and preferred
stock. Options, warrants, convertible debt and preferred stock were not included
in the computation of diluted loss per share for the quarter ended September 30,
1999 and the nine month periods ended September 30, 1999 and 2000 because the
effect would be antidilutive.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ------------------------------
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 1999 2000 1999 2000
FOR THE PERIODS INDICATED WERE AS FOLLOWS: ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Basic
Weighted average common shares issued 52,488 52,647 52,403 52,602
Weighted average treasury shares (261) (561) (328) (654)
------------- ------------- ------------- --------------
Shares used in Basic EPS calculation 52,227 52,086 52,075 51,948
============= ============= ============= ==============
Diluted
Shares used in Basic EPS calculation 52,227 52,086 52,075 51,948
Common stock equivalents:
Dilutive stock options and warrants, net of shares
assumed repurchased with exercise proceeds - 71 - -
------------- ------------- ------------- --------------
Shares used in Diluted EPS calculation 52,227 52,157 52,075 51,948
============= ============= ============= ==============
ANTIDILUTIVE SECURITIES EXCLUDED FROM THE COMPUTATION
OF DILUTED EPS FOR THE PERIODS INDICATED ARE AS FOLLOWS:
Shares issuable under option agreements 7,665 10,515 7,665 11,437
Shares issuable under warrant agreements 2,756 1,756 2,756 2,756
Shares issuable upon conversion of preferred stock 6,013 57,448 6,013 57,448
Shares issuable upon conversion of convertible debt 5,236 5,905 5,236 5,905
</TABLE>
5. SEGMENTS
The Company classifies its operations into two segments, multi-channel
customer relationship management ("CRM") and marketing research, which are
managed separately because each provide 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, 1999. The CRM segment provides large corporations as
well as emerging e-business companies with multi-channel customer relationship
management programs including Internet-enabled customer care and inbound and
outbound call handling services including customer service, help desk,
8
<PAGE>
customer acquisition and retention, multilingual communications programs,
order provisioning, and database management. The marketing research segment
provides its clients, representing a broad range of industries, with
customized marketing research 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
1999 2000 1999 2000
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
CRM $ 53,693 $ 67,145 $ 161,872 $ 195,517
Marketing research 7,376 6,997 19,036 21,208
-------------- --------------- -------------- --------------
Total $ 61,069 $ 74,142 $ 180,908 $ 216,725
============== =============== ============== ==============
OPERATING INCOME (LOSS):
CRM $ (4,265) $ 3,993 $ (10,943) $ (4,443)
Marketing research 58 238 (1,023) (772)
Non-cash asset impairment charge - - (20,399) -
Restructuring and other non-recurring charges - - (541) (3,539)
-------------- --------------- -------------- --------------
Total $ (4,207) $ 4,231 $ (32,906) $ (8,754)
============== =============== ============== ==============
DEPRECIATION AND AMORTIZATION:
CRM $ 3,345 $ 3,039 $ 9,226 $ 9,826
Marketing research 140 118 465 330
Acquisition goodwill amortization 744 594 2,213 1,783
-------------- --------------- -------------- --------------
Total $ 4,229 $ 3,751 $ 11,904 $ 11,939
============== =============== ============== ==============
TOTAL ASSETS:
CRM $ 145,862 $ 156,819
Marketing research 15,640 14,646
-------------- --------------
Total $ 161,502 $ 171,465
============== ==============
</TABLE>
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
6. RESTRUCTURING, OTHER NON-RECURRING AND SPECIAL CHARGES
On July 9, 1998, ATC Communications Group, Inc. ("ATC") completed the
acquisition of IQI, Inc., a New York corporation ("IQI") to form Aegis
Communications Group, Inc. ("Aegis"). The acquisition was effected through the
merger (the "Merger") of a wholly-owned subsidiary of ATC with and into IQI
pursuant to an Agreement and Plan of Merger, dated as of April 7, 1998 (the
"Merger Agreement"). On July 29, 1998, the Company announced that it would
record pre-tax restructuring charges of $13.0 million 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 was recorded to the extent the related amounts had 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 were not accrued, but were recognized as the related expenses
were 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 30, 1999,
as a 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.
The Company's results for the nine months ended September 30, 2000
include special charges of $12,031 ($8,511, net of taxes) recorded in the
quarter ended June 30, 2000. The special charges were recorded in connection
with the recent transition in the Company's executive management team and
actions taken to implement a broad-based turnaround plan designed to improve
productivity and promote profitable revenue growth. During the quarter ended
June 30, 2000, Aegis continued the transition to its new executive management
team with the appointments of Hugh E. Sawyer as President and Chief Executive
Officer and Michael J. Graham as Executive Vice President and Chief Financial
Officer. The special charges are related to the costs necessary to transition
the executive management team, the unanticipated costs of certain employee
healthcare benefits, and the costs necessary for actions taken following the new
management team's initial assessment of the Aegis operating platform. This
analysis prompted the Company to take aggressive steps to focus on its most
profitable assets and streamline the Aegis organization by reducing headcount
not directly responsible for improving profitability, client service, or
employee retention. The following chart details special charges recorded in the
income statement during the nine months ended September 30, 2000:
<TABLE>
<S> <C>
Cost of services:
Compensation expense settlements $ 400
Selling, general and administrative expenses:
Unanticipated costs of certain employee benefits 6,439
Reserve for doubtful accounts 500
Elimination of non-performing assets 315
Depreciation:
Write-offs of undepreciated salvage value of outmoded equipment 838
Restructuring and other non-recurring charges:
Executive transition and severance costs 2,240
Resolution of lease litigation and disputes related to an insurance claim 1,299
--------
Total pre-tax special charges 12,031
Tax benefit (3,520)
--------
Total special charges, net of taxes $ 8,511
========
</TABLE>
10
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AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. NON-CASH ASSET IMPAIRMENT CHARGE
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", 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, in the first quarter of 1999, 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 was impaired. Accordingly, in the
quarter ended March 31, 1999, the Company adjusted the carrying value of E&L's
long-lived assets to their fair value resulting in a non-cash asset impairment
charge of $20,399, which reduced the amount of goodwill on the Company's balance
sheet. This reduction has resulted in a decrease in the Company's goodwill
amortization expense of approximately $1,100 annually.
8. CREDIT FACILITY
In conjunction with the December 10, 1999 closing of the Questor
Transaction and the associated repayment of bank debt, the Company entered into
the Third Amended and Restated Credit Agreement (the "Credit Agreement") with
Bank of Nova Scotia ("Scotiabank") and Credit Suisse First Boston ("CSFB"),
thereby curing all outstanding defaults. Under the amended agreement, these
lenders expanded their aggregate revolving credit facility commitments from
$30,000 to $45,000 at closing. The Company met certain financial targets in the
fourth quarter of 1999, which resulted in a $1,500 increase in the commitment
under the credit facility, and the Company met certain financial targets in the
first quarter of 2000, which resulted in an additional $2,500 increase in the
commitment.
As a result of the special charges recorded in the second quarter of
2000, the Company was in default of certain covenants of the Credit Agreement at
June 30, 2000. On July 28, 2000, following negotiations with Scotiabank and
CSFB, the Company entered into the First Amendment to the Credit Agreement
(the "First Amendment"), which: i) waived the Company's default under certain
financial covenants of the Credit Agreement; and ii) amended and restated
certain covenants of the agreement related to the interest rate, availability
under the revolving line of credit, and certain financial targets. As a result
of the default and subsequent Credit Agreement amendment, the Company's
borrowing base under the First Amendment is limited to $49,000, and the
Company's interest rate increased 175 basis points for the second half of 2000.
9. DEFERRED TAX ASSET
The Company has a deferred tax asset of $16,565 at September 30, 2000.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), management periodically
evaluates the realizability of the deferred tax asset. As part of this
evaluation, management has considered past operating results, the trend of
improved operating results over the last two quarters, the favorable outlook for
future financial performance, as well as other positive evidence, in determining
that a valuation allowance was not necessary at September 30, 2000. However,
should the Company's future operating results be significantly below assumptions
used in the evaluation of the deferred tax asset, it may be necessary to
consider the need for a valuation allowance in the future.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The accompanying unaudited 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
indicated. 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 unaudited statements of
operations data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services, excluding depreciation
and amortization shown below 72.2% 65.3% 72.3% 69.7%
-------- -------- -------- --------
Gross profit 27.8% 34.7% 27.7% 30.3%
Selling, general and administrative expenses 27.8% 23.9% 27.7% 27.2%
Depreciation 5.7% 4.3% 5.4% 4.7%
Acquisition goodwill amortization 1.2% 0.8% 1.2% 0.8%
Non-cash asset impairment charge - - 11.3% -
Restructuring and other non-recurring charges - - 0.3% 1.6%
-------- -------- -------- --------
Total operating expenses 34.7% 29.0% 45.9% 34.3%
-------- -------- -------- --------
Operating income (loss) (6.9%) 5.7% (18.2%) (4.0%)
Interest expense, net 3.1% 2.0% 3.0% 1.9%
-------- -------- -------- --------
Income (loss) before income taxes (10.0%) 3.7% (21.2%) (5.9%)
Income tax expense (benefit) (3.4%) 1.2% (3.4%) (1.7%)
-------- -------- -------- --------
Net income (loss) (6.6%) 2.5% (17.8%) (4.2%)
Preferred stock dividends 0.7% 2.3% 0.3% 2.3%
-------- -------- -------- --------
Net income (loss) after preferred stock dividends (7.3%) 0.2% (18.1%) (6.5%)
======== ======== ======== ========
</TABLE>
The Company's results for the nine months ended September 30, 2000
include special charges of approximately $12.0 million ($8.5 million, net of
taxes) recorded in the quarter ended June 30, 2000. The special charges were
recorded in connection with the recent transition in the Company's executive
management team and actions taken to implement a broad-based turnaround plan
designed to improve productivity and promote profitable revenue growth. During
the quarter ended June 30, 2000, Aegis continued the transition to its new
executive management team with the appointments of Hugh E. Sawyer as President
and Chief Executive Officer and Michael J. Graham as Executive Vice President
and Chief Financial Officer. The special charges are related to the costs
necessary to transition the executive management team, the unanticipated costs
of certain employee healthcare benefits, and the costs necessary for actions
taken following the new management team's initial assessment of the Aegis
operating platform. This analysis prompted the Company to take aggressive steps
to focus on its most profitable assets and streamline the Aegis organization by
reducing headcount not directly responsible for improving profitability, client
service, or employee retention. The following chart details special charges
recorded in the income statement during the quarter ended June 30, 2000:
12
<PAGE>
SECOND QUARTER 2000 SPECIAL CHARGES
(IN THOUSANDS)
<TABLE>
<S> <C>
Cost of services:
Compensation expense settlements $ 400
Selling, general and administrative expenses:
Unanticipated costs of certain employee benefits 6,439
Reserve for doubtful accounts 500
Elimination of non-performing assets 315
Depreciation:
Write-offs of undepreciated salvage value of outmoded equipment 838
Restructuring and other non-recurring charges:
Executive transition and severance costs 2,240
Resolution of lease litigation and disputes related to an insurance claim 1,299
--------
Total pre-tax special charges 12,031
Tax benefit (3,520)
--------
Total special charges, net of taxes $ 8,511
========
</TABLE>
Total revenues generated during the quarter ended September 30, 2000
were $74.1 million as compared to $61.1 million in the third quarter a year ago,
an increase of $13.0 million, or 21%. Net income after preferred stock dividends
for the third quarter of 2000 was approximately $0.1 million, or $0.00 per
share, as compared to a net loss in the third quarter of 1999 of $4.5 million,
or $0.09 per share.
For the nine months ended September 30, 2000, total revenues were
approximately $216.7 million as compared to $180.9 million in the prior year
period, an increase of $35.8 million, or 20%. Net loss after preferred stock
dividends for the nine-month period of 2000 was $14.1 million, or $0.27 per
share, as compared to a net loss in the nine-month period of 1999 of $32.8
million, or $0.63 per share. The decrease in the net loss after preferred stock
dividends was primarily related to a non-cash asset impairment charge of $20.4
million in 1999, partially offset by special charges of $12.0 million, net of
taxes, discussed above.
The increases in revenues for the quarter and nine months ended
September 30, 2000 were due primarily to increases in inbound CRM revenues of
approximately $9.9 million, or 29%, for the quarter and $36.8 million, or 43%,
for the nine-month period. Marketing research revenues decreased $0.4 million,
or 5%, for the quarter; however, such revenues increased approximately $2.2
million, or 11%, for the nine months ended September 30, 2000 versus the prior
year periods. For the periods ended September 30, 1999 and 2000, our actual mix
of revenues was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- ------------------------------------------------
1999 % 2000 % 1999 % 2000 %
--------- -------- ---------- -------- --------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inbound CRM $ 34,023 55.7% $ 43,968 59.3% $ 85,032 47.0% $ 121,794 56.2%
Outbound CRM 19,670 32.2% 23,177 31.3% 76,840 42.5% 73,723 34.0%
-------- -------- --------- ---------
CRM total 53,693 87.9% 67,145 90.6% 161,872 89.5% 195,517 90.2%
Marketing research 7,376 12.1% 6,997 9.4% 19,036 10.5% 21,208 9.8%
-------- -------- --------- ---------
Total revenues $ 61,069 100.0% $ 74,142 100.0% $ 180,908 100.0% $ 216,725 100.0%
======== ======== ========= =========
</TABLE>
As a result of the acquisition of one of our clients by our largest
telecommunications client and giving effect to the merger as if it occurred at
the beginning of the periods, for the quarter and nine months ended September
30, 2000, approximately 38% and 35%, respectively, of our total revenues were
generated by our largest telecommunications client. This client generated total
revenues representing approximately 28% for the quarter and 25% for the nine
months ended September 30, 1999. Revenues from our largest telecommunications
client are derived from separate contractual arrangements with several different
business units of this client. For the quarter ended September 30, 2000,
approximately 13% of our total revenues were generated by our largest financial
services client, as compared to approximately 16% in the prior year's quarter.
For the nine months ended September
13
<PAGE>
30, 2000 approximately 14% of our total revenues were generated by our largest
financial services client, as compared to approximately 16% for the
comparable 1999 period.
Aegis seeks to secure recurring revenues from long-term relationships
with targeted corporate clients that utilize telecommunications and marketing
research strategies as integral, ongoing elements in their marketing and CRM
programs. In addition to providing services on an outsourcing basis, in which we
provide all or a substantial portion of a client's CRM and/or marketing research
needs, we also continue to perform project-based services for certain clients.
Project-based services, however, are frequently short-term and there can be no
assurance that these clients will continue existing projects or provide new
ones.
For the quarter ended September 30, 2000, gross profit earned on
revenues increased approximately $8.7 million, or 51%, from the quarter ended
September 30, 1999. Gross profit for the nine months ended September 30, 2000
increased approximately $15.6 million, or 31%, versus the prior year period
primarily due to the increased revenue and to cost reduction initiatives
implemented earlier in the year. Gross profit as a percentage of revenues
("gross margin") for the quarter and nine months ended September 30, 2000 was
34.7% and 30.3%, respectively, as compared to 27.8% and 27.7% in the comparable
prior year periods. The increases in gross margin are due to improved capacity
utilization resulting from the revenue increase, a reduction in operating costs
due to the implementation of the cost reduction initiatives mentioned above and
improved operating efficiencies resulting from the implementation of our site
migration plan discussed below.
Our site strategy focuses on locating client service centers in areas
where we believe Aegis can more effectively attract and retain employees and
efficiently control front-line costs. In keeping with this site strategy, during
the quarter ended September 30, 2000, we completed a portion of the build-out of
a new 400-workstation client service center in Terre Haute, Indiana. The new
center opened concurrent with the closing of our 120-seat center in Virginia
Beach, Virginia on August 31, 2000.
Selling, general and administrative ("SG&A") expenses increased $0.8
million, or 5%, in the quarter ended September 30, 2000 versus the comparable
periods of 1999 due to increased revenues in the current year quarter; however,
as a percentage of revenues, SG&A expenses for the current year quarter were
23.9% versus 27.8% in the 1999 quarter. For the nine months ended September 30,
2000, SG&A expenses increased $8.8 million, or 18% versus the comparable prior
year period. This increase is primarily attributable to $6.4 million in special
charges associated with unanticipated costs of certain employee benefits
recorded in the second quarter 2000. The Company has implemented a new employee
benefit plan effective October 1, 2000 which will help control such
unanticipated costs and reduce the Company's employee benefits costs in the
future. Despite the increase in SG&A expenses in the current year nine month
period, SG&A expenses as a percentage of revenue decreased from 27.7% in the
prior year period to 27.2% in the current year. The reduction in SG&A expenses
as a percentage of revenue in the current year periods, despite the special
charges, is primarily due to cost reduction programs combined with rigorous
financial controls implemented by management during the second quarter of 2000.
Depreciation and amortization expenses decreased $0.5 million, or 11%,
in the quarter and remained virtually unchanged in the nine months ended
September 30, 2000 as compared to the prior year periods. Depreciation and
amortization expenses in the nine-month period of the current year were higher
due to $0.8 million in special charges associated with write-offs of the salvage
value of outmoded equipment. As a percentage of revenues, depreciation and
amortization expenses were 5.1% in the quarter and 5.5% in the first nine months
of 2000 versus 6.9% and 6.6%, respectively, in the prior year periods. Excluding
special charges, the decreases in depreciation and amortization expenses as a
percentage of revenues are due primarily to the increase in revenues over the
prior year periods and the reduction of acquisition goodwill amortization
expense resulting from a non-cash asset impairment charge taken at March 31,
1999. See "Notes to Unaudited Consolidated Financial Statements - Non-Cash Asset
Impairment Charge."
Net interest expense decreased $0.4 million, or 21%, in the third
quarter of 2000 and $1.4 million, or 26%, in the nine months ended September 30,
2000 as compared to the prior year periods due to the reduction of long-term
debt resulting from the use of proceeds from the Company's sale of $46.75
million of convertible preferred stock on December 10, 1999.
Our statutory state and federal income tax benefit rate for the
quarters and nine months ended September 30, 1999 and 2000 was approximately
40.0%. Our effective tax rate on reported taxable income or loss differs from
14
<PAGE>
the statutory rate due primarily to the non-deductibility, for tax purposes, of
our goodwill amortization expense and, in the prior year, to the
non-deductibility of the non-cash asset impairment charge taken at March 31,
1999.
The Company has a deferred tax asset of $16.6 million at September 30,
2000. Management periodically evaluates the realizability of the deferred tax
asset. As part of this evaluation, we have considered past operating results,
the trend of improved operating results over the last two quarters, the
favorable outlook for future financial performance, as well as other positive
evidence, in determining that a valuation allowance was not necessary at
September 30, 2000. However, should the Company's future operating results be
significantly below assumptions used in the evaluation of the deferred tax
asset, it may be necessary to consider the need for a valuation allowance in the
future.
Preferred dividends increased to approximately $1.3 million for the
quarter and $4.5 million for the nine months ended September 30, 2000 from $0.5
million in the prior year periods as a result of the conversion of affiliated
debt to Series D and E Preferred Shares and the sale of Preferred F Shares. For
the three and nine-month periods ended September 30, 2000, dividends on the
Preferred F Shares were not paid in cash, but were added to the investment value
of such shares. Dividends on the Series D and E Preferred Shares are currently
being paid in additional shares of Series D and E Preferred Shares,
respectively. See "Notes to Unaudited Consolidated Financial Statements - Sale
of Redeemable Convertible Preferred Stock" and "- Preferred Stock Dividends."
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain unaudited information from the
Company's statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 2000
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash provided by (used in) operating activities $ (11,739) $ 60
Net cash used in investing activities (8,618) (11,361)
Net cash provided by financing activities 10,016 10,044
----------- ----------
Net change in cash and cash equivalents $ (10,341) $ (1,257)
=========== ==========
</TABLE>
We have historically utilized cash flow from operations, available
borrowing capacity under our credit facilities, subordinated indebtedness
provided by certain of our shareholders (primarily Thayer Equity) and the
issuance of convertible preferred stock to meet our liquidity needs. Thayer
Equity has previously provided Aegis with financial support through subordinated
debt financing, the conversion of subordinated debt into preferred stock, and
providing loan guarantees; however, there can be no assurance, should we
experience future liquidity issues, that Thayer Equity will continue to provide
such financial support. We anticipate that the funding provided in the Questor
Transaction and the funds available under our revolving line of credit, as
amended, will enable us to meet our liquidity needs for the foreseeable future.
See "Questor Transaction" and "Credit Facility" below.
Cash used in operating activities improved approximately $11.8 million,
or 101%, during the nine months ended September 30, 2000 as compared to the
prior year period due to decreased operating losses resulting from increased
revenues and improved gross margins. Increases in our accounts receivable,
resulting from higher revenues, were partially offset by increases in our
accrued expenses resulting in positive cash flow from operating activities in
the nine months ended September 30, 2000.
Cash used in investing activities during the first nine months of 2000
increased $2.7 million, or 32%, from the same period in 1999 primarily due to
capital expenditures on two new telecommunications switches put into service in
the first quarter of 2000 and capital expenditures related to the opening of the
new Terre Haute facility during the third quarter 2000. Capital expenditures
have consisted primarily of new telecommunications equipment and information
technology hardware and software required in the maintenance, upgrade and
expansion of our operations including the build-out of new client service
centers and the upgrade or replacement of workstations in our existing
facilities. Capital expenditures during the first nine months of 2000 were
funded with proceeds from bank borrowings under an expanded revolving line of
credit and available cash. See "Credit Facility" below.
Cash provided by financing activities during the first nine months of
2000 remained essentially unchanged from the same period in 1999. During the
first nine months of 2000, financing activities consisted primarily of proceeds
of approximately $11.7 million from our revolving line of credit, which were
somewhat offset by payments of capital lease obligations of $2.1 million. In the
prior year, our financing activities were centered primarily around proceeds
from affiliated debt and proceeds from and payments on long-term bank debt.
See "Credit Facility" below.
QUESTOR TRANSACTION
In an effort to reduce outstanding debt on our balance sheet, thereby
providing us the needed flexibility to renegotiate our bank revolving credit
agreement (and cure then outstanding defaults), and provide access to working
capital to fund future operations, on December 10, 1999, we completed the sale
of 46,750 shares of newly issued Preferred F Shares to the Questor Investors for
an aggregate purchase price of $46.75 million. The Preferred F Shares are
entitled to receive dividends, in preference to all other capital stock of the
Company, except for the Company's Series B Voting Convertible Preferred Stock,
par value $0.01 per share (the "Preferred B Shares"), at the rate of 9.626% per
annum, which accrue and cumulate from their original issue date. The dividends
on the Preferred F Shares accrue on each share from its issuance on a daily
basis, whether or not earned or declared. To the extent that dividends have not
been paid in-cash on any March 31, June 30, September 30 or December 31 of any
year, all
16
<PAGE>
such dividends are added to the investment value of such share. The Preferred
F Shares also participate, on an as-converted basis, with the Common Stock in
any dividends that may be declared and paid after the payment of preferential
dividends. The Preferred F Shares vote on an as-converted basis. We used the
proceeds from the sale of the Preferred F Shares to repay outstanding bank
debt and pay transaction expenses. For the nine months ended September 30,
2000, accrued dividends on the Preferred F Shares were added to the
investment value of such shares.
As a result of the sale of the Preferred F Shares and subsequent
increases to the investment value of such shares, on an as-converted basis, the
Questor Investors collectively beneficially own approximately 49% of the
Company's issued and outstanding Common Stock and approximately 39% of the
Company's Common Stock and Common Stock equivalents outstanding. The Preferred F
Shares vote on an as-converted basis and represent approximately 49% of our
voting equity stock.
CREDIT FACILITY
In conjunction with the December 10, 1999 closing of the Questor
Transaction and the associated repayment of bank debt, we entered into the Third
Amended and Restated Credit Agreement (the "Credit Agreement") with Bank of Nova
Scotia ("Scotiabank") and Credit Suisse First Boston ("CSFB"), thereby curing
all outstanding defaults. Under the amended agreement, our lenders expanded
their aggregate revolving credit facility commitments from $30.0 million to
$45.0 million at closing. We met certain financial targets in the fourth quarter
of 1999, which resulted in a $1.5 million increase in the commitment under the
credit facility, and we met certain financial targets in the first quarter of
2000, which resulted in an additional $2.5 million increase in the commitment.
As a result of the special charges recorded in the second quarter of
2000 (see "Results of Operations" above), the Company was in default of
certain covenants of the Credit Agreement at June 30, 2000. On July 28, 2000,
following negotiations with Scotiabank and CSFB, we entered into the First
Amendment to the Credit Agreement (the "First Amendment"), which: i) waived
the Company's default under certain financial covenants of the Credit
Agreement; and ii) amended and restated certain covenants of the agreement
related to the interest rate, availability under the revolving line of
credit, and certain financial targets. As a result of the default and
subsequent Credit Agreement amendment, the Company's borrowing base under the
First Amendment is limited to $49.0 million and, at current levels of
indebtedness, we estimate the Company's interest expense in the second half
of 2000 will be approximately 175 basis points higher than under the
pre-amendment Credit Agreement.
NOTE RECEIVABLE
As of September 30, 2000, Michael G. Santry, a director of the Company,
owed the Company approximately $2.1 million, including accrued interest, under a
secured promissory note dated September 16, 1997. The note bears interest at an
annual rate of 7% and is secured by 7,000 shares of our Common Stock, options to
purchase 1,750,000 shares of our Common Stock held by Mr. Santry and other
collateral. On May 26, 2000, under the terms of an amended and restated
promissory note and an amended pledge agreement, the Company extended the term
of the loan until March 31, 2001 and Mr. Santry agreed to pay accrued but unpaid
interest on the loan for the period October 1, 1999 through September 30, 2000,
pay rent on office space sub-leased from the Company, and make certain other
payments to the Company. In July 2000 and October 2000, Mr. Santry defaulted on
certain payment conditions of the amended and restated secured promissory note.
As a result, the Company exercised its rights under the amended and restated
secured promissory note to cancel options to purchase 875,000 shares of our
Common Stock held by Mr. Santry. Mr. Santry resigned as a director of the
Company on August 9, 2000. Mr. Santry remains obligated under the promissory
note, which remains secured by the collateral described above, less the
cancelled options. Because Mr. Santry was an affiliate of the Company and the
amount of the loan had been outstanding for more than one year, the balance of
the note receivable was reclassified as a reduction to additional paid-in
capital in shareholders' equity in the fourth quarter of 1999.
GROWTH STRATEGIES
We primarily compete in the segment of the customer relationship
management ("CRM") market which provides large corporations, as well as emerging
e-business companies, with outsourced multi-channel support (customer
interaction support across multiple communications channels including the
Internet, e-mail and the telephone). The CRM industry is very competitive and is
spread among many competitors including a large number of in-house organizations
and numerous independent providers like Aegis. In order to compete more
effectively in this market, in March 2000, we introduced the Aegis
e.CARE.PLUS-SM- suite of web-enabled customer care capabilities
17
<PAGE>
that will transform a number of our production workstations into
multi-channel capable workstations able to handle a variety of customer
interactions, especially those originating from the Internet. The
transformation of such workstations into e-care stations will require capital
expenditures and may require additional borrowing, including utilizing funds
available under the existing credit facility.
We also anticipate the continued implementation of our site strategy
and center migration plan, which focuses on locating client service centers in
areas where we believe Aegis can more effectively attract and retain employees
and efficiently control front-line costs. Our growth and continued
implementation of our growth strategies may necessitate additional client
service centers and such facilities will have furniture, equipment and
technological requirements consistent with our existing facilities. Any
additional client service centers will require capital expenditures and may
require additional borrowing under the existing credit facility. In addition,
expenses associated with such centers may temporarily dampen operating income.
Although no assurances can be made in this regard, based on our ability
to secure such financing to date, our current credit facility and anticipated
cash flow from operations, management anticipates that for the foreseeable
future we should be able to sufficiently fund the combination of our future
working capital needs, expenditures associated with the roll-out of our e-care
capabilities, and the capital equipment requirements for the build-out of
additional facilities needed to meet unanticipated growth.
NEW ACCOUNTING PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that the
corresponding gains and losses be reported either in the statement of operations
or as a component of comprehensive income (loss), depending on the type of
hedging relationship that exists. SFAS No. 133, as amended, will be effective
for fiscal years beginning after June 15, 2000. This statement is not expected
to have a material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. SAB 101 did not have a material impact on the Company's
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB
No. 25 for (a) the definition of an employee for purposes of applying APB No.
25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. FIN 44 did not have a
material impact on the Company's consolidated financial statements.
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; unanticipated losses of or delays in implementation of
client programs; higher than anticipated implementation costs associated with
new client programs; the successful combination of revenue growth with operating
expense reduction to result in improved profitability and cash flow; government
regulation and tax policy;
18
<PAGE>
economic conditions; competition and pricing; dependence on the Company's
labor force; reliance on technology; telephone and internet service
dependence; and other operational, financial or legal risks or uncertainties
detailed in the Company's SEC filings from time to time. Should one or more
of these uncertainties or risks materialize, actual results may differ
materially from those described in the forward-looking statements. The
Company disclaims any intention or obligation to revise any forward-looking
statements whether as a result of new information, future event, change in
expectations, conditions or circumstances, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 2000, 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, 1999.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United Steelworkers of America ("USWA") has undertaken an effort
to organize the Company's call center workforce located in Elkins, West
Virginia. The Company believes that a unionized workforce is contrary to the
Company's best interests, and is contrary to its employees', customers' and
shareholders' best interests as well. Accordingly, the Company is vigorously
opposing the unionization effort. A representative election was previously
scheduled for August 1, 2000. On July 27, 2000, the USWA filed an unfair
labor practice charge against the Company with the National Labor Relations
Board's ("NLRB") Region 6 office in Pittsburgh, Pennsylvania, alleging that
the Company engaged in unlawful conduct to discourage employees in Elkins
from engaging in union activity. The Company denied the allegations,
asserting that it had lawfully opposed the unionization effort. The USWA
sought an order from the NLRB directing the Company to cease and desist from
such practices in the future. After negotiations with the NLRB, USWA
dismissed the petition for an order and the Company agreed to discontinue
certain of the actions found objectionable by USWA. The election has
tentatively been rescheduled for December 2000.
ITEM 5. OTHER INFORMATION
On November 1, 2000, Aegis announced the addition of two
senior executives to Aegis' management team. Herman Schwarz joined the Company
as President of its Elrick & Lavidge Marketing Research division ("E&L") and
Thomas Franklin joined as Executive Vice President - Administration with
responsibilities in human resources and the administration of employee benefits,
government compliance, training and recruiting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-K Annual Report for
the year ended December 31, 1999).
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2
of the Company's Form 8-K Current Report filed on December 20, 1999).
4.1 Specimen of Share Certificate of Company's Common Stock (Incorporated
by reference to Exhibit 4.1 of the Company's Form 10-Q for the
quarterly period ended September 30, 1998).
4.2 Form of Series B Preferred Stock certificate, as amended. (Incorporated
by reference to the Company's Form 10-K Annual Report for the year
ended September 30, 1994).
4.3 Elimination Certificate for Series D Junior Participating Preferred
Stock (Incorporated by reference to Exhibit 4.3 of the Company's Form
8-K Current Report filed on December 20, 1999).
4.4 Series D and E Preferred Stock Certificate of Designation (Incorporated
by reference to Exhibit 4.10 of the Company's Form 10-Q Quarterly
Report for the quarterly period ended September 30, 1999).
4.5 Amendment of Series D & E Certificate of Designation of the Company
(Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K
Current Report filed on December 20, 1999).
4.6 Series F Preferred Stock Certificate of Designation (Incorporated by
reference to the Exhibit 4.1 of the Company's Form 8-K Current Report
filed on December 20, 1999)
10.45 Agreement by and among Stephen A. McNeely and Aegis Communications
Group, Inc. and its subsidiaries dated April 17, 2000 filed herewith.
20
<PAGE>
10.46 Employment Agreement dated October 13, 2000 by and among Aegis
Communications Group, Inc. and its subsidiaries and Thomas P.G.
Franklin filed herewith.
10.47 Employment Agreement dated October 23, 2000 by and among Aegis
Communications Group, Inc. and its subsidiaries and Herman M Schwarz
filed herewith.
27.1 Financial Data Schedule (filed herewith).
(B) Reports on Form 8-K
None.
21
<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 10, 2000 By: /s/ Michael J. Graham
-------------------------------
Michael J. Graham
Executive Vice President and
Chief Financial Officer
9/30/2000 Quarter
22
<PAGE>
EXHIBITS INDEX
Number Description of Exhibit
------ ----------------------
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 of the Company's
Form 10-K Annual Report for the year ended December 31, 1999).
3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 of the Company's Form 8-K Current Report filed on
December 20, 1999).
4.1 Specimen of Share Certificate of Company's Common Stock
(Incorporated by reference to Exhibit 4.1 of the Company's
Form 10-Q for the quarterly period ended September 30, 1998).
4.2 Form of Series B Preferred Stock certificate, as amended.
(Incorporated by reference to the Company's Form 10-K Annual
Report for the year ended September 30, 1994).
4.3 Elimination Certificate for Series D Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 4.3 of
the Company's Form 8-K Current Report filed on December 20,
1999).
4.4 Series D and E Preferred Stock Certificate of Designation
(Incorporated by reference to Exhibit 4.10 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
September 30, 1999).
4.5 Amendment of Series D & E Certificate of Designation of the
Company (Incorporated by reference to Exhibit 4.2 of the
Company's Form 8-K Current Report filed on December 20, 1999).
4.6 Series F Preferred Stock Certificate of Designation
(Incorporated by reference to the Exhibit 4.1 of the Company's
Form 8-K Current Report filed on December 20, 1999)
10.45 Agreement by and among Stephen A. McNeely and Aegis
Communications Group, Inc. and its subsidiaries dated April
17, 2000 filed herewith.
10.46 Employment Agreement dated October 13, 2000 by and among Aegis
Communications Group, Inc. and its subsidiaries and Thomas
P.G. Franklin filed herewith.
10.47 Employment Agreement dated October 23, 2000 by and among Aegis
Communications Group, Inc. and its subsidiaries and Herman M
Schwarz filed herewith.
27.1 Financial Data Schedule (filed herewith).
23
