<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
/ / Confidential, For Use of the Commission Only
(as permitted by Rule 14a-6(e) (2))
</TABLE>
<TABLE>
<S> <C>
AEGIS COMMUNICATIONS GROUP, INC.
- ------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
- ------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on the table below per Exchange Act
Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed Maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
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</TABLE>
<PAGE>
[LOGO]
------------------------
November 29, 1999
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Aegis Communications Group, Inc. (the "Company"), to be held on Friday, December
10, 1999 at 9:00 a.m., local time, at the law offices of Hughes & Luce, L.L.P.,
1717 Main Street, Suite 2800, Dallas, Texas 75201.
The purpose of the meeting is to consider and vote upon a series of
proposals prompted by a proposed preferred stock investment in the Company.
Questor Partners Fund II, L.P. and related purchasers propose investing
$46.75 million in the Company for a new series of preferred stock. The Company
intends to use the invested cash primarily to reduce bank debt. The Company
believes that these changes in its capital structure will provide greater
flexibility to finance future growth in operations. The Questor investment would
culminate the Company's recent review of its strategic alternatives, which could
have included a merger, sale of the Company, debt, equity or other financing.
The Purchase Agreement requires stockholder approval. We are asking you to
approve the Purchase Agreement and the terms of the Series F Preferred Stock,
the issuance of the preferred stock (and, upon conversion of the preferred
stock, the common stock into which the preferred stock is convertible), certain
amendments to the Company's charter to facilitate the transaction, and the
election of a new board of twelve directors, six of whom have been nominated by
Questor and six of whom have been nominated by existing investors.
Specifically, at the Special Meeting, the Company will ask you to consider
and vote upon a proposal of the Company's Board of Directors (Proposal 1) to
approve the Series F Senior Voting Convertible Preferred Stock Purchase and
Registration Rights Agreement dated as of August 25, 1999, as amended on
August 26, 1999 and October 22, 1999 (the "Purchase Agreement") and the terms of
the Company's Series F Senior Voting Convertible Preferred Stock, par value
$0.01 per share (the "Preferred F Shares"); the issuance by the Company to the
Questor Investors (as defined in the Proxy Statement) pursuant to the Purchase
Agreement of 46,750 Preferred F Shares; and the issuance by the Company of
common stock, par value $0.01 per share (the "Common Stock") issuable upon the
conversion of the Preferred F Shares.
The Company will also ask you to consider and vote upon a proposal of the
Company's Board of Directors (Proposals 2 and 3) to amend the Company's Amended
and Restated Certificate of Incorporation (the "Charter") to increase the number
of authorized shares of the Company's Common Stock from 100,000,000 to
200,000,000 and an amendment to the Charter to increase the number of authorized
shares of the Company's Preferred Stock from 1,000,000 to 2,000,000. The Company
will also ask you to consider and vote upon a proposal of the Company's Board of
Directors (Proposal 4) to amend the Charter to remove the provision that
currently classifies the Board of Directors into three separate classes.
Finally, the Company will ask you to consider and vote upon a proposal of the
Company's Board of Directors (Proposal 5) to elect twelve directors to serve
until the next annual meeting of stockholders and each of their respective
successors shall have been duly elected and qualified.
CERTAIN EXISTING STOCKHOLDERS HOLDING MORE THAN FIFTY PERCENT OF THE VOTING
STOCK OF THE COMPANY HAVE AGREED IN WRITING TO APPROVE THE PROPOSALS. AS A
RESULT, THE RECEIPT OF THE REQUIRED APPROVAL IS NOT PRACTICALLY IN DOUBT.
The issuance of the Preferred F Shares will have a dilutive effect on both
the voting power and economic interests of the existing stockholders. The 46,750
Preferred F Shares will vote on all matters with the Common Stock on an as
converted basis. Assuming a conversion rate of $1.00 per share (the rate that
<PAGE>
results in the highest possible number of votes), the Questor Investors will
hold approximately 47% of the voting power of the Company and the voting power
of existing stockholders will be reduced proportionately. Similarly, the
Preferred F Shares are convertible into Common Stock, and assuming the same
conversion rate as above, upon conversion, the Questor Investors will hold
approximately 47% of the issued and outstanding Common Stock, thereby diluting
the existing stockholders proportionately. On a fully diluted and as converted
basis, the Questor Investors will hold approximately 38% of the Company's common
stock and common stock equivalents.
Whether or not you plan to attend in person, it is important that your
shares be represented at the Meeting. Consequently, please sign, date and return
your proxy card in the enclosed envelope as soon as possible. THE BOARD OF
DIRECTORS HAS DETERMINED THAT EACH OF THESE PROPOSALS (AS DETAILED IN THE PROXY
STATEMENT) TO BE VOTED UPON AT THE SPECIAL MEETING IS IN THE BEST INTERESTS OF
BOTH THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE FOR EACH OF THE
PROPOSALS.
You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Proxy Statement for the details of the Proposals before
you. Your vote is important. Whether or not you plan to attend the Special
Meeting, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed postage-prepaid envelope. Your stock will be voted in
accordance with the instructions you have given in your proxy, or, if no
instructions are given, your executed proxy will be voted for all five Proposals
in accordance with the recommendations of the Board of Directors. If you attend
the Special Meeting, you may vote in person if you wish, even though you
previously returned your proxy card. Your prompt cooperation will be greatly
appreciated.
Thank you.
Sincerely,
/s/ JOHN R. BIRK
--------------------------------------
John R. Birk
CHAIRMAN OF THE BOARD
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
7880 BENT BRANCH DRIVE, SUITE 150
IRVING, TEXAS 75063
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 10, 1999
------------------------
To the Stockholders of
AEGIS COMMUNICATIONS GROUP, INC.
A Special Meeting of Stockholders, or any adjournment or postponement
thereof (the "Meeting") of Aegis Communications Group, Inc. (the "Company") will
be held on Friday, December 10, 1999, at the law offices of Hughes & Luce,
L.L.P., 1717 Main Street, Suite 2800, Dallas, Texas 75201, commencing at
9:00 a.m. local time, for the following purposes:
(1) To consider and vote on a proposal to approve (a) that certain Series F
Senior Voting Convertible Preferred Stock Purchase and Registration
Rights Agreement dated as of August 25, 1999 (as amended, the "Purchase
Agreement") by and among the Company, Questor Partners Fund II, L.P. and
certain affiliated investment funds (as more fully described in the Proxy
Statement) and Thayer Equity Investors III, L.P., certain affiliated
investment funds and certain other existing investors (as more fully
described in the Proxy Statement), (b) the terms of the Company's
Series F Senior Voting Convertible Preferred Stock, par value $0.01 per
share (the "Preferred F Shares"), (c) the issuance by the Company to the
Questor Investors pursuant to the terms and subject to the conditions of
the Purchase Agreement of 46,750 Preferred F Shares; and (d) the issuance
by the Company of common stock, par value $0.01 per share (the "Common
Stock") issuable if and when the Preferred F Shares are converted into
Common Stock (collectively, the "Questor Transaction"). The maximum
number of shares of Common Stock issuable upon conversion of the 46,750
Preferred F Shares into Common Stock (assuming a conversion price of
$1.00 and subject to adjustment as provided in the Certificate of
Designation for the Preferred F Shares) is 46,750,000, or approximately
47% of the issued and outstanding shares of Common Stock following
conversion. On a fully diluted and as converted basis, the Questor
Investors will hold approximately 38% of the Company's Common Stock and
Common Stock equivalents;
(2) To consider and vote on a proposal to approve an amendment to the
Company's Amended and Restated Certificate of Incorporation (the
"Charter") to increase the number of authorized shares of the Company's
Common Stock from 100,000,000 to 200,000,000;
(3) To consider and vote on a proposal to approve an amendment to the
Charter to increase the number of authorized shares of the Company's
Preferred Stock from 1,000,000 to 2,000,000;
(4) To consider and vote on a proposal to approve an amendment to the
Charter to remove the provision relating to classification of the Board
of Directors into three separate classes;
(5) To elect twelve directors to serve until the next annual meeting of
stockholders and each of their respective successors shall have been duly
elected and qualified; and
(6) To transact such other business as may properly come before the Meeting.
The Questor Transaction will not be effected if it is not approved by the
requisite vote of stockholders, and the proposed amendments to the Charter and
the election of a new slate of directors will only be effective if the Questor
Transaction is consummated. CERTAIN EXISTING STOCKHOLDERS HOLDING MORE THAN
FIFTY PERCENT OF THE VOTING STOCK OF THE COMPANY HAVE AGREED IN WRITING TO
APPROVE THESE PROPOSALS, AND AS A RESULT, THE RECEIPT OF THE REQUIRED APPROVAL
IS NOT PRACTICALLY IN DOUBT.
<PAGE>
Only stockholders of record at the close of business on November 22, 1999
(the "Voting Record Date") are entitled to notice of and to vote at the Meeting.
A holder of shares of the Company's Common Stock is entitled to one vote, in
person or by proxy, for each share of the Company's Common Stock on all matters
properly brought before the Meeting. A list of such stockholders, arranged in
alphabetical order and showing the address of and the number of shares
registered in the name of each such stockholder, will be available for
examination by any stockholder for any purpose germane to the Meeting during
ordinary business hours for a period of at least ten days prior to the Meeting
at the offices of the Company at 7880 Bent Branch Drive, Suite 150, Irving,
Texas 75063. Prior to the actual voting thereof, a proxy may be revoked by the
person executing such proxy by filing with the Secretary of the Company an
instrument of revocation, by a duly executed proxy bearing a later date, or by
voting in person at the Meeting.
A FORM OF PROXY AND THE PROXY STATEMENT OF THE COMPANY RELATING TO THE
MEETING ARE ENCLOSED. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE MEETING,
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE,
WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES. YOUR STOCK WILL
BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY OR, IF
NO INSTRUCTIONS ARE GIVEN, YOUR EXECUTED PROXY WILL BE VOTED FOR PROPOSALS 1
THROUGH 5, IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS
CONTAINED IN THE PROXY STATEMENT. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN
PERSON IF YOU WISH, EVEN THOUGH YOU PREVIOUSLY RETURNED YOUR PROXY CARD. YOUR
PROMPT COOPERATION WILL BE GREATLY APPRECIATED.
By Order of the Board of Directors,
/s/ Jerry L. Sims, Jr.
--------------------------------------
Jerry L. Sims, Jr.,
SECRETARY
Irving, Texas
November 29, 1999
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
7880 BENT BRANCH DRIVE, SUITE 150
IRVING, TEXAS 75063
------------------------
PROXY STATEMENT FOR THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 10, 1999
------------------------
This Proxy Statement is being furnished to you as a stockholder of the
Company. The Board of Directors of the Company is soliciting your proxy in the
form enclosed to be used at the Meeting to be held at the law offices of
Hughes & Luce, L.L.P., 1717 Main Street, Suite 2800, Dallas, Texas 75201,
commencing at 10:00 a.m. local time for the purposes set forth in the
accompanying Notice of the Meeting. The Company's principal executive offices
are located at 7880 Bent Branch Drive, Suite 150, Irving, Texas 75063 and its
telephone number is (972) 830-1800. Stockholders of record at the Voting Record
Date are entitled to notice of and to vote at the Meeting. This Proxy Statement
and accompanying proxy are first being mailed to you on or about November 29,
1999.
PURPOSE OF MEETING
At the Meeting, action will be taken for the following purposes:
(1) To consider and vote on a proposal to approve (a) the Purchase
Agreement, (b) the terms of the Preferred F Shares, (c) the issuance by
the Company to the Questor Investors pursuant to the terms and subject to
the conditions of the Purchase Agreement of 46,750 Preferred F Shares;
and (d) the issuance by the Company of Common Stock, issuable if and when
the Preferred F Shares are converted into Common Stock. The maximum
number of shares of Common Stock issuable upon conversion of the 46,750
Preferred F Shares into Common Stock (assuming a conversion price of
$1.00 and subject to adjustment as provided in the Certificate of
Designation for the Preferred F Shares) is 46,750,000, or approximately
47% of the issued and outstanding shares of Common Stock following
conversion. On a fully diluted and as converted basis, the Questor
Investors will hold approximately 38% of the Company's Common Stock and
Common Stock equivalents;
(2) To consider and vote on a proposal to approve an amendment to the
Charter to increase the number of authorized shares of the Company's
Common Stock from 100,000,000 to 200,000,000;
(3) To consider and vote on a proposal to approve an amendment to the
Charter to increase the number of authorized shares of the Company's
Preferred Stock from 1,000,000 to 2,000,000;
(4) To consider and vote on a proposal to approve an amendment to the
Charter to remove the provision relating to classification of the Board
of Directors into three separate classes;
(5) To elect twelve directors to serve until the next annual meeting of
stockholders and each of their respective successors shall have been duly
elected and qualified; and
(6) To transact such other business as may properly come before the Meeting.
Items (1) through (5) constitute the "Proposals". We urge you to sign the
accompanying form of proxy and, immediately after reviewing the information
contained in this Proxy Statement, return it in the envelope provided for that
purpose. The Company does not know of any other matters that are to come before
the Meeting. If any other matters are properly presented at the Meeting,
however, the persons
1
<PAGE>
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their judgment.
RECORD DATE AND VOTING
Only holders of record of Common Stock and Preferred Stock at the close of
business on the Voting Record Date are entitled to notice of, and to vote at,
the Meeting. As of November 22, 1999, there were issued and outstanding
52,492,616 shares of Common Stock, 29,778 shares of Series B Preferred Stock,
77,300 shares of Series D Preferred Stock and 44,018 shares of Series E
Preferred Stock. Each holder of Common Stock will be entitled to one vote, in
person or by proxy, for each share of Common Stock outstanding in his or her
name on the books of the Company on the Voting Record Date on any matter
submitted to a vote of the Company stockholders. Each holder of Series B,
Series D and Series E Preferred Stock will be entitled to one vote, in person or
by proxy, for each share of Preferred Stock outstanding in his or her name on
the books of the Company on the Voting Record Date, on Proposal 3. The presence,
in person or by proxy, of holders of record of a majority of the shares entitled
to vote constitutes a quorum for action at the Meeting. Under applicable rules,
brokers who hold shares in street name do not have the authority to vote in
favor of Proposals 1, 2 or 3, if they do not receive voting instructions from
beneficial owners prior to the Meeting. Under applicable law, if a broker has
not received voting instructions with respect to certain shares and gives a
proxy for those shares, but does not vote the shares on a particular matter,
those shares will be treated as not affecting the outcome of the vote with
respect to that matter. Any stockholder that is present at the Meeting, either
in person or by proxy, but abstains from voting, will be counted for purposes of
determining whether a quorum exists.
VOTE REQUIRED
The affirmative vote of the holders of shares of Common Stock having a
majority of the voting power of the shares of Common Stock actually voting at
the Meeting, both in person or by proxy, is required to approve and adopt
Proposal 1. The affirmative vote of the holders of shares of Common Stock having
a majority of the voting power of the total issued and outstanding Common Stock
of the Company (regardless of the number of shares actually voting at the
Meeting), in person or by proxy, is required to approve Proposals 2 and 4. The
affirmative vote of the holders of (i) shares of Common Stock and Preferred
Stock, voting together, (ii) shares of the Preferred Stock, voting separately
and as a class, and (iii) the Series D Preferred Stock and the Series E
Preferred Stock, voting as separate series of Preferred Stock, in each case,
having a majority of the voting power of the total issued and outstanding shares
of such capital stock (regardless of the number of shares actually voting at the
Meeting), in person or by proxy, is required to approve Proposal 3. The Company
intends to redeem the Series B Preferred Stock (the current liquidation value of
which is approximately $150,000) to the extent that the holders thereof consent
to redemption. If they do not, the Series B Preferred Stock not repurchased will
remain outstanding and will continue to have priority and preference over the
other series of Preferred Stock, including the Series F Preferred Stock.
Accordingly, the affirmative vote of the holders of the Series B Preferred Stock
as a separate series is not required and is not being solicited. The affirmative
vote of the holders of shares of Common Stock, having a plurality of the voting
power of the Company, in person or by proxy, is required to elect directors
pursuant to Proposal 5. As a part of the Questor Transaction, the Questor
Investors and certain existing investors entered into a Stockholders and Voting
Agreement (see Proposal 1--Approval of the Questor Transaction and Issuance of
Shares) whereby shares in excess of 50% of the total issued and outstanding
shares agreed to vote for each of the Proposals. The holders of the Series D and
Series E Shares have unanimously agreed to approve each of the Proposals by
virtue of signing the Stockholders and Voting Agreement. ACCORDINGLY, AS A
PRACTICAL MATTER, THE RECEIPT OF STOCKHOLDER APPROVAL OF THE PROPOSALS IS NOT IN
DOUBT.
2
<PAGE>
PROXY SOLICITATION, REVOCATION AND EXPENSES
All proxies that are properly completed, signed and returned prior to the
Meeting will be voted as indicated on the proxy. If the enclosed proxy is signed
and returned, it may, nevertheless, be revoked at any time prior to the voting
thereof at your pleasure by either: (i) filing a written notice of revocation
received by the person or persons named therein, (ii) attending the Meeting and
voting the shares covered thereby in person, or (iii) delivering another duly
executed proxy dated subsequent to the date thereof to the addressee named in
the enclosed proxy. Shares represented by duly executed proxies in the
accompanying form will be voted in accordance with the instructions indicated on
such proxies, and, if no such instructions are indicated thereon, will be voted
for each of the Proposals.
The expense of preparing, printing and mailing this Proxy Statement and the
material used in this solicitation of proxies from you will be borne by the
Company. In addition to the use of the mails, proxies may also be solicited
personally, by telephone or facsimile by officers and regular employees of the
Company. The Company may reimburse banks, brokers and fiduciaries holding shares
in their names or in the names of nominees for their expenses in sending
soliciting materials to the beneficial owners of such shares and obtaining their
Proxies. The cost for such reimbursement is, at this time, unknown to the
Company but is anticipated to be minimal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has determined that each of the
Proposals is in the best interests of both the Company and its stockholders and
recommends that you vote "for" each of the Proposals.
3
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TABLE OF CONTENTS
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PURPOSE OF MEETING.......................................... 1
Record Date and Voting.................................... 2
Vote Required............................................. 2
Proxy Solicitation, Revocation and Expenses............... 3
Recommendation Of The Board Of Directors.................. 3
PROPOSAL 1: APPROVAL OF THE QUESTOR TRANSACTION AND ISSUANCE
OF SHARES................................................. 7
What is the Company Asking You to Approve and Why?........ 7
What is the Background of and the Board's Reasons for
Pursuing the Questor Transaction?....................... 7
What are the General Terms of the Purchase Agreement and
Related Agreements?..................................... 9
What are the Indemnification Obligations in the Purchase
Agreement?.............................................. 10
What Conditions are there to Closing the Questor
Transaction?............................................ 11
How is the Rights Plan being Amended?..................... 11
What Registration Rights will the Questor Investors
have?................................................... 12
What Fees and Expenses are involved in the Questor
Transaction?............................................ 12
How can the Purchase Agreement be Terminated?............. 12
What are the Principal Terms of the Preferred F Shares?... 12
What are the Principal Terms of the Stockholders
Agreement?.............................................. 14
What are the General Terms of the Stockholders and Voting
Agreement?.............................................. 16
How will the Company use the Proceeds from the Questor
Transaction?............................................ 16
What will happen to the Series B, D and E Shares and How
will the Terms of the Series F Shares be changed if the
Series B, D and E Shares are not Repurchased prior to
Closing?................................................ 16
How will the Terms of Certain Warrants be Amended after
Closing?................................................ 16
Who are the Questor Investors?............................ 17
How are the Bylaws being Amended?......................... 17
Why did the Board approve the Questor Transaction?........ 18
What are the Disadvantages of the Questor Transaction?.... 18
Why is the Company Asking for Your Approval?.............. 18
What does the Board Recommend with respect to this
Proposal?............................................... 19
PROPOSALS 2 AND 3: APPROVAL OF AMENDMENTS TO THE FOURTH
ARTICLE................................................... 20
What is the Company Asking You to Approve?................ 20
What are the Current Number of Outstanding Company
Shares?................................................. 20
What are the Reasons for the Amendments to the Fourth
Article?................................................ 20
Why did the Board Approve the Amendment to the Fourth
Article?................................................ 22
What does the Board Recommend with respect to these
Proposals?.............................................. 22
PROPOSAL 4: APPROVAL OF AMENDMENTS TO THE SIXTH ARTICLE..... 23
What are the Reasons for Amending the Sixth Article?...... 23
What does the Board Recommend with respect to this
Proposal?............................................... 23
PROPOSAL 5: ELECTION OF DIRECTORS........................... 24
What does the Board Recommend with respect to this
Proposal?............................................... 24
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. 25
Thayer Director Nominees.................................. 25
Questor Director Nominees................................. 26
Officers and Other Current Directors...................... 27
Security Ownership of Management and Certain Beneficial
Owners.................................................. 29
</TABLE>
4
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<TABLE>
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Stockholder and Voting Agreements......................... 31
DIRECTORS' MEETINGS AND COMPENSATION........................ 31
Board Committees and Meetings............................. 31
Compensation of Directors................................. 32
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions................. 32
EXECUTIVE COMPENSATION AND OTHER INFORMATION................ 33
Executive Officers of the Company......................... 33
Compensation Committee Report on Executive Compensation... 33
Summary Compensation Table................................ 35
Stock Option Plans........................................ 36
Option Grants and Holdings................................ 36
Employment Agreements..................................... 37
Separation Agreement...................................... 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
STOCK PRICE PERFORMANCE GRAPH............................... 41
SELECTED FINANCIAL DATA..................................... 42
FORWARD LOOKING STATEMENTS.................................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 44
Results of Operations..................................... 44
Liquidity and Capital Resources........................... 52
Credit Facility........................................... 53
Subordinated Indebtedness................................. 54
Note Receivable........................................... 55
Proposed Financing........................................ 55
Growth Strategies......................................... 55
YEAR 2000 UPDATE............................................ 56
General................................................. 56
The Project............................................. 56
Costs................................................... 57
Risks................................................... 57
QUANTITATIVE AND QUALITATIVE DICLOSURES ABOUT MARKET RISK... 58
UNAUDITED PRO FORMA FINANCIAL DATA.......................... 59
Unaudited Pro Forma Consolidated Condensed Balance
Sheet................................................... 60
Unaudited Pro Forma Consolidated Statements of
Operations.............................................. 61
COMPARATIVE CAPITAL STRUCTURE DATA.......................... 62
Unaudited Differences in September 30, 1999 and Pro Forma
Capital Structures...................................... 62
Unaudited Pro Forma Annual Impact on Net Income and Net
Income Available to Common Stock........................ 62
DEADLINE FOR STOCKHOLDER PROPOSALS AT 2000 ANNUAL MEETING... 63
</TABLE>
5
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<TABLE>
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PAGE
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<S> <C>
OTHER MATTERS............................................... 63
CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
APPENDICES
Appendix A--Purchase Agreement.......................... A-1
Appendix B--Amendment No. 1............................. B-1
Appendix C--Amendment No. 2............................. C-1
Appendix D--Certificate of Designation.................. D-1
Appendix E--Amended and Restated Bylaws................. E-1
Appendix G--Stockholders Agreement...................... G-1
Appendix H--Voting Agreement............................ H-1
</TABLE>
6
<PAGE>
PROPOSAL 1
APPROVAL OF THE QUESTOR TRANSACTION
AND ISSUANCE OF SHARES
WHAT IS THE COMPANY ASKING YOU TO APPROVE AND WHY?
You are being asked to approve the Questor Transaction, and specifically the
following elements which constitute Proposal 1:
(a) the Purchase Agreement and the terms of the Series F Shares;
(b) the issuance of 46,750 Preferred F Shares to the Questor Investors; and
(c) the issuance of shares of Common Stock upon the conversion of the
Preferred F Shares.
The Company needs stockholder approval of the Questor Transaction to obtain
needed cash capital. Since the merger of IQI Inc. and ATC Communications
Group, Inc. (renamed Aegis Communications Group, Inc.) in July 1998 (the
"Merger"), the Company has experienced operating losses. These losses have
prompted additional draws on the Company's revolving line of credit to the
extent that the Company has currently drawn all available funds from its
revolving line of credit. In addition, the operating losses have led to covenant
defaults under the Company's bank credit agreement with the Bank of Nova Scotia
("Scotiabank") and Credit Suisse First Boston ("CSFB") (the "Credit Agreement").
Moreover, recent revenue declines and net operating losses have placed pressure
on the Company's ability to open new call centers or expand operations in
existing centers. The Company intends to use the net proceeds from the sale of
the 46,750 Preferred F Shares primarily to reduce outstanding debt. Such
reduction will deleverage the Company and put the Company in a better position
to renegotiate or refinance its existing bank revolving credit agreement in
order to cure the current defaults, provide needed flexibility for the Company
under the financial covenants and access working capital to fund future
operations.
WHAT IS THE BACKGROUND OF AND THE BOARD'S REASONS FOR PURSUING THE QUESTOR
TRANSACTION?
During the fourth quarter of 1998 and the first quarter of 1999, several of
the Company's clients, including its largest client, significantly curtailed
service volumes in several of the programs provided by the Company. At the same
time, the Company began providing new services to several new clients and new
programs to certain existing clients. These events increased the volatility, and
the unpredictability, of the Company's revenues. In the face of increased
revenue volatility, the Company was unable to reduce its fixed operating
expenses sufficiently to avoid incurring substantial operating losses.
Additionally, the Company continued its development of two new client
service centers which were required to migrate positions dedicated to American
Express in its Addison, Texas client service center. The lease on the Addison
client service center expired on October 31, 1999. As a result of the increased
volatility in revenues in conjunction with the increased capital required to
establish two new client service centers, the Company's working capital
resources were severely depleted.
On March 30, 1999, Thayer Equity Investors III, L.P. ("Thayer Equity"), the
Company's largest shareholder and a current subordinated debt lender, provided
approximately $5.7 million in additional subordinated indebtedness to assist in
funding the Company's working capital needs. The additional indebtedness is
convertible into Common Stock at a conversion price of $1.15 per share.
Due to the net losses incurred in the fourth quarter of 1998 and the first
quarter of 1999, the Company's net tangible asset position declined to negative
$2.0 million on March 31, 1999. On April 14, 1999, Nasdaq notified the Company
that the Company failed to meet the continued listing requirement of
$4.0 million in minimum tangible net assets. Nasdaq asked the Company to provide
an explanation of how the Company intended to rectify the listing requirement
problem.
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In response to the need to fund prior operating losses, provide sufficient
working capital for the Company's ongoing operations, and improve the Company's
tangible net asset position, in May 1999, the Board determined that the Company
should explore its strategic alternatives, including an evaluation of various
alternatives that would enable the Company to increase its access to additional
working capital. The primary reasons for seeking an equity investment included a
need for additional capital to (1) pay off term and revolving debt and improve
flexibility under the Credit Agreement, (2) fund potential revenue growth and
required additional working capital, (3) provide for additional capital
investment required for new technology and new site development, and (4) avoid
the addition of debt to the Company's capital structure.
The Company, along with Thayer Equity, entered into conversations with
several investment banks to assess their capabilities for such an assignment and
to determine the financing alternatives available to secure additional working
capital. On May 13, 1999, the Company engaged Merrill Lynch & Company, Inc.
("Merrill Lynch") to assist the Company in securing a private placement of
equity securities of at least $20 million. The terms of this engagement were
amended in September 1999. As part of its engagement, the Company directed
Merrill Lynch to explore the other strategic alternatives available to the
Company in addition to equity financing, which included a merger, sale of
division or assets, joint venture or strategic alliance, or other business
combination.
During this process, the Company was in contact with Nasdaq regarding the
Company's plans and its proposals for rectifying the minimum tangible net assets
issue.
In an effort to reduce debt and improve the Company's tangible net asset
position, effective June 30, 1999, a group led by Thayer Equity (the "Thayer-led
group"), agreed to convert approximately $12.1 million of its subordinated debt
into two new series of convertible preferred stock. The 77,300 shares of Series
D Preferred Stock ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.00 per share, and
the 44,018 shares of Series E Preferred ($.01 par value per share, $100 per
share liquidation preference) are convertible into Company Common Stock at
$2.375 per share. Both series earn cumulative dividends (payable-in-kind in
additional shares of the respective series of Preferred Stock) at the annual
rate of 15%, and are non-voting except on specified matters. In consideration of
the conversion of the subordinated debt into Preferred Stock, the Company issued
the Thayer-led group warrants to purchase an additional 1,000,000 shares of
Common Stock at $0.90625 per share, the closing price of such stock on the
conversion date. The excess of the fair value of the convertible subordinated
debt extinguished over the fair value of the securities issued was
$6.3 million, which was recorded as an addition to paid-in capital as a result
of this capital transaction.
On August 6, 1999, the Company entered into the Fourth Amendment to the
Credit Agreement (the "Fourth Amendment") whereby Scotiabank and CSFB committed
to provide the Company an additional $7.5 million in term debt. The proceeds of
the additional loan were used for the Company's general corporate and working
capital needs. As part of the Fourth Amendment, Thayer Equity agreed to
guarantee the Company's additional $7.5 million of indebtedness. In
consideration of such guarantee, the Company issued Thayer Equity a warrant to
purchase up to 800,000 shares of the Company's Common Stock, exercisable only if
the guarantee is drawn upon and at an exercise price, to be based on the then
current market price of the Company's Common Stock. As part of its settlement of
an indemnification claim made by the Company related to the Merger, Thayer
Equity subsequently waived its right to this contingent warrant.
As a result of the Merrill Lynch process, the Company received preliminary
proposals from several parties, including one proposal regarding a potential
stock-for-stock merger with another company. The Board determined not to proceed
with the merger proposal due to the time frame required to close the merger, the
higher dilution dictated by the proposed terms of the merger and the belief that
the merger had a higher risk of non-consummation. After assessing its
alternatives, the Board decided in August 1999 to proceed with the proposal made
by Questor. After a period of exhaustive due diligence and extensive
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negotiation of the proposal, the Company entered into the Purchase Agreement
with the Questor Investors.
The primary reasons the Board selected the Questor Investors' proposal were:
(1) the Questor Investors' proposal represented a minority investment, which
allows the current shareholders a greater opportunity to participate in the
Company's potential growth and operating improvement; (2) assuming a conversion
price of $1.00 per share, the price that results in the largest potential number
of shares of Common Stock issuable on conversion of the Preferred F Shares, the
Questor Investors' proposal still represents a significant premium to the
current market price of the Common Stock and, if the Preferred F Shares are
converted, would result in less dilution as compared with the merger proposal;
(3) Questor has prior experience in enhancing the value of companies
experiencing operating and financial difficulties; and (4) the Questor
Investors' proposal required a shorter time frame and higher likelihood of
consummation.
As a consequence of continued operating losses and their impact on the
trading price of the Common Stock (the Company's stock price declined to less
than $1.00 per share, another continued listing requirement under the Nasdaq
rules), on September 17, 1999, Nasdaq informed the Company that the Company no
longer met certain minimum requirements for continued listing on the Nasdaq
National Market System or the Nasdaq SmallCap Market, and therefore, that Nasdaq
had determined that continued listing was no longer warranted. Accordingly, the
Company's Common Stock began trading over-the-counter on the National
Association of Securities Dealers' ("NASD's") Electronic Bulletin Board ("OTC
BB") effective September 20, 1999. The Company is in the process of appealing
the Nasdaq decision and, if unsuccessful in the appeal process, currently
anticipates reapplying for listing with the NASDAQ-AMEX Market Group at the
appropriate time. There can be no assurance that the Company will qualify for
continued listing or a new listing on Nasdaq.
On October 22, 1999 the Purchase Agreement was amended. Following the
execution of the Purchase Agreement, Aegis' financial results for July and
August 1999 were lower than anticipated. As a result, Questor and Aegis agreed
to set the low end of the conversion price range at $1.00 versus the $1.35
provided for earlier. On October 21, 1999, the last trade of Common Stock on the
OTC BB was executed at $0.6875. In addition, Questor's commitment was made
contingent on the Company's achievement of minimum earnings before interest,
taxes, depreciation and amortization of at least negative $150,000 for the
quarter ended September 30, 1999. The Company's financial performance for the
quarter ended September 30, 1999 exceeded this requirement and thus this
condition of the Purchase Agreement has been satisfied. The Company and the
Questor Investors also agreed to extend the termination date from December 31,
1999 to January 31, 2000. All other material terms and conditions of the
definitive agreement remain unchanged. Assuming a minimum conversion price of
$1.00 per share, the price that results in the largest potential number of
shares of Common Stock issuable on conversion of the Preferred F Shares, the
Questor Investors' proposal continues to represent a premium to the current
market price of the Common Stock.
The Company and the Questor Investors are discussing the possible sale of
additional Preferred F Shares to the Questor Investors at the closing under the
Purchase Agreement, but there can be no assurance that the Company will offer
such additional Preferred F Shares to the Questor Investors or that any such
offer will be accepted.
WHAT ARE THE GENERAL TERMS OF THE PURCHASE AGREEMENT AND RELATED AGREEMENTS?
The following summarizes certain terms of the Purchase Agreement dated
August 25, 1999 (as amended) by and among the Company, Questor Partners Fund II,
L.P., a Delaware limited partnership ("Fund II"), Questor Side-by-Side Partners
II, L.P., a Delaware limited partnership (the "Side-by-Side Fund"), and Questor
Side-by-Side Partners II 3(c)(1), L.P., a Delaware limited partnership (the
"3(c)(1) Fund" and together with Fund II and the Side-by-Side Fund, the "Questor
Investors"), Thayer Equity, TC Co-Investors LLC, a Delaware limited liability
company ("TC Co-Investors" and, together with Thayer
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Equity, "Thayer"), ITC Services Company ("ITC"), Edward Blank ("Blank"), trusts
created by Edward Blank as both grantor and trustee under Article Fourth of the
Edward Blank 1995 Grantor Retained Annuity Trust, dated December 29, 1995, a
trust organized under the laws of New Jersey, (the "Blank Trust" and, together
with Thayer, ITC and Blank, the "Existing Investors") and the Certificate of
Designation of Preferred F Shares (the "Certificate of Designation"). The
Company, the Existing Investors and the Questor Investors also entered into a
Letter Agreement ("Amendment No. 1") dated August 26, 1999 which amended the
Purchase Agreement in certain respects and set forth certain additional duties
and obligations, including those described below. The Company, the Existing
Investors and the Questor Investors entered into Amendment No. 2, dated
October 22, 1999 ("Amendment No. 2"), which further amended the Purchase
Agreement. This summary is qualified in its entirety by reference to these
documents. We have attached the Purchase Agreement, Amendment No. 1, Amendment
No. 2 and the Certificate of Designation as Appendices A, B, C and D
respectively for your convenience and encourage you to read all these documents.
Pursuant to the Purchase Agreement, the Company has agreed to issue 46,750
Preferred F Shares to the Questor Investors for an aggregate purchase price of
$46,750,000 (the "Purchase Price). The purchase and issuance of the Preferred F
Shares will take place at the Closing to be held promptly three business days
following the satisfaction of certain conditions to the Closing or at such other
date as the parties may mutually agree (the "Closing Date"). At the Closing
Date, subject to the terms and conditions of the Purchase Agreement, the Company
will deliver to the Questor Investors the Preferred F Shares in exchange for the
Purchase Price.
The Purchase Agreement contains customary representations and warranties
regarding the Company's corporate status, financial statements and SEC filings,
operations and other matters, including but not limited to the Board of
Directors taking all necessary action to approve the Questor Transaction and any
subsequent sales of shares by Questor Investors for purposes of Section 203 of
the Delaware General Corporation Law, which deals with board approval for
business combinations with interested stockholders, and the absence of any
material adverse change to the business, operations and financial condition of
the Company. The Purchase Agreement also contains customary covenants regarding
the operations of the Company prior to the Closing.
The Closing is subject to, among other conditions, your approval of the
issuance of the Preferred F Shares. Based on its evaluation of the Questor
Transaction, the Board of Directors has recommended that the Company's
stockholders vote for the issuance to the Questor Investors of the Preferred F
Shares and the issuance of shares of Common Stock upon the conversion of such
Preferred F Shares. In the event that the Company does not obtain stockholder
approval, the Company is not required to consummate the Closing. As a part of
the Questor Transaction, however, the Questor Investors and the Existing
Investors entered into a Stockholders and Voting Agreement whereby the Existing
Investors, who hold more than fifty percent of the voting stock of the Company,
agreed to vote for each of the Proposals, including Proposal 1. Accordingly, as
a practical matter, the receipt of stockholder approval is not in doubt.
The Preferred F Shares issued or to be issued in the Questor Transaction
will be issued in a transaction exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") and will, therefore,
be subject to transfer restrictions imposed by the Securities Act. However,
pursuant to the Purchase Agreement, the Company has granted the Questor
Investors certain rights to require the Company to register the Common Stock
issuable upon conversion of the Preferred F Shares for resale in the future. See
"What Registration Rights will the Questor Investors Have?" below.
WHAT ARE THE INDEMNIFICATION OBLIGATIONS IN THE PURCHASE AGREEMENT?
The Company and the Questor Investors have agreed to indemnify each other
from all damages asserted against, arising out of, imposed upon or incurred by
the other based upon a breach of any representation, warranty, agreement or
covenant of the indemnifying party in the Purchase Agreement and
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certain other specifically identified matters. All indemnification obligations
end thirty days after delivery to the Questor Investors of the Company's audited
consolidated financial statements for the fiscal year ended December 31, 2000,
other than representations and warranties as to tax matters and as to the
Company's capitalization and authorization of the Purchase Agreement and the
sale of the Series F Preferred and the Conversion Shares. The tax related
representations and warranties survive for the applicable statute of limitations
while the capitalization and authorization representations and warranties
survive indefinitely. The Company's indemnity obligations are limited in that it
is not required to indemnify the Questor Investors until the aggregate damages
to be indemnified exceed $450,000. At that point, the Company is responsible
from the $450,000 threshold up to a maximum of $15,000,000.
WHAT CONDITIONS ARE THERE TO CLOSING THE QUESTOR TRANSACTION?
The obligations of both the Questor Investors and the Company under the
Purchase Agreement are subject to the satisfaction or waiver of certain
conditions, including the following:
- The Company shall have obtained all necessary consents or amendments under
the Credit Agreement (the "Bank Approval") or shall have refinanced the
Credit Agreement (the "Refinancing"); this condition shall be satisfied if
there will be at least $15 million of immediately available funds under
the revolving credit facility under the Credit Agreement or under a new
credit agreement entered into in connection with the Refinancing, after
taking account of all limitations on borrowing thereunder;
- The Company and the Existing Investors shall have obtained all consents,
permits and waivers that are necessary or appropriate and there shall be
no legal proceedings that would prevent the Questor Transaction; and
- The Company's stockholders shall have approved Proposals 1 through 5.
The obligations of the Questor Investors under the Purchase Agreement are
also subject to the satisfaction or waiver of certain other conditions,
including the following:
- The correctness of the representations and warranties of the Company and
the Existing Investors in all material respects as of October 22, 1999
(the date of Amendment No. 2) and at the time of the Closing, and the
performance by the Company and the Existing Investors in all material
respects of all obligations and conditions required to be performed or
observed on or prior to the Closing;
- The receipt by the Company of resignations from its current directors and
the election of six directors designated by the Questor Investors and six
directors designated by Thayer; and
- The termination of (i) the Company's Rights Plan, (ii) its existing
registration rights agreement with the Existing Investors, and
(iii) certain warrants to purchase 800,000 shares of Common Stock held by
Thayer Equity. As part of its settlement of an indemnification claim made
by the Company related to the Merger, Thayer Equity has waived its right
to these warrants.
HOW IS THE RIGHTS PLAN BEING AMENDED?
A condition of the Purchase Agreement requires that the Rights Agreement
dated December 16, 1998 between the Company and Harris Trust & Savings Bank (the
"Rights Plan") be amended so that neither the entering into of the Purchase
Agreement nor any of the transactions contemplated by the Purchase Agreement
trigger the operation of the Rights Plan or result in the distribution of
separate rights certificates, the occurrence of a "Distribution Date" or Questor
or any of its affiliates being deemed to be an Acquiring Person. A "Distribution
Date" occurs upon the earlier of 10 days following the public announcement that
a person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding shares of Common Stock, or 10 business days following
the commencement of a tender offer or exchange offer
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that would result in a person or group beneficially owning 20% or more of such
outstanding shares of Common Stock. Subject to the Closing, the Purchase
Agreement also requires that the "Final Expiration Date" be amended to coincide
with the Closing so that, if the Questor Transaction were consummated, the
Rights Plan would terminate effective as of the Closing. The Board of Directors
approved these amendments at the same time it approved the Purchase Agreement.
WHAT REGISTRATION RIGHTS WILL THE QUESTOR INVESTORS HAVE?
The Company, upon written request from the holders of more than 50% of the
Preferred F Shares, has agreed to file and cause to become effective one
registration on a form other than Form S-3 and up to three registrations on
Form S-3 covering the Common Stock issued or issuable upon exercise or
conversion of the Preferred F Shares pursuant to the Purchase Agreement (the
"Conversion Shares") as more fully described in the Purchase Agreement (the
"Registrable Securities") held by the Questor Investors. The Questor Investors
may require a "shelf" registration that would remain effective for at least one
year. The Company further agreed to provide the Questor Investors with certain
"incidental", or "piggyback" registration rights, subject to rights of the
Company's underwriters to "cut back" the number of shares to be included in such
registrations.
At the same time the Company granted these rights to the Questor Investors,
the Company also granted the same rights to the Existing Investors as a group.
Previously, the Company had granted the Existing Investors certain demand and
piggyback registration rights, but with respect only to certain shares issued in
subordinated debt and warrant transactions. See "Certain Relationships and
Certain Transactions." The new grant extends these rights to all shares of
Common Stock held by the Existing Investors, including shares issued in
connection with the Merger that was consummated in July of 1998.
WHAT FEES AND EXPENSES ARE INVOLVED IN THE QUESTOR TRANSACTION?
The Company is required to pay a transaction fee of $1.7 million to Merrill
Lynch and a transaction fee of $1.7 million to Questor Management Company
("Questor"). The Company also is responsible for all of its own expenses in
connection with the Questor Transaction and for Questor's expenses of up to
$350,000.
HOW CAN THE PURCHASE AGREEMENT BE TERMINATED?
The Purchase Agreement can be terminated by: 1) the mutual written consent
of the Questor Investors and the Company; or 2) either the Questor Investors or
the Company, if the Closing has not occurred on or before January 31, 2000, with
certain exceptions.
WHAT ARE THE PRINCIPAL TERMS OF THE PREFERRED F SHARES?
The following summarizes certain rights and preferences of the Preferred F
Shares. The summary is qualified in its entirety by, and you should read it in
conjunction with, the complete terms and conditions contained in the Certificate
of Designation attached hereto as Appendix "D".
DIVIDENDS: The Preferred F Shares will be entitled to receive dividends, in
preference to all other capital stock of the Company, except for the Company's
Series B Voting Convertible Preferred Stock, par value $0.01 per share (the
"Preferred B Shares"), at the rate of 9.626% per annum, which will accrue and be
cumulative from their original issue date. The dividends on the Preferred F
Shares shall accrue on each share from its issuance on a daily basis, whether or
not earned or declared. To the extent that dividends have not been paid on any
March 31, June 30, September 30 or December 31 of any year, all such dividends
shall be added to the investment value of such share. The Series F Preferred
Shares will 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.
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LIQUIDATION PREFERENCE: In the event of the Company's liquidation,
dissolution or winding up, and there being assets or funds available for
distribution to the stockholders of the Company, the holders of the Series F
Preferred Shares will receive, in preference to the holders of any other Company
capital stock, except for the Preferred B Shares (the current liquidation value
of which is approximately $150,000), an amount equal to the investment value per
share ($1,000) of each Preferred F Share plus any accrued but unpaid dividends
("Liquidation Amount"), and will share ratably in any remaining assets of the
Company on an as converted basis.
REDEMPTION: To the extent allowed by law, the Company has the option to
redeem not less than 60% of all of the then outstanding Preferred F Shares, but
only after the fifth anniversary of their issuance and before the eighth
anniversary of their issuance, at a redemption price equal to the Liquidation
Amount. Furthermore, the holders of the Preferred F Shares may require that the
Company redeem each of the Preferred F Shares at the Liquidation Amount if there
is a change of control transaction. Change of control transactions include the
following:
1. the acquisition of 35% or more of the voting power or economic interests of
the voting securities of the Company by certain individuals, entities or
groups;
2. individuals, who at the beginning of any 12 consecutive month period
following the issuance of the Preferred F Shares constituted a majority of
the Company's Directors ceasing to be at least a majority of the directors,
with certain exceptions;
3. the approval by the Company's stockholders of a reorganization, merger or
consolidation, whereby the owners of the Company's voting power before such
transaction do not have more than 51% of the Company's voting power
afterwards; and
4. the sale or other disposition of assets representing 50% or more of the
assets of the Company and its subsidiaries in one transaction or a series of
related transactions (collectively, a "Change of Control Transaction").
As a consequence of the holders' ability to require redemption of the
Preferred F Shares in the event of a change of control transaction, for
accounting purposes the Preferred F Shares are classified as "redeemable
convertible preferred stock." Accordingly, the Preferred F Shares will not be
included in the shareholders' equity section of the Company's balance sheet.
CONVERSION RIGHTS: The holders of the Preferred F Shares shall have the
right to convert such shares at any time prior to the eighth anniversary of
their issuance, at the holder's option, into shares of Common Stock at a
conversion price of $1.506, subject to certain adjustments (the "Conversion
Price"). The Conversion Price is to be adjusted to the extent the Company's 1999
adjusted earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA") is less than or more than $17,000,000. Subject to certain
limitations, Adjusted EBITDA means, for the year ending December 31, 1999, the
sum derived from adding the Company's net income as set forth in its audited
consolidated statement of operations for such period and, subject to certain
limitations, the amounts deducted in determining such net income representing
amortization, income taxes, interest expense, depreciation, goodwill write-offs,
restructuring charges, certain transaction related expenses and certain other
expenses as discussed in more detail in the Certificate of Designation. For each
$500,000 (and/or fraction thereof) that the Company's Adjusted EBITDA is greater
than $17,000,000, the starting point for the Conversion Price will be increased
by $0.031; conversely, for each $500,000 the Company's Adjusted EBITDA is less
than $17,000,000, the starting point for the Conversion Price will be decreased
by $0.031. There is a floor and ceiling of $1.00 and $1.661, respectively, on
the starting point for the Conversion Price. Based on the Company's financial
performance to date and the financial data currently available to the Company,
the Company believes that the starting point for the Conversion Price is most
likely to be $1.00. Additionally, there is an automatic $0.005 reduction in the
Conversion Price on each of the first eight anniversaries from the date the
Preferred F Shares are first issued. The Conversion Price is also subject to
adjustment from time to time in
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the event of stock dividends or splits, the issuance of options, rights or
warrants with exercise prices below the fair market value of the Common Stock,
reclassifications, reorganizations, mergers, sales of assets or other events
that would otherwise dilute the number of shares into which the Preferred F
Shares are convertible. If not already converted, the Preferred F Shares will be
automatically converted into shares of Common Stock on the eighth anniversary of
their original issue date.
VOTING RIGHTS: So long as any Preferred F Share is outstanding, each holder
is entitled to vote in person or by proxy or written consent on all matters
voted on by holders of Common Stock voting together as a single class with other
shares entitled to vote thereon. With respect to any such vote, each Preferred F
Share shall have the number of votes per share as is equal to the number of
votes per share that such holder would be entitled to cast had such holder
converted his Preferred F Shares into Common Stock as of the record date for
such vote. For so long as there are Preferred F Shares issued and outstanding
with an aggregate investment value of at least $15,000,000, if a majority of the
holders of the Preferred F Shares so request, then the number of directors
constituting the Board of Directors shall be increased by two and the holders of
a majority of the Preferred F Shares shall have the exclusive right, voting as a
single class without regard to series, to elect two directors of the Company to
fill such positions, subject to the Stockholders Agreement limitations on the
Questor Investors' right to nominate directors. The Preferred F Shares do not
have any other voting rights except as required by Delaware law or as described
below under "Protective Rights."
PROTECTIVE RIGHTS: So long as any Preferred F Shares are outstanding, the
Company shall not take the following actions without the prior approval of at
least a majority of the then outstanding Preferred F Shares:
(a) Authorize, create or issue any new class or series of capital stock or
any other securities convertible into equity securities of the Company
(other than Common Stock) having a preference over, or being on parity
with, the Preferred F Shares with respect to voting dividends,
redemption, liquidation or dissolution of the Company;
(b) Increase or decrease (other than by redemption or conversion) the total
number of authorized Preferred F Shares;
(c) Increase or decrease the par value of the Preferred F Shares;
(d) Alter or change the powers, preferences or special rights of the
Preferred F Shares so as to affect them adversely;
(e) Engage in a Change of Control Transaction, provided that the rights of
the holders of Preferred F Shares pursuant to this provision shall
terminate at such time as the aggregate investment value of all the
Preferred F Shares outstanding is less than $5 million; or
(f) Declare or pay any dividend (whether in cash or in shares of Common
Stock or any other capital stock of the Company) on or declare or make
any other distribution, direct or indirect, on account of other capital
stock of the Company or set apart any sum for any such purposes.
The Preferred B, D and E Shares may be repurchased with the proceeds of the sale
of the Preferred F Shares to the extent permitted by the Bank Approval or the
Refinancing and approved by the Questor Investors. The Questor Investors have
indicated that they do not intend to approve the repurchase of the Preferred D
or E Shares using proceeds of the sale of the Preferred F Shares. The parties
have agreed to revise the Certificate of Designation to provide that the
Series F Shares have priority and preference over the Preferred D and E Shares
and will be subordinate to any Preferred B Shares not repurchased at or prior to
Closing regarding dividends and liquidation rights.
WHAT ARE THE PRINCIPAL TERMS OF THE STOCKHOLDERS AGREEMENT?
As a condition of the Purchase Agreement, the Company, the Existing
Investors and the Questor Investors agreed to enter into a new Stockholders
Agreement (the "Stockholders Agreement") attached as
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Appendix G. The Stockholders Agreement provides that the Existing Investors and
the Questor Investors must satisfy a "right of first offer" to the other prior
to a transfer of its shares to a third party. The Stockholders Agreement also
provides that the Questor Investors and the Existing Investors will provide each
other with certain "tag-along" rights in the event of a sale or transfer of
shares to a third party. The Existing Investors and the Questor Investors are
required to use their best efforts to vote all of their shares to elect and
continue in office twelve directors, six of whom are nominated by the Questor
Investors and six of whom are nominated by Thayer. The Questor Investors also
agreed that from and after the Closing they will use their best efforts to cause
their Board designees to abstain from voting on any Board action in connection
with the optional redemption of the Preferred F Shares. Further, the Existing
Investors agreed that from and after the Closing they will use their best
efforts to cause their Board designees to abstain from voting on any Board
action in connection with the repayment of the Promissory Note by and among IQI,
Blank and the Blank Trust dated April 16, 1998 in the original aggregate
principal amount of $1.0 million and the Promissory Note by and between IQI and
Thayer Equity dated April 16, 1998 in the original principal amount of
$2.0 million or the redemption or repurchase of any or all of either the
Preferred D Shares or the Preferred E Shares. Additionally, each committee of
the Board will be constituted so that the number of Questor Designees (as
defined in the Stockholders Agreement) and Existing Stockholder Designees (as
defined in the Stockholders' Agreement) on any such committee is as nearly as
possible in the same proportion as the number of Questor Designees and Existing
Stockholder Designees on the entire Board. The Stockholders Agreement and the
Bylaws also provides that certain major decisions will require the affirmative
vote of not less than three-fourths of the directors of the Board. Those
decisions consist of the following:
1. Issuing shares, including any indebtedness convertible into shares, or any
other form of equity in the Company or any subsidiary of the Company other
than a) granting options to directors or employees of the Company pursuant
to any incentive or other benefit plan adopted by the Board, b) issuing
shares of Common Stock pursuant to the exercise of such options and
c) issuing shares of Common Stock or any security, including any debt
convertible into shares of Common Stock, or any other form of equity in the
Company, in one or more offerings, where the aggregate purchase price for
all such issuances does not exceed $500,000.
2. Adoption of any stock-based employee benefit plan by the Company.
3. Incurring debt or entering into guarantees for borrowed money (excluding
trade payables) in excess of $2,500,000 in a 12 month period, subject to
certain exceptions.
4. Selling, leasing, pledging or granting a security interest or encumbrance in
all or substantially all of the Company's or any subsidiary of the Company's
assets, except in connection with the incurrence of indebtedness for
borrowed money that does not involve a major decision under 3 above;
5. Acquiring (whether through an asset purchase, merger, equity purchase or
otherwise) any assets (excluding acquisitions of raw materials and supplies
in the ordinary course of business) having a value, individually or in the
aggregate for any series of related transactions, in excess of $2,000,000;
6. Selling or otherwise disposing of any assets (excluding sales or other
dispositions of inventory in the ordinary course of business) having a
value, individually or in the aggregate for any series of related
transactions, in excess of $2,000,000;
7. Amending the By-laws or the Certificate of Incorporation of the Company;
8. Any Change of Control Transaction;
9. Executing or delivering any assignment for the benefit of creditors of the
Company;
10. Filing any voluntary petition in bankruptcy or receivership with respect to
the Company; or
11. Taking any action while there is a vacancy on the Board, including without
limitation the filling of such vacancy.
15
<PAGE>
WHAT ARE THE GENERAL TERMS OF THE STOCKHOLDERS AND VOTING AGREEMENT?
As a condition of the Purchase Agreement, the Questor Investors, the
Existing Directors and Codinvest Limited ("Codinvest") agreed to enter into a
Stockholders and Voting Agreement (the "Voting Agreement") attached as
Appendix H. The Voting Agreement requires that, while it is in effect, each
Company stockholder who is a party to such agreement will vote its shares of
Common Stock in favor of the Proposals, among other things. Each Existing
Investor also granted proxies to the Questor Investors to vote its shares to
such effect.
HOW WILL THE COMPANY USE THE PROCEEDS FROM THE QUESTOR TRANSACTION?
The Company intends to use the net proceeds from the sale of the 46,750
Preferred F Shares primarily to reduce outstanding debt. Such reduction will
deleverage the Company and put the Company in a better position to renegotiate
or refinance its existing bank revolving credit agreement in order to cure the
current defaults, provide needed flexibility for the Company under the financial
covenants and provide access to working capital to fund future operations.
Under the terms of the Purchase Agreement, as of the Closing, the Company is
required to have at least $15,000,000 of immediately available funds under the
revolving credit facility under the Credit Agreement or under the credit
agreement entered into in connection with the Refinancing after taking account
of all limitations on borrowing thereunder, including, without limitation, the
borrowing base. Either approval of the banks which are parties to the Credit
Agreement or a refinancing of the Credit Agreement is also a condition to
Closing for both the Company and the Questor Investors in the Purchase
Agreement.
The proceeds from the sale of the Preferred F Shares must be used
exclusively for 1) the reduction of outstanding debt under the Credit Agreement;
2) the repurchase of Series B, D and E Preferred Stock to the extent
a) permitted by the Bank Approval or the Refinancing and b) approved by the
Questor Investors; and 3) the payment of transaction fees and expenses. If
repurchased on or immediately following the Closing Date, the Preferred E Shares
must be repurchased in full before any portion of the Preferred D Shares may be
repurchased. The Questor Investors have indicated that they do not intend to
approve the repurchase of the Preferred D or E Shares using proceeds of the sale
of the Preferred F Shares.
WHAT WILL HAPPEN TO THE SERIES B, D AND E SHARES AND HOW WILL THE TERMS OF THE
VARIOUS SERIES OF PREFERRED STOCK BE CHANGED IF THE SERIES B, D AND E SHARES ARE
NOT REPURCHASED PRIOR TO CLOSING?
The Company's goal and intention is to redeem the Series B Preferred Stock
(the current liquidation value of which is approximately $150,000); however, to
date, the Company has been unable to redeem the Series B Preferred Stock. Any
Series B Preferred Stock not repurchased will remain outstanding and will
continue to have priority and preference over the other series of Preferred
Stock, including the Series F Preferred Stock.
The Company also has the right to use the proceeds from the sale of the
Series F Shares to redeem the Series D and E Preferred Stock (the current
redemption value of which is approximately $7,730,000 and $4,401,800, plus
accrued and unpaid dividends, respectively), subject to Bank Approval and the
Questor Investors' approval. The Questor Investors have indicated that they do
not intend to approve the redemption of the Series D and Series E Preferred
Stock using the proceeds of the Preferred F Shares. Accordingly, the parties are
required under the terms of the Purchase Agreement to revise the Certificate of
Designation to provide that the Series F Shares will have priority and
preference over the Preferred D and E Shares and will be subordinate to the
Series B Shares that are not repurchased regarding dividend and liquidation
rights.
16
<PAGE>
HOW WILL THE TERMS OF CERTAIN WARRANTS BE AMENDED AFTER CLOSING?
In connection with the negotiation of the Questor Transaction, the Company
agreed that if subsequent to the Closing it repays, prior to maturity, the
Promissory Note, dated as of December 17, 1997, made by IQI and payable to the
Blank Trust, in the principal amount of $191,400, and/or the Promissory Note,
dated as of December 1997, made by IQI and payable to Blank, in the principal
amount of $808,600, then the Company will amend the related Stock Purchase
Warrant, dated as of December 17, 1997, issued by IQI to Blank, to permit the
warrant to be exercised independently of the Promissory Note. Under its current
terms, such warrant would expire upon repayment of the Promissory Notes.
WHO ARE THE QUESTOR INVESTORS?
The Questor Investors are private investment funds managed by Questor based
in Southfield, Michigan. Questor and its affiliate, Questor Management Company
(Delaware) ("Questor Management"), manage over $1 billion of equity investment
funds created to bring capital, turnaround and management expertise to non-core
units of Fortune 1000 companies, businesses yet to realize their full potential
and underperforming, and even distressed, companies.
The portfolio companies of funds managed by Questor and Questor Management
include Schwinn/ GT Corp., a leading worldwide supplier of high quality cycling
and fitness equipment, AP Automotive Systems, one of the world's largest
integrated suppliers of automotive exhaust systems, and Channel Master, the
world's largest and leading manufacturer of antenna systems, satellite dishes
and related electronics and other equipment.
Questor takes an active role in the portfolio companies of the funds it
manages. Typically, Questor develops a profit-improvement or restructuring plan
and takes an active role in assisting management to implement its plans. This
level of involvement leverages Questor's management and turnaround expertise.
Questor's approach allows it to identify additional issues that need to be
addressed to continue the process of management, operational, and financial
improvement towards enhanced profitability and valuation.
For a description of the business backgrounds of certain Questor principals
and representatives, namely, Henry L. Druker, Michael D. Madden, Peter D.
Fitzsimmons, Robert D. Denious, Dean Anderson, and Kevin J. Prokop, see
"Directors and Executive Officers of the Company--Questor Designees."
HOW ARE THE BYLAWS BEING AMENDED?
Pursuant to the Purchase Agreement, subject to the Closing, the Company's
bylaws will be amended and restated with the following changes (See
Appendix E):
- The Annual Stockholders meeting will be held on the third Thursday during
April or at such other date and time as may be selected by the board of
directors.
- Holders of a majority of the issued and outstanding stock entitled to
vote, present in person or represented by proxy, will constitute a quorum
for a stockholders meeting.
- The number of directors on the board (no fewer than two nor more than
twelve) may be changed by either the board of directors or stockholders.
The first board shall consist of twelve directors. At the next annual
meeting following the occurrence of the time at which the total ownership
by either the Existing Investors and certain of their transferees or the
Questor Investors and certain of their transferees in the Company falls
below 25% of the total ownership of all such parties combined (the "First
Break Point"), the number of directors will be reduced from twelve to
nine.
- Any major decision (as described above under "What are the Principal Terms
of the Stockholders Agreement?") must be approved by the affirmative vote
of not less than three-fourths (or in the event that the number of
directors constituting the entire board is reduced to nine, by the
affirmative vote of not less than two thirds) of the directors then
serving on the board.
17
<PAGE>
- Each committee of the Board will be constituted so that the number of
Questor Designees (as defined in the Stockholders Agreement) and Existing
Stockholder Designees (as defined in the Stockholders' Agreement) on any
such committee is as nearly as possible in the same proportion as the
number of Questor Designees and Existing Stockholder Designees on the
entire Board.
WHY DID THE BOARD APPROVE THE QUESTOR TRANSACTION?
The Board unanimously approved the Questor Transaction and believes it is in
the best interests of both the Company and its stockholders. THEREFORE, THE
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF PROPOSAL 1.
In reaching its determination to approve the Questor Transaction, the Board
considered a variety of factors, although it did not assume any relative or
specific weight to the factors considered. However, no assurances can be given
that the Company will realize all of the benefits described below if the
proposed Questor Transaction is consummated. The factors considered included the
following:
1. pay down term and revolving debt thereby reducing financial leverage;
2. fund potential revenue growth and required additional working capital;
3. provide for additional capital investment required for new technology
and new site development; and
4. avoid the addition of debt to the Company's capital structure.
The primary reasons the Company selected the Questor Investors' proposal
were: (1) the Questor Investors' proposal represented a minority investment,
which allows the current shareholders a greater opportunity to participate in
the Company's potential growth and operating improvement; (2) assuming a
conversion price of $1.00 per share, the price that results in the largest
potential number of shares of Common Stock issuable on conversion of the
Preferred F Shares, the Questor Investors' proposal continues to represent a
premium to the current market price of the Common Stock and, if the Preferred F
Shares are converted, would result in less dilution as compared with the merger
proposal; (3) Questor has prior experience in enhancing the value of companies
experiencing operating and financial difficulties; and (4) the Questor
Investors' proposal required a shorter time frame and higher likelihood of
consummation.
WHAT ARE THE DISADVANTAGES OF THE QUESTOR TRANSACTION?
The Board considered and discussed certain potential negative factors and
risks that could arise or do arise from the Questor Transaction. These included,
among others, the dilution to existing stockholders, the costs involved in
connection with consummating the Questor Transaction, the time and effort
required of management to consummate the Questor Transaction, the right of the
Questor Investors to designate six directors and to influence the Company's
board of directors, the potential adverse consequences of the Company's
concentration of ownership among a small number of stockholders, including the
dilution in each current stockholder's percentage ownership in the Company, and
the risk that the benefits of the proposed transaction might not be fully
realized. The Questor Investors and the Existing Investors would also, through
their ownership of voting securities and their control of the Board of
Directors, be able to block major transactions, including possible change of
control transactions. The Board believes, however, that the benefits and
advantages of the proposed transaction outweigh the negative factors and risks.
In view of the wide variety of factors, both positive and negative, considered
by the Board, the Board did not find it practicable to quantify or otherwise
assign weights to the specific factors considered.
WHY IS THE COMPANY ASKING FOR YOUR APPROVAL?
The Purchase Agreement requires the Company to seek your approval of the
Questor Transaction and the sale of the Preferred F Shares to the Questor
Investors.
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<PAGE>
WHAT DOES THE BOARD RECOMMEND WITH RESPECT TO THIS PROPOSAL?
THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS ADVISABLE AND IN THE
BEST INTERESTS OF BOTH THE COMPANY AND ITS STOCKHOLDERS FOR THE REASONS STATED
ABOVE. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THIS PROPOSAL.
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<PAGE>
PROPOSALS 2 AND 3
APPROVAL OF AMENDMENTS TO THE
FOURTH ARTICLE
WHAT IS THE COMPANY ASKING YOU TO APPROVE?
In contemplation of the Questor Transaction, but subject to the Closing of
such transaction, the Board of Directors also approved an amendment to the
Fourth Article of the Charter to increase the total number of shares of all
classes of stock which the Company may issue from 101,000,0000 to 202,000,000,
consisting of increasing the authorized shares of Common Stock from 100,000,000
to 200,000,000 shares (Proposal 2), and increasing the authorized shares of
Preferred Stock from 1,000,000 shares to 2,000,000 shares, which may be issued
in such series and such amounts, and subject to such rights and preferences, as
the Board of Directors shall approve from time to time (Proposal 3). The Board
of Directors believes that these two Proposals are advisable and in the best
interests of both the Company and its stockholders and recommends a vote "for"
these two Proposals.
WHAT ARE THE CURRENT NUMBER OF OUTSTANDING COMPANY SHARES?
As of October 31, 1999, the Company had the following number of authorized,
and issued and outstanding, shares of the following capital stock:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED OUTSTANDING
----------- -----------
<S> <C> <C>
Common Stock........................................ 100,000,000 52,492,616
Series B Preferred Stock............................ 29,778 29,778
Series D Junior Participating Preferred Stock....... 100,000 --
Series D Preferred Stock............................ 231,902 77,300
Series E Preferred Stock............................ 132,053 44,018
Undesignated Preferred.............................. 506,267 --
</TABLE>
The Series B Preferred Stock is convertible into Common Stock at a rate of
two shares of Common Stock for each share of Series B Preferred Stock held; the
Series D Junior Participating Preferred Stock is reserved pursuant to the
Company's Stockholder Rights Plan, which has been amended to terminate
concurrently with the closing of the Questor Transaction; the Series D Preferred
Stock is convertible at a conversion price of $2.00 per share (which is
divisible upon conversion into the Series D Preferred Shares' investment value
of $100 per share); and the Series E Preferred Stock is convertible into Common
Stock at a conversion price of $2.375 per share (which is divisible upon
conversion into the Series E Preferred Shares' investment value of $100 per
share). In addition, the Company has outstanding $6,021,498 of convertible
subordinated debt which is convertible into Common Stock at a conversion price
of $1.15 per share. The Company also has outstanding options and warrants to
purchase an additional 11,018,341 shares of Common Stock.
WHAT ARE THE REASONS FOR THE AMENDMENTS TO THE FOURTH ARTICLE?
PROPOSAL 2. With the issuance of 46,750 Preferred F Shares, which are
convertible into Common Stock at a conversion price ranging from $1.00 to $1.661
(depending on certain adjustments and subject to certain further adjustments as
discussed under "What are the Principal Terms of the Preferred F Shares?"), the
Company will need additional shares of authorized but unissued Common Stock to
reserve for issuance upon the conversion of various series of Preferred Stock,
warrants, employee stock options and future issuances of Common Stock for
capital formation, acquisition, employee incentives and other corporate
purposes. The Preferred F Shares shall be convertible into the number of shares
of Common Stock equal to the Conversion Price, which management currently
expects will be $1.00 initially, divided into the Preferred F Shares "Investment
Value," comprised of $1,000 per share plus accrued but unpaid
20
<PAGE>
dividends. Assuming a Conversion Price of $1.00 per share, the maximum number of
shares of Common Stock issuable upon conversion of the 46,750 Preferred F Shares
into Common Stock (subject to adjustment as provided in the Certificate of
Designation of the Preferred F Shares) is currently 46,750,000, or approximately
47% of the issued and outstanding shares of Common Stock following conversion.
On a fully diluted and as converted basis the Questor Investors will hold
approximately 38% of the Company's Common Stock and Common Stock equivalents.
PROPOSAL 3. The Board of Directors believes that it is in the Company's and
its stockholders' best interests to authorize additional shares of "blank check"
preferred stock, which the Company could use to raise additional equity capital,
acquire other companies or fulfill other corporate purposes.
Accordingly, the Board of Directors has approved the following amendment,
and recommends your adoption and approval of this amendment. Article Fourth, as
recommended to be amended, will provide as follows:
ARTICLE FOURTH
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue shall be 202,000,000 shares,
consisting of (a) 200,000,000 shares of common stock, $.01 par value per
share ("Common Stock"), and (b) 2,000,000 shares of preferred stock, $.01
par value per share ("Preferred Stock").
A. Shares of Preferred Stock may be issued from time to time in one or
more series as authorized by the Board of Directors, each such series to
have such designations as may be fixed by the Board of Directors prior to
the issuance of any shares thereof. Each such series shall have such voting
powers, full or limited, and such designations, preferences and relative,
participating, optional or other special rights, terms, qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
Certificate of Incorporation or any amendment thereto, or in the resolution
or resolutions providing for the issuance of such stock adopted by the Board
of Directors. The Preferred Stock of any series shall or may be, without
limitation, (a) subject to redemption at such time or times and at such
price or prices; (b) entitled to receive dividends at such rates, on such
conditions and at such times; (c) entitled to such rights upon the
dissolution of, or upon the distribution of the assets of, the Corporation;
(d) entitled to such voting rights; (e) subject to or entitled to such
preferences; (f) subject to or entitled to such sinking fund provisions; and
(g) made convertible into, or exchangeable for, shares of any other class or
classes, or any other series of the same or any other class or classes of
stock of the Corporation at such price or prices or at such rates of
exchange and with such adjustments, as shall or may be provided, stated or
expressed in the resolution or resolutions adopted by the Board of Directors
of the Corporation providing for the issue of such series. Subject to the
express terms of any other series of Preferred Stock outstanding at the
time, the Board of Directors may increase or decrease the number of shares
or alter the designation or classify or reclassify any unissued shares of a
particular series of Preferred Stock by fixing or altering in any one or
more respects from time to time before issuing the shares any terms, rights,
restrictions and qualifications of the shares.
B. The Common Stock of the Corporation shall be subject to the prior
rights of the Preferred Stock as may be set forth in the resolution or
resolutions by the Board of Directors providing for the issuance of the
Preferred Stock. Except for such voting rights as may be provided for in the
resolution or resolutions creating one or more series of Preferred Stock,
voting rights solely shall be in the Common Stock. Cumulative voting in any
election of directors, regardless of class or series, is hereby expressly
denied.
C. By resolutions duly adopted by the Corporation's Board of Directors,
on or prior to the date hereof, the Corporation has designated the
following: (a) 29,778 shares of Preferred Stock as Series B Preferred Stock;
(b) 231,902 shares of Preferred Stock as Series D Preferred Stock;
(c) 132,053 shares
21
<PAGE>
of Preferred Stock as Series E Preferred Stock; and (d) 46,750 shares of
Preferred Stock as Series F Preferred Stock.
Paragraph C of the amended Article Fourth will be revised as is appropriate
to reflect the actual redemption or elimination of any of the existing series of
Preferred Stock based on the uses of proceeds derived from the Questor
Transaction. As indicated above, preferred stock will be issuable from time to
time in such series and in such amounts, and subject to such rights and
preferences, as the Board of Directors shall determine prior to issuance without
further action or approval by the stockholders ("Blank Check Preferred"). These
rights and preferences can be superior to those of Common Stock and include,
without limitation, dividend preferences, special voting rights, rights to
convert into Common Stock, redemption rights, and priority over Common Stock on
distributions of assets in the event of liquidation or dissolution of the
Company.
Although the Board of Directors is not recommending increasing the number of
shares of authorized preferred stock for such purpose, a series of Preferred
Stock could also be used to create voting impediments or to frustrate the
purposes of persons seeking to effect a merger or otherwise gain control of the
Company. If used for such an anti-takeover purpose, such series of Preferred
Stock could be privately placed with persons affiliated with the Company or its
management with an agreement or understanding as to the manner in which the
shares of such series of Preferred Stock would be voted. The Company does not
currently intend to create such a series of Preferred Stock with such features
at this time, although this intention could change in the future depending on
the facts and circumstances then present.
The issuance of new series of Preferred Stock from time to time would likely
affect the holders of Common Stock by taking priority as to distributions by the
Company of dividends or of assets remaining after the payment of creditors upon
the liquidation or dissolution of the Company. In addition, special voting
rights and rights to convert Preferred Stock into Common Stock would reduce the
voting power of holders of the Common Stock.
WHY DID THE BOARD APPROVE THE AMENDMENT TO THE FOURTH ARTICLE?
The Board of Directors adopted the amendment to the Fourth Article in
connection with the Questor Transaction, and the approval of the amendment is a
condition to the consummation of the Questor Transaction. In approving
Proposal 2, the Board in part was simply recognizing the need for additional
shares of Common Stock to satisfy the Company's possible obligations under the
terms of the Preferred F Shares. In approving both Proposals 2 and 3, the Board
of Directors determined that it is in the best interests of both the Company and
its stockholders to allow the Company more flexibility in its capital structure,
to enable the Company to meet its obligations with respect to shares of
convertible securities, warrants and options, and generally to enable the
Company to use its capital stock to raise cash as necessary, acquire other
companies, continue providing equity incentives to its employees and fulfill
other corporate purposes. Consequently, the Board of Directors believes that
approval of the increase in both the authorized Common Stock and Preferred Stock
is in the best interests of both the Company and its stockholders and recommends
your approval of the amendment to the Fourth Article to the Charter.
WHAT DOES THE BOARD RECOMMEND WITH RESPECT TO THESE PROPOSALS?
THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS ADVISABLE AND IN THE
BEST INTERESTS OF BOTH THE COMPANY AND ITS STOCKHOLDERS FOR THE REASONS STATED
ABOVE. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THIS PROPOSAL.
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<PAGE>
PROPOSAL 4
APPROVAL OF AMENDMENTS TO THE
SIXTH ARTICLE
WHAT ARE THE REASONS FOR AMENDING THE SIXTH ARTICLE?
In contemplation of the Questor Transaction, but subject to the Closing of
such transaction, the Board of Directors also approved an amendment to the Sixth
Article of the Charter to remove the provisions relating to the classification
of the Board of Directors into three classes. The Company's stockholders
approved amendments to the Charter in August 1999 to implement a classified
board to help assure the continuity and stability of the Company's Board and the
Company's business strategies and policies. If the Questor Transaction is
consummated, however, Questor and its affiliates will possess approximately 47%
of the voting power, and Thayer and its affiliates will possess approximately
20% of the voting power, and pursuant to the terms of the Stockholders
Agreement, each group is obligated to vote all of its respective shares in favor
of a Board consisting of twelve members, six nominees of which are designated by
each of the Questor Investors and Thayer. Consequently, the objectives of the
classified board will be met since the Questor Investors and Thayer will be able
to ensure the continuity of Board representation and the stability of the
Company's business strategies and policies. Moreover, the Questor Investors made
the removal of the classification provisions a closing condition to the Purchase
Agreement. Accordingly, the Board of Directors has recommended the adoption and
approval of this amendment by the Stockholders of the Company. Article Sixth, as
contemplated to be amended, will provide as follows:
SIXTH: NUMBER, ELECTION AND TERMS OF DIRECTORS. Subject to the rights, if
any, of the holders of any series of Preferred Stock to elect additional
directors under circumstances specified in a Preferred Stock designation,
the number of directors of the Corporation will not be less than two nor
more than twelve and will be fixed from time to time in the manner described
in the bylaws of the Corporation. Each director will be elected for a
one-year term and until his or her successor has been duly elected and
qualified.
WHAT DOES THE BOARD RECOMMEND WITH RESPECT TO THIS PROPOSAL?
THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS ADVISABLE AND IN THE
BEST INTERESTS OF BOTH THE COMPANY AND ITS STOCKHOLDERS FOR THE REASONS STATED
ABOVE. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THIS PROPOSAL.
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<PAGE>
PROPOSAL 5
ELECTION OF DIRECTORS
The Meeting will also include the election of directors. Currently, each
director serves until the annual meeting of the Company's stockholders (as
determined by which class such director falls within) and until the director's
successor is duly elected and qualified. Effective upon Closing, all eleven
current directors of the Company will resign, and the nominees for a
newly-elected Board are Henry L. Druker, Michael D. Madden, Peter D.
Fitzsimmons, Robert D. Denious, Dean Anderson, Kevin J. Prokop, Frederic V.
Malek, John R. Birk, Michael G. Santry, Edward Blank, Stephen A. McNeely and
Paul G. Stern.
Shares represented by proxies returned duly executed will be voted, unless
otherwise specified, in favor of the twelve nominees for the Board as described
herein. The proxies cannot be voted for more than twelve nominees. The nominees
have indicated that they are able and willing to serve as directors. If any (or
all) such persons should be unable to serve, the persons named in the enclosed
proxy, unless otherwise indicated on the proxy, will vote the shares covered
thereby for such substitute nominee (or nominees) as the Board may select.
Stockholders may withhold authority to vote for any nominee by entering the name
of such nominee in the space provided for such purpose on the proxy card. For
biographical and other information regarding the nominees, please see "Directors
and Executive Officers of the Company".
WHAT DOES THE BOARD RECOMMEND WITH RESPECT TO THIS PROPOSAL?
THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS ADVISABLE AND IN THE
BEST INTERESTS OF BOTH THE COMPANY AND ITS STOCKHOLDERS FOR THE REASONS STATED
ABOVE. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
ELECTION OF EACH OF THE NOMINEES.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of all directors and
executive officers of the Company as of October 31, 1999, as well as all
positions and offices held by each such person and his term in each such
position or office, and the names and ages of all nominees for director:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY OR SUBSIDIARIES SINCE
- ---- -------- ------------------------------------------------ --------------
<S> <C> <C> <C>
John R. Birk*........... 48 Chairman of the Board May 1999
Stephen A. McNeely*..... 53 President and Chief Executive Officer and August 1997
Director
Matthew S. Waller....... 37 Chief Financial Officer March 1997
Director October 1997
Thomas J. Flynn......... 47 President of Elrick & Lavidge Marketing Research October 1998
Richard M. March 1999
Interdonato........... 50 Chief Operations Officer/Executive Vice
President of Teleservices Operations
William F. December 1996
Bergeron, Jr.......... 38 Senior Vice President of Technology
Edward Blank*........... 64 Director July 1998
Daniel H. Chapman....... 54 Director July 1998
Drew Lewis.............. 67 Director July 1998
David L. Malcolm........ 44 Director July 1998
Frederic V. Malek*...... 62 Director July 1998
Darryl D. Pounds........ 49 Director March 1996
Michael G. Santry*...... 51 Director February 1986
Paul G. Stern*.......... 60 Director July 1998
Henry L. Druker*........ 46 Questor Nominee Not applicable
Michael D. Madden*...... 50 Questor Nominee Not applicable
Peter D. Fitzsimmons*... 42 Questor Nominee Not applicable
Robert D. Denious*...... 38 Questor Nominee Not applicable
Dean Anderson*.......... 34 Questor Nominee Not applicable
Kevin J. Prokop*........ 31 Questor Nominee Not applicable
</TABLE>
- ------------------------
* DIRECTOR NOMINEE
THAYER DIRECTOR NOMINEES
JOHN R. BIRK was elected as Chairman of the Board of the Company in
May 1999. Since February 1996, Mr. Birk has been an operating executive with
Evercore Partners, Inc., which, in addition to making private equity
investments, provides merger, acquisition and strategic restructuring advice to
Fortune 500 companies. In 1995, Mr. Birk became President of Ideon Group, Inc.
following Ideon's acquisition of Wright Express Corp., where he was President,
CEO and a director from 1992 through 1995. From 1988 to 1992, Mr. Birk was
President, COO and a director of ADVO, Inc., the publicly-traded direct mail and
marketing services company. Prior to that, he served in a variety of senior
executive positions with Sprint, Inc. including Group President--Western Group,
President--US Sprint Northeast Division, and President of US Telecom
Communications Services Co. Mr. Birk also has held executive and management
positions with MCI, the Pepsi Cola Company and Procter & Gamble. Mr. Birk is a
past Chairman of
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<PAGE>
National Leisure Group, Inc. and Wright Express Corp. He currently serves on the
boards of Specialty Products & Insulation Co., and T. O. Richardson Mutual
Funds.
STEPHEN A. MCNEELY has been President and Chief Executive Officer of the
Company since August 1997. Prior to joining the Company, between June 1996 and
August 1997, he was President and CEO of Keystone Communications Group, the
leading U.S. provider of worldwide broadcast services. From 1995 to 1996,
Mr. McNeely was President and CEO of PMG Equities, Inc. From 1991 to 1995, he
was President and CEO of Patrick Media Group, Inc. Mr. McNeely has held the
position of President and CEO in the automotive industry as well, with companies
such as GE Capital Resale Service (GECARS) (from 1989 to 1991) and Tenneco
Automotive Retail Services (a division of Tenneco Automotive, Inc.) (from 1987
to 1989). In addition, Mr. McNeely held a wide variety of senior management
positions with Exxon Corporation from 1968 to 1985. Mr. McNeely currently sits
on the Board of Directors of the Advertising Council and is the Campaign
Director for the Coalition of Organ and Tissue Donation.
EDWARD BLANK, former Vice Chairman and founder of IQI, is one of the
pioneers of the telemarketing industry. He founded IQI's predecessor company in
1968, and, under his direction, IQI grew to be one of the largest telemarketers
in the U.S. Prior to establishing IQI, Mr. Blank was associated with Litton
Industries, Benton & Bowles Advertising and NBC in senior marketing research
capacities.
FREDERIC V. MALEK has been a director since July 1998. Mr. Malek founded
Thayer Capital Partners in 1991 and co-founded Thayer Equity
Investors III, L.P. in 1995. From 1989 to 1991, Mr. Malek was President and then
Vice Chairman of Northwest Airlines. Prior to that time, Mr. Malek served as
President of Marriott Hotels and Resorts from 1980 to 1988. Mr. Malek currently
serves as director of American Management Systems, Inc., Automatic Data
Processing Corp., CB Richard Ellis Services, Inc., FPL Group, Inc., Global
Vacation Group, Inc., HCR Manor Care, Inc., Northwest Airlines Corp., and
various PaineWebber mutual funds.
MICHAEL G. SANTRY has been a director of the Company since February 1986 and
served as Co-Chairman of the Board from September 1996 through May 1999.
Mr. Santry previously held the positions of President and Chief Executive
Officer of the Company from February 1986 through September 1996 and
October 1997 through July 1998, and was Chief Financial Officer of the Company
from February 1986 through September 1996. Mr. Santry founded Chartwell
Group, Inc., a Dallas based investment firm, in 1996 and has served as its
Chairman of the Board since that time. Since 1980, Mr. Santry has been President
and a director of Lakewood Financial Consultants, Inc., a privately held
corporation providing financial consulting services.
PAUL G. STERN has been a director of the Company since July 1998 and served
as Co-Chairman of the Board from that time through May 1999. Dr. Stern
co-founded Thayer Equity in 1995. Prior to that, Dr. Stern was a Special Limited
Partner at Forstmann Little & Co. From 1989 until 1993, Dr. Stern served as the
Chairman and CEO of Northern Telecom Ltd. Prior to that time, Dr. Stern served
as President and Chief Operating Officer of Burroughs (later Unisys)
Corporation, Corporate Vice President and later President of Commercial
Electronics Operations at Rockwell International Corporation and Chairman and
Chief Executive Officer of Braun AG in Germany. Dr. Stern serves on the Board of
Dow Chemical Company, MLC Holdings, Inc., Software AG Systems, Inc., and
Whirlpool Corporation.
QUESTOR DIRECTOR NOMINEES
HENRY L. DRUKER has been a principal of Questor and Questor Management,
managers of private equity investment funds, since January 1999. Mr. Druker was
a managing director of Questor Management from 1995 to January 1999. Prior to
joining Questor and Questor Management, Mr. Druker was a principal with Jay
Alix & Associates from 1992 to 1995. Previously, he held positions as an
associate in corporate finance at Goldman, Sachs & Co., a managing director and
head of the leveraged buyout group at L.F. Rothschild, Inc. and a partner in the
New York office of Toronto-based merchant bank Gordon Capital.
26
<PAGE>
MICHAEL D. MADDEN has been a principal of Questor and Questor Management
since March 1999. Prior to joining Questor, from August 1996 to March 1999,
Mr. Madden was an Executive Director of Beacon Group Holdings L.L.C., a New York
merchant banking and financial advisory firm specializing in principal
transactions involving the natural resources, healthcare and financial services
industries. Previously, Mr. Madden was Vice Chairman of PaineWebber Incorporated
where, along with his Board of Directors' and Executive committee duties, he led
the firm's Global Investment Banking Group from December 1994 through
December 1995. Prior to joining PaineWebber, he served as Executive Managing
Director responsible for Global Origination at Kidder, Peabody & Co. Previously
he was Co-head of Worldwide Investment Banking at Lehman Brothers.
PETER D. FITZSIMMONS has been a principal of Jay Alix & Associates, a
turnaround and crisis management firm, since November 1997. Prior to joining Jay
Alix as a senior associate in November 1995, Mr. Fitzsimmons was a senior
manager with Ernst & Young, LLP's Restructuring Consulting Group from
August 1990 through October 1995.
ROBERT D. DENIOUS has been a managing director of Questor and Questor
Management since March 1999. From September 1988 to March 1999, Mr. Denious was
an associate and then partner at the Philadelphia-based law firm of Drinker
Biddle & Reath LLP, where he specialized in mergers and acquisitions, financings
and private equity and venture capital investments.
DEAN ANDERSON has been a vice president of Questor since January 1999, a
vice president of Questor Management since January 1998 and was an associate of
Questor Management from December 1995 to December 1997. From April 1994 to
December 1995, Mr. Anderson was an associate with Jay Alix & Associates, where
he specialized in mergers and acquisitions and corporate finance. Previously, he
was a senior associate in the restructuring and bankruptcy group of Coopers &
Lybrand L.L.P. in New York.
KEVIN J. PROKOP has been an associate of Questor since January 1999. Prior
to joining Questor, Mr. Prokop was an associate with Jay Alix & Associates from
December 1997 through December 1998. From August 1995 to December 1997, he was
an associate and engagement manager at McKinsey & Company. Previously he was an
associate at Kleinwort Benson, Ltd. and First Chicago-NBD Capital Markets, where
he worked on buyouts and middle market mergers and acquisitions.
OFFICERS AND OTHER CURRENT DIRECTORS
MATTHEW S. WALLER has served as the Company's Chief Financial Officer since
March 1997. From 1993 to March 1997, Mr. Waller served in various positions with
Principal Financial Securities, Inc., most recently as Senior Vice President and
Head of Technology Investment Banking.
THOMAS J. FLYNN joined the Company as President of its Elrick & Lavidge
Marketing Research division in October 1998. Prior to joining Elrick & Lavidge,
Mr. Flynn was Senior Vice President of ICR Survey Research, Inc. from
January 1998 to October 1998. From 1996 though 1997, he was Senior Vice
President and Director of International Research for Opinion Research
Corporation. Prior to that, Mr. Flynn was Chief Operating Officer and Managing
Partner of Yankelovich Partners, Inc. from 1992 through 1996.
RICHARD M. INTERDONATO joined the Company as Chief Operations
Officer/Executive Vice President of Teleservices Operations in March 1999. From
1996 through 1998, Mr. Interdonato was Principal of RMI Associates, Inc., which
provided management consulting services, including strategic planning, product
development and the expansion of business opportunities, to companies including
American Express, Fidelity Investments, PageNet and Credentials International.
From 1994 through 1996, Mr. Interdonato was Executive Vice President of Safecard
Services, Inc. From 1973 through 1992, he held
27
<PAGE>
variety of positions of increasing responsibility with American Express Company
including the development of systems and operational structure to support the
launch of the Optima Card in the U.S. as well as the Gold Card in Tokyo, Japan.
WILLIAM F. BERGERON, JR. joined the Company's Advanced Telemarketing
Corporation ("Advanced") operating subsidiary in February 1993 and has been
Senior Vice President of Technology since December 1996. From 1992 to 1993,
Mr. Bergeron served in a variety of management positions with Tandem
Telecommunications Systems Inc., most recently as Senior Member of the Technical
Staff. Mr. Bergeron resigned from the Company effective November 24, 1999.
DANIEL H. CHAPMAN is currently Chairman of Northern Trust Bank of Texas and
Director of National Expansion of Northern Trust Corporation and has served in
such capacities since October 1997. From August 1985 until October 1997,
Mr. Chapman was President and Chief Executive Officer of Northern Trust Bank of
Texas and its predecessor, Concorde Bank, N.A.
DREW LEWIS served as Chairman and Chief Executive Officer of Union Pacific
Corporation from 1987 to 1997. Prior to that time, Mr. Lewis served as President
and Chief Operating Officer of Union Pacific Railroad from 1986 to 1987. Prior
to his career with Union Pacific, Mr. Lewis served as Chairman and Chief
Executive Officer of Warner Amex Cable Communications and served as
U.S. Secretary of Transportation in President Reagan's cabinet from 1981 through
1983. Mr. Lewis is a director of American Express Company, FPL Group, Inc.,
Gannett Co., Inc., Gulfstream Aerospace Corporation, Lucent Technologies and
Union Pacific Resources Group Inc. Mr. Lewis also has served as past Chairman of
The Business Roundtable.
DAVID L. MALCOLM currently serves as Chairman of Suncoast Financial
Corporation, a HUD approved mortgage banking company. Mr. Malcolm is also the
founder and President of West Coast Restaurant Enterprises, an owner and
operator of 18 restaurants. Mr. Malcolm also serves as a consultant and Senior
Vice President of Artemis Capital, a large municipal investment banking firm,
and is Chairman of the Board of San Diego United Port District, which owns and
operates San Diego's International Airport and all water rights and real
property on San Diego Bay. From 1994 to 1997, Mr. Malcolm served on the
California Commission for judicial Performance, and from 1984 to 1995, on the
California Coastal Commission. Mr. Malcolm serves on the board of Giant
Group Ltd.
DARRYL D. POUNDS is Chairman and CEO of the Managing General Partner of G&H
Manufacturing, Ltd., a Texas limited partnership, which manufactures refuse
hauling equipment. He has been a director of the Company since March 1996 and
has been a Partner of Chartwell Group, Inc., a Dallas based investment firm,
since 1996. From 1993 until 1995, Mr. Pounds served as Chairman and CEO of the
Trust Company of Texas and, from 1972 through 1993, Mr. Pounds held a variety of
positions within First City Bancorporation, including Chairman and CEO of First
City Bank of Dallas.
Assuming the Questor Transaction is consummated, all of the existing
directors will resign and a new slate of twelve (12) directors will be elected,
six (6) of whom have been nominated by the Questor Investors and the other six
(6) of whom have been nominated by Thayer (as herein defined). See
Proposals No. 5 "Election of Directors".
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth as of October 31, 1999 the persons known to
the Company as beneficially owning more than five percent (5%) of the
outstanding shares of the Company and number of shares of the Company's Common
Stock beneficially owned by individual directors and executive officers and by
all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)(2)
- ------------------------------------ ------------------ -----------
<S> <C> <C>
Thayer Equity Investors III, L.P.(3)........................ 32,539,244 49.92%
1445 Pennsylvania Ave., NW, Suite 350
Washington, DC 20004
Paul G. Stern(3)(4)......................................... 32,539,244 49.92%
600 New Hampshire Ave., NW, 6th Floor
Washington, DC 20037
Frederic V. Malek(3)(4)..................................... 32,539,244 49.92%
1445 Pennsylvania Ave., NW, Suite 350
Washington, DC 20004
Edward Blank(4)(5).......................................... 4,381,254 8.28%
1250 Broadway, 37th Floor
New York, NY 10001
ITC Service Company......................................... 3,125,298 5.95%
1239 O.G. Skinner Drive
West Point, GA 31833
William H. Scott, III(6).................................... 3,125,298 5.95%
1239 O.G. Skinner Drive
West Point, GA 31833
Codinvest Limited........................................... 2,200,000 4.21%
Road Town
Tortola, British Virgin Islands
Michael G. Santry(4)(7)..................................... 1,223,667 2.29%
Stephen A. McNeely(4)(8).................................... 984,924 1.86%
Matthew S. Waller(4)(9)..................................... 604,324 1.14%
John R. Birk(4)(10)......................................... 466,669 0.89%
Darryl D. Pounds(4)(11)..................................... 120,000 0.23%
William F. Bergeron, Jr.(12)................................ 112,700 0.22%
Richard Interdonato(13)..................................... 100,000 0.19%
Drew Lewis(4)(14)........................................... 71,789 0.14%
Robert B. Allen(15)......................................... 39,600 0.08%
Craig Callaway(16).......................................... 31,117 0.06%
Eric Croson(17)............................................. -- --
All directors and executive officers as a group
(13 persons)(18)............................................ 40,438,321 58.47%
</TABLE>
- ------------------------
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
29
<PAGE>
(1) Reported in accordance with the beneficial ownership rules of the Securities
and Exchange Commission. Unless otherwise noted, the shareholders listed in
the table have both sole voting power and sole dispositive power with
respect to such shares, subject to community property laws where applicable
and the information contained in the other footnotes to the table.
(2) Based on 52,231,616 shares of Common Stock outstanding at September 30,
1999. This number excludes 261,000 unretired treasury shares held by the
Company. Each owner's percentage is calculated by dividing the number of
shares beneficially held by the sum of 52,231,616 and the number of shares
such owner has the right to acquire within 60 days.
(3) Includes (a) 19,224,493 shares owned by Thayer, (b) 2,269,224 shares subject
to warrants held by Thayer and exercisable within 60 days, (c) 5,236,085
shares issuable upon conversion of convertible subordinated debt held by
Thayer, (d) 5,445,183 shares issuable upon conversion of convertible
preferred stock held by Thayer, (e) 210,900 shares owned by investors in
Thayer who may be deemed to be affiliates of Thayer, and (f) 153,359 shares
owned by TC Co-Investors, which may be deemed to be an affiliate of Thayer.
Each of Dr. Stern and Mr. Malek are members of the general partner of
Thayer, and may be deemed to be the beneficial owner of its shares and those
of its affiliates. Dr. Stern and Mr. Malek disclaim such beneficial
ownership.
(4) Director.
(5) Includes 330,403 shares subject to warrants exercisable within 60 days and
223,052 shares issuable upon conversion of convertible preferred stock. Also
includes (a) 707,525 shares owned by the Edward Blank 1995 Grantor Retained
Annuity Trust (the "Blank Trust"), (b) 78,238 shares subject to warrants
exercisable within 60 days held by the Blank Trust, and (c) 52,901 shares
issuable upon conversion of convertible preferred stock held by the Blank
Trust. Mr. Blank is the trustee of the Blank Trust and therefore may be
deemed to beneficially own its shares.
(6) Includes (a) 2,835,123 shares owned by ITC Service Company ("ITC"), for
which William H. Scott, III serves as President, (b) 78,482 shares subject
to warrants held by ITC and exercisable within 60 days, and (c) 211,694
shares issuable upon conversion of convertible preferred stock held by ITC.
Mr. Scott disclaims any and all beneficial ownership associated with such
shares owned by ITC.
(7) 7,000 of Mr. Santry's shares are owned of record by Lakewood Financial
Consultants, Inc., which is 99% owned by Mr. Santry. Includes beneficial
ownership of 950,000 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the ATC Plans and 266,667 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1998 Plan.
(8) Includes 747,957 shares subject to options exercisable within 60 days and
236,967 shares subject to a purchase option agreement with Thayer for shares
of Common Stock held by the Thayer fund.
(9) Includes beneficial ownership of 300,000 shares of Common Stock issuable
upon exercise of stock options granted pursuant to the ATC Plans and 300,000
shares of Common Stock issuable upon exercise of stock options granted
pursuant to the 1998 Plan.
(10) Includes 100,000 shares of Common Stock purchased from the Company (out of
the Company's unretired treasury shares) at the closing price on May 27,
1999, $1.03125, and 366,669 shares of Common Stock issuable upon exercise of
stock options granted pursuant to the 1998 Plan and exercisable within
60 days.
(11) Subject to options exercisable within 60 days.
(12) Subject to options exercisable within 60 days. Mr. Bergeron resigned from
the Company effective November 24, 1999.
(13) Includes 100,000 shares subject to options exercisable within 60 days.
(14) Includes 47,860 shares subject to options exercisable within 60 days.
(15) Mr. Allen is no longer employed by the Company.
30
<PAGE>
(16) Mr. Callaway is no longer employed by the Company.
(17) Mr. Croson is no longer employed by the Company.
(18) Includes beneficial ownership of 17,124,415 shares subject to warrants or
options exercisable within 60 days and shares issuable upon conversion of
convertible subordinated debt and convertible preferred stock as set forth
in footnotes (3), (5), (6), (7), (8), (9), (10), (11), (12), (13) and
(14) above.
STOCKHOLDER AND VOTING AGREEMENTS
On July 9, 1998, the Company (formerly known as ATC Communications
Group, Inc. ("ATC")) completed the acquisition of IQI. The acquisition was
effected through the Merger of a wholly-owned subsidiary of ATC with and into
IQI pursuant to an Agreement and Plan of Merger dated as of April 7, 1998 (the
"Merger Agreement").
Pursuant to the Merger Agreement, each former holder of common stock, $.001
par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the Common Stock. As a result of the Merger, ATC issued
approximately 34.2 million shares of Common Stock and Common Stock equivalents
to holders of IQI Common Stock and IQI stock options and warrants in a tax-free
exchange. Thayer Equity and its affiliates, as noted in the table above,
acquired approximately 19,588,752 shares of Common Stock in the Merger, or
approximately 37.46% of the then issued and outstanding shares, and currently
beneficially own 31,631,260 shares of Common Stock (see footnote 3 to the table
above). The acquisition was accounted for as a reverse purchase, meaning that,
for accounting purposes, IQI is the surviving corporation and is treated as
having acquired ATC in a purchase accounting transaction. Effective upon the
Merger, the Company formally changed its name to Aegis Communications
Group, Inc. and its Nasdaq National Market System symbol to "AGIS". In
accordance with the Merger Agreement and effective with the Merger, the Company
also amended its bylaws to require the approval of seven of twelve directors for
certain transactions.
At the Company's annual meeting of stockholders held on August 5, 1999, the
stockholders elected a new classified board of directors comprised of Frederic
V. Malek (Class I), Michael G. Santry (Class I), Paul G. Stern (Class I),
Matthew S. Waller (Class I), John R. Birk (Class II), Drew Lewis (Class II),
David L. Malcolm (Class II), Darryl D. Pounds (Class II), Edward Blank
(Class III), Daniel H. Chapman (Class III), and Stephen A. McNeely (Class III).
One vacancy currently exists in Class III.
Certain stockholders who, in the aggregate, own more than a majority of the
voting stock of the Company entered into a Stockholders' Agreement in connection
with the Merger whereby, for a period of two years from the date of the Merger,
each such stockholder agreed to vote its shares of the Company's capital stock
in favor of the six nominees to the board of directors of the Company selected
by the representative of the other party's stockholder group. A condition to the
Questor Investors' obligation to consummate the Questor Transaction is that the
existing Stockholders Agreement will have been terminated and the current Board
will have resigned. The existing Stockholders Agreement would be replaced by a
new one entered into between the Questor Investors and Thayer upon consummation
of the Questor Transaction. See Proposal No.1--Approval of the Questor
Transaction and the Issuance of Shares.
DIRECTORS' MEETINGS AND COMPENSATION
BOARD COMMITTEES AND MEETINGS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Company's Board of Directors meets during the Company's
fiscal year to review significant developments affecting the Company and to act
on matters requiring Board approval. The Board held nine formal meetings and
acted by unanimous written consent one time during the year ended December 31,
1998. Each of the current directors attended at least 75% of all meetings of the
board of directors called during
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<PAGE>
the time he served as a director and at least 75% of all meetings of each
committee of the board of directors on which he served.
The Board has established an Audit Committee and Compensation Committee to
devote attention to specific subjects and to assist the Board in the discharge
of its responsibilities. The functions of these committees are described below.
AUDIT COMMITTEE
During 1998, the Audit Committee was comprised of Daniel H. Chapman
(Chairman), Drew Lewis, David L. Malcolm and Frederic V. Malek. The Audit
Committee is empowered to recommend to the Board a firm of certified public
accountants to conduct audits of the accounts and affairs of the Company, review
accounting objectives and procedures of the Company and the findings and reports
of the independent certified public accountants, and make such reports and
recommendations to the Board as it deems appropriate. The Audit Committee met as
a committee at each formal meeting of the Board during 1998.
COMPENSATION COMMITTEE
During 1998, the Compensation Committee was comprised of Dr. Paul G. Stern
(Chairman), Frederic V. Malek and Darryl D. Pounds. The Compensation Committee
is empowered to establish and revise the compensation paid to all executive
officers of the Company and has complete authority to (a) construe, interpret
and administer the provisions of the Company stock option plans and the
provisions of option agreements granted thereunder, (b) select the key
employees, consultants and directors to whom awards are granted, the number of
options, the number of shares of Common Stock with respect to each option, the
exercise price of each option, the vesting and exercise period of each option,
and such other terms and conditions of each option, if any, that are not
inconsistent with the provisions of the Company's stock option plans,
(c) prescribe, amend and rescind rules and regulations pertaining to the stock
option plans, and (d) make all other determinations necessary or advisable for
their implementation and administration. The Compensation Committee acted by
unanimous written consent two times during 1998.
The Board does not have a standing nominating committee or any other
committee performing a similar function. The function customarily attributable
to a nominating committee is performed by the Board as a whole.
COMPENSATION OF DIRECTORS
Directors of the Company receive no fees for serving on the Board of
Directors. Upon their initial election and as compensation for their service as
a director, each outside director is granted non-qualified options to purchase
50,000 shares of Common Stock, which vest ratably over a three-year period. As
such, in 1998, Messrs. Malcolm, Pounds and Lewis were granted options to
purchase 50,000, 25,000 and 10,000 shares of Common Stock, respectively, with an
exercise price of $1.25. The amount of the grants to Mr. Pounds and Mr. Lewis
reflected their prior status as directors of ATC and IQI, respectively, and
their existing option grants from such service. All directors are entitled to
reimbursement for expenses incurred for attendance at each meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Dr. Paul G. Stern, Darryl D. Pounds and Frederic V. Malek served on the
Company's Compensation Committee during the fiscal year ended December 31, 1998.
None of Dr. Stern, Mr. Pounds, nor Mr. Malek is a current officer or employee of
the Company. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
the Company's Compensation Committee.
32
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE OFFICERS OF THE COMPANY
For biographical and other information regarding the executive officers of
the Company, please see "Directors and Executive Officers of the Company".
Officers serve at the discretion of the Board of Directors. There is no family
relationship among any of the named officers and directors of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the Company is
responsible for overseeing the Company's compensation policy, approving salaries
and annual bonuses for executive officers and administering the Company's stock
option plans. The Compensation Committee is comprised of three non-employee
directors.
COMPENSATION POLICY
The Compensation Committee's philosophy for executive compensation is
designed to enable the Company to recruit, motivate, and retain qualified
individuals to manage the Company in order to enhance stockholders' value. The
objective of this philosophy is to recognize individual contributions and
achievements while enabling individuals to share the risks and rewards of the
Company's overall performance. The Compensation Committee fulfills its
responsibilities with input from the Company's executive officers and by
evaluating compensation relative to a broad range of companies both in the
Company's peer group and in comparable lines of business. The key components of
the Company's current compensation policy are competitive base salaries, annual
cash performance bonuses and long-term equity incentives.
BASE SALARIES
Base salaries of executive officers are targeted to be competitive with
companies with similar growth and operations. The Compensation Committee also
considers the executive's contribution to operating performance and
profitability, the executive's role in developing and maintaining client
relationships, and the executive's level and complexity of responsibility in
determining annual base salaries and salary increases.
PERFORMANCE BONUSES
Cash performance bonuses are determined annually by the Compensation
Committee based on an executive's performance relative to predetermined
individual performance goals. Additionally, the Compensation Committee considers
the Company's overall financial performance, including the achievement of
targets for revenue and earnings before interest taxes depreciation and
amortization ("EBITDA"), in determining the extent to which performance bonuses
will be paid. Bonus potential ranges from 0% to 100% of base salary, based on
the executive's level of responsibilities, with 100% being the Chief Executive
Officer's maximum bonus potential.
LONG-TERM EQUITY INCENTIVES
The Compensation Committee believes that the use of equity-based long-term
compensation directly links executive interests to enhancing stockholder value.
Stock options are generally offered to induce executives to accept employment
with the Company. Such offerings generally vest over time and are subject to
forfeiture. The Compensation Committee establishes the number of shares granted
and the exercise price and vesting period of each grant. The stock options
granted generally have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant thus rewarding the executive only if
the Company's common share price appreciates above the price on the date of
grant.
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<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
The Compensation Committee set the annual base compensation of Mr. McNeely,
the Company's chief executive officer, at $350,000 per year and believes such
base salary is comparable to that paid the chief executive officers of companies
of similar size and growth potential. Additionally, Mr. McNeely is entitled to
receive annual bonus compensation of up to 100% of his base salary based on
predetermined performance goals established each year by the Compensation
Committee.
Mr. McNeely's bonus compensation for 1998 was dependent upon the Company's
achievement of specified revenue and profitability targets and certain client
business and internal operations development goals. Although the Company
achieved record revenue growth in 1998, the Company's client business
development and profitability results were adversely affected by (i) a
substantial decrease in service volumes from the Company's largest client of
approximately 13.6% and a decline in the Company's Elrick & Lavidge marketing
research division's revenues of approximately 12.0%; (ii) a material decline in
client service center capacity utilization in the fourth quarter of 1998
resulting from lower volumes of business from the Company's two largest
telecommunications clients, and (iii) the Company's restructuring efforts
following the Merger which resulted in one-time write-offs of redundant hardware
and software, write-offs of deferred loan fees, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees. As a result, the Company achieved some but not all of the
performance objectives upon which Mr. McNeely's 1998 bonus compensation was
based.
Submitted by the Compensation Committee of the Board of Directors.
Dr. Paul G. Stern (Chairman)
Frederic V. Malek
Darryl D. Pounds
34
<PAGE>
SUMMARY COMPENSATION TABLE
Furnished below is a table containing individual compensation information on
persons serving as Chief Executive Officer of the Company during the fiscal year
ended December 31, 1998 and the five other most highly paid executive officers
of the Company and its operating subsidiaries whose total annual salary and
bonus amounts totaled $100,000 or more for services rendered in all capacities
during the fiscal year ended December 31, 1998 (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ $ OPTIONS(1) $
- --------------------------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. McNeely .............. 1998 325,000 100,000 26,119(2) -- 15,236(3)
Chief Executive Officer and 1997 110,769(4) -- -- 1,121,936 --
President 1996 -- -- -- -- --
Michael G. Santry ............... 1998 350,000 -- -- 800,000 --
Former Co-Chairman, former 1997 175,000(5) -- -- -- --
Chief Executive Officer and 1996 156,250(5) -- -- 950,000 --
President
Matthew S. Waller ............... 1998 225,000 121,500 -- 300,000 --
Executive Vice President and 1997 164,567(6) 33,650 -- 300,000 --
Chief Financial Officer 1996 -- -- -- -- --
Eric Croson ..................... 1998 248,416 60,000 -- -- --
Former Chief Financial Officer 1997 248,416 -- -- -- --
of IQI 1996 11,538(7) -- -- 237,912 --
Robert B. Allen ................. 1998 220,000 80,000 -- -- --
Executive Vice President of 1997 210,833(8) 44,000 -- 300,000 --
Sales and Marketing, former 1996 -- -- -- -- --
Senior Vice President of
Operations
Craig Callaway(9) ............... 1998 148,088 127,109 -- 38,000 --
Former Senior Vice President of 1997 136,168 61,165 2,758(11) 103,627 --
Operations 1996 123,532 15,723 3,220(11) -- --
William F. Bergeron, Jr.(10) ... 1998 146,521 57,625 -- 50,000 --
Senior Vice President of 1997 112,007 25,000 -- 100,000 --
Technology 1996 85,926 20,000 -- -- --
</TABLE>
- --------------------------
(1) In connection with the Merger, each share of IQI common stock was converted
into 9.7513 shares of the Company's Common Stock and each option to acquire
IQI common stock was converted into options to purchase 9.7513 shares of
Common Stock.
(2) Includes a $15,246 car allowance and $10,873 in relocation costs paid by
the Company on Mr. McNeely's behalf.
(3) Includes $15,236 paid for additional life insurance and long-term
disability coverage and other perquisites paid to or on behalf of
Mr. McNeely.
(4) The amount indicated is the salary paid to Mr. McNeely from the
commencement of his employment with the Company, on August 1, 1997, through
December 31,1997.
(5) Mr. Santry elected not to receive any salary or bonus compensation during
the period from July 1, 1996 through June 30, 1997. Effective April 1,
1996, the Compensation Committee of the Board of Directors set
Mr. Santry's annual base salary at $350,000 and his bonus compensation
potential at up to $125,000 annually. Effective with the Merger,
Mr. Santry relinquished the roles of President and CEO and assumed the role
of Co-Chairman of the Board of the Company. Mr. Santry resigned as
Co-Chairman of the Company on May 27, 1999 but remains as a Director.
35
<PAGE>
(6) Mr. Waller joined the Company as Chief Financial Officer on March 24, 1997.
The amount indicated is the salary paid to Mr. Waller from the commencement
of his employment with the Company through December 31, 1997. Mr. Waller's
employment agreement with the Company specifies an annual base salary of
$225,000 and bonus compensation of up to $135,000 annually. See "Employment
Agreements and Termination of Employment Agreements."
(7) Mr. Croson joined the Company as Chief Financial Officer on December 2,
1996. The amount indicated is the salary paid to Mr. Croson from the
commencement of his employment through December 31, 1996. Mr. Croson is no
longer employed by the Company.
(8) Mr. Allen joined ATC as Chief Operating Officer on January 6,1997. The
amount indicated is the salary paid to Mr. Allen from the commencement of
his employment through December 31,1997. Mr. Allen is no longer employed by
the Company.
(9) Mr. Callaway is no longer employed by the Company.
(10) Mr. Bergeron resigned from the Company effective November 24, 1999.
(11) Consists of commissions earned on revenues.
STOCK OPTION PLANS
In November 1996, IQI established the 1996 Incentive Stock Option Plan (the
"IQI Plan"). The Plan provided for the award of incentive stock options to
directors, officers, key employees and members of Thayer Equity's Advisory
Board. The IQI Plan was administered by a Compensation Committee, as established
by IQI's Board of Directors. These options were incentive stock options ("ISOs")
under the Internal Revenue Code or non-statutory stock options ("NSOs") which
are not intended to qualify. IQI reserved 3,929,774 shares of common stock for
issuance under the IQI Plan.
Prior to the Merger, ATC stockholders approved two stock option plans, which
provided for the granting of options to purchase up to 5,000,000 shares of
Common Stock to key employees, officers and directors of ATC and its operating
subsidiary (the "ATC Plans"). At the date of the Merger, options to purchase
4,447,000 shares of Common Stock granted pursuant to the ATC Plans were
outstanding.
In September 1998, the Company initiated the Company's 1998 Stock Option and
Restricted Stock Plan (the "1998 Plan") which provides for the granting of
options to purchase up to a maximum of 7,500,000 shares of Common Stock to key
employees, officers and directors of the Company and its operating subsidiaries.
Options granted pursuant to the 1998 Plan are exercisable for 10 years from the
date of the grant subject to vesting schedules. The Company may grant additional
options at any time prior to September 2008. As a result of the adoption of the
1998 Plan, the Company will not grant any future options to purchase shares of
Common Stock pursuant to the IQI Plan and the ATC Plans.
OPTION GRANTS AND HOLDINGS
1998 OPTION GRANTS
On April 7, 1998, in connection with the ATC Board's approval of the Merger
and to be effective upon completion of the Merger, the ATC Board granted Michael
G. Santry, Chairman of the Board, President and Chief Executive Officer of ATC,
nonqualified options to purchase 450,000 shares of ATC Common Stock under the
ATC Plans at an exercise price equal to 1/16(th) over the closing bid price of
ATC Common Stock on the closing date of the Merger, vesting one-third on the
first, second and third anniversaries of the Effective Date, respectively, all
of which were contingent upon consummation of the Merger. In addition, ATC and
IQI agreed that the Company would, upon consummation of the Merger, grant
Mr. Santry and Mr. Waller, Chief Financial Officer and Director of ATC,
nonqualified options to purchase 350,000 and 300,000 shares, respectively, of
Common Stock under the 1998 Plan at an exercise price equal to 1/16(th) over the
closing bid price of Common Stock on the closing date of the Merger. Two-thirds
of the options to be granted to Mr. Waller vested on the date of grant and
one-third vest on the
36
<PAGE>
first anniversary of the Effective Date. The options granted to Mr. Santry vest
one-third on the first, second, and third anniversaries of the Effective Date,
respectively.
The following table sets forth certain information relating to stock option
grants made by the Company to the Named Executive Officers during the last
fiscal year. The Company has no plans that provide for the granting of stock
appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Santry......... 800,000 46.57% $2.81 7/9/08 $1,415,013 $3,585,921
Matthew S. Waller......... 300,000 17.47% $2.81 7/9/08 $ 530,630 $1,344,720
William F. Bergeron,
Jr...................... 50,000 2.91% $1.25 11/5/08 $ 39,306 $ 99,609
Craig Callaway............ 38,000 2.21% $1.25 11/5/08 $ 29,872 $ 75,703
</TABLE>
- ------------------------
(1) Potential realizable value is based on the assumption that the Company's
Common Stock price appreciates at the annual rate shown (compounded
annually) from the date of the grant until the end of the option term. The
amounts have been calculated based on the requirements promulgated by the
SEC. The actual value, if any, a Named Executive Officer may realize will
depend on the excess of the stock price over the exercise price on the date
the option is exercised (if the executive were to sell the shares on the
date of exercise). Accordingly, there is no assurance that the value that
may be realized will be at or near the potential realizable value as
calculated in this table.
(2) These options have a term of 10 years from the date of grant.
1998 YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
shares underlying unexercised options held as of December 31, 1998, by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF "IN-THE-MONEY" OPTIONS AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Stephen A. McNeely............................ 373,979 747,957 $ -- $ --
Michael G. Santry............................. 950,000 800,000 $ -- $ --
Matthew S. Waller............................. 500,000 100,000 $ -- $ --
Eric Croson................................... 158,608 79,304 $ -- $ --
Robert B. Allen............................... 300,000 -- $ -- $ --
Craig Callaway................................ 77,624 64,003 $ -- $ --
William F. Bergeron, Jr....................... 100,000 50,000 $ -- $ --
</TABLE>
- ------------------------
(1) Based on the closing price per share of the Common Stock on December 31,
1998, as reported on the Nasdaq National Market, which was $0.8125, less the
exercise price payable for such shares. Using such calculation no
unexercised options were "in-the-money" as of December 31,1998.
EMPLOYMENT AGREEMENTS
MATTHEW S. WALLER entered into an employment agreement effective March 24,
1997, pursuant to which he serves as Chief Financial Officer of the Company.
Under the employment agreement, Mr. Waller is entitled to receive an annual base
salary and an incentive bonus based upon certain financial performance targets
of the Company. The employment agreement provides for the payment to Mr. Waller
37
<PAGE>
of one times of his annual compensation if the Company terminates Mr. Waller's
employment without cause (as defined in the employment agreement) or in the
event that he is terminated after a change in control (as defined in the
employment agreement) of the Company. Mr. Waller's options vest immediately in
the event of a change in control (as defined in the employment agreement) of the
Company. The Questor Transaction does not result in a change in control for
purposes of this employment agreement.
STEPHEN A. MCNEELY entered into an employment agreement effective June 11,
1997, pursuant to which he serves as President and Chief Executive Officer of
the Company. Under the employment agreement, Mr. McNeely is entitled to receive
an annual base salary and an incentive bonus based upon certain financial
performance targets of the Company. The employment agreement provides for the
payment to Mr. McNeely of one and one half times his base annual compensation if
the Company terminates Mr. McNeely's employment after a change in control (as
defined in the employment agreement) of the Company. Mr. McNeely's options vest
immediately in the event of a change in control (as defined in the option
agreement) of the Company. The Questor Transaction does not result in a change
in control for purposes of this employment agreement.
RICHARD INTERDONATO entered into an employment agreement effective March 9,
1999, pursuant to which he serves as Chief Operating Officer of the Company.
Under the employment agreement, Mr. Interdonato is entitled to receive an annual
base salary and an incentive bonus based upon certain financial performance
targets of the Company. The employment agreement provides for the payment to
Mr. Interdonato of one times his base annual compensation and prior year bonus
if the Company terminates Mr. Interdonato's employment without cause (as defined
in the employment agreement) or in the event that he is terminated after a
change in control (as defined in the employment agreement) of the Company.
Mr. Interdonato's options vest immediately in the event of a change in control
(as defined in the option agreement) of the Company. The Questor Transaction
does not result in a change in control for purposes of this employment
agreement.
JOHN R. BIRK entered into an employment agreement effective May 28, 1999,
pursuant to which he serves as Chairman of the Board of the Company. Under the
employment agreement, Mr. Birk is entitled to receive an annual base salary.
Mr. Birk's options vest immediately in the event of a change in control (as
defined in the option agreement) of the Company and accelerate upon his removal
as Chairman (as defined in his employment agreement). The Questor Transaction
does not result in a change in control for purposes of this employment
agreement. Mr. Birk also has incidental registration rights with respect to
100,000 shares of Common Stock he purchased from the Company when he was elected
Chairman of the Board.
SEPARATION AGREEMENT
MATTHEW S. WALLER entered into a separation agreement in September 1999,
pursuant to which Mr. Waller has agreed to continue working full-time for the
Company as its Chief Financial Officer through December 31, 1999, although he
would resign as a director effective as of the election of the new slate of
directors at the Special Meeting. From January 1, 2000 through March 31, 2000,
Mr. Waller has agreed to work part-time for the Company, with primary
responsibility to complete the Company's 1999 audit. Mr. Waller is entitled to
receive severance compensation equal to his annual base salary payable in
accordance with the Company's usual payroll practices through December 31, 2000.
In addition, Mr. Waller's stock option expiration date will be extended to the
later of December 31, 2001 or such later date as any other outgoing director's
option expiration date is extended in connection with the Questor Transaction.
The Company has also agreed to provide Mr. Waller with continued health benefits
and executive support through December 31, 2000.
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998, Michael G. Santry, the then Co-Chairman of the
Company, had outstanding borrowings and accrued interest due to the Company of
approximately $1.9 million. The borrowings bear interest at a 6% annual rate and
were due in full on March 31, 1999. In connection with the Merger, Mr. Santry
paid one-half of the principal amount of the note in July 1998. The note is
secured by 7,000 shares of the Company's Common Stock and options to purchase
1,750,000 shares of the Company's Common Stock held by Mr. Santry. Reported
interest income from the receivable amounted to approximately $58,000 in 1998.
In June 1999, the Company extended the maturity date of the note to March 31,
2000 but increased the annual rate of interest to 7%. Mr. Santry also pledged
additional collateral to secure the note.
The Company provides services to certain clients, including its most
significant client, who, directly or through affiliates, have an ownership
interest in Thayer.
During the year ended December 31, 1998, the Company paid J. Frank Mermoud,
a former director of ATC, $80,000, in monthly installments, in consideration for
consulting services performed. These payments terminated at the end of 1998.
In connection with the Merger, Thayer provided the Company with
$6.8 million in subordinated indebtedness due August 31, 2003 and bearing
interest at a 12% annual rate (the "Subordinated Indebtedness") as well as a
guarantee for $2.0 million in bridge financing to assist in funding the
Company's working capital needs. In connection with the guarantee, and for
additional consideration of $110,000, the Company issued to Thayer warrants to
purchase 1,100,000 shares of the Company's Common Stock at an exercise price of
$1.96 (the "First Warrant").
Prior to the Merger, on July 2, 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 (the "Second Warrant"). This indebtedness is
convertible into the Company's Common Stock at a conversion price of $2.375 per
share. This debt is in addition to, and on the same basic terms as, the
subordinated debt that Thayer had previously loaned to the Company.
On March 30, 1999, Thayer Equity provided the Company with approximately
$5.7 million in additional subordinated indebtedness. Approximately one-half of
the proceeds from this financing were used to pay down bank debt and the
remainder for working capital purposes. The additional indebtedness is
convertible into the Company's Common Stock at a conversion price of $1.15 per
share. This debt is in addition to, and on the same basic terms as, the
subordinated debt that Thayer Equity had previously loaned to the Company.
In an effort to reduce debt and improve the Company's balance sheet,
effective June 30, 1999, the Thayer-led group agreed to convert approximately
$12.1 million of its subordinated debt into two new series of convertible
preferred stock. The 77,300 shares of new Series D Preferred Stock ($.01 par
value per share, $100 per share liquidation preference) are convertible into
Company Common Stock at $2.00 per share, and the 44,018 shares of new Series E
Preferred ($.01 par value per share, $100 per share liquidation preference) are
convertible into Company Common Stock at $2.375 per share. Both series earn
cumulative dividends (payable-in-kind in additional shares of the respective
series of Preferred Stock) at the annual rate of 15%, and are non-voting except
on specified matters. In consideration of the conversion of the subordinated
debt into preferred stock, the Company issued the Thayer-led group warrants to
39
<PAGE>
purchase an additional 1,000,000 shares of Company Common Stock (the "Third
Warrant") at $0.90625 per share, the closing price of such stock on the date the
debt was converted into equity.
On December 17, 1997, IQI issued warrants to Blank to purchase 25,403 shares
for $808,600 and 6,013 shares for $191,400, both of which were converted upon
the Merger into warrants to purchase 306,347 shares of Company Common Stock at
an exercise price of $3.26 per share (the "Fourth Warrant").
Paul G. Stern, Drew Lewis, and Frederic V. Malek, each directors of the
Company, are partners in and/or advisors to Thayer Equity.
Thayer Equity, ITC, Blank and The Blank Trust (the "IQI Parties") and
Michael G. Santry, Darryl D. Pounds and Codinvest (the "ATC Parties"), are
parties to a Stockholders' Agreement with the Company whereby, for a period of
two years from the date of the Merger Agreement, each such stockholder has
agreed to vote its shares of Company Common Stock, if any, in favor of the
nominees to the board of directors selected by the other party's stockholder
group. Messrs. Stern, Lewis and Malek, by virtue of their positions with Thayer,
may be viewed as indirect beneficiaries of this voting arrangement, and
Messrs. Santry and Pounds may be viewed as direct beneficiaries of this voting
arrangement. This Stockholders' Agreement will be terminated in connection with
the Questor Transaction.
In connection with the Merger, the Company granted Thayer Equity the right
to demand one registration on a form other than Form S-3, and up to three
registrations on Form S-3, of the shares of Common Stock issuable upon exercise
of the First Warrant. These rights were subsequently extended to the shares
issuable upon exercise of the Second Warrant and the Third Warrant. Holders of
at least 200,000 shares of Common Stock are required to request registration. In
addition, Thayer Equity has unlimited "piggyback" registration rights and may
seek to include shares of Common Stock issuable upon exercise of the warrants in
any registration statement filed by the Company for its own purposes, subject to
customary "cut-back" rights of the Company's underwriter to reduce the number of
shares to be included if it exceeds, in the underwriter's good faith judgment,
the number that can be sold in the offering. In connection with the Questor
Transaction, the registration rights described above would be replaced by
registration rights that parallel those granted to the Questor Investors. See
"Proposal 1--Approval of the Questor Transaction and the Issuance of
Shares--What Registration Rights Will the Questor Investors have?"
40
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph sets forth a comparison of the cumulative total
shareholder return on the Common Stock over the five year period ended
December 31, 1998 as compared with the cumulative total return of a broad equity
market index, the Nasdaq Market Index, and a Peer Group Index. The Peer Group
consists of ACI Telecentrics, Inc., APAC Customer Services, Inc., Convergys
Corp., ICT Group, Inc., National TechTeam, Inc., Precision Response Corp., RMH
Teleservices, Inc., Site Corp., Sykes Enterprises, Inc., TeleTech
Holdings, Inc., TeleSpectrum. Worldwide, Inc. and West TeleServices Corp. The
total shareholder return for each company in the Peer Group has been weighted
according to the company's stock market capitalization. This graph assumes an
investment of $100 on December 31, 1993 in each of the Company's Common Stock,
the Nasdaq Market Index and the Peer Group Index, and assumes reinvestment of
dividends, if any. The stock price performance shown on the graph below is not
necessarily indicative of future stock price performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AEGIS COMMUNICATIONS GROUP, INC. PEER GROUP INDEX NASDAQ MARKET INDEX
<S> <C> <C> <C>
12/31/93 $100.00 $100.00 $100.00
12/31/94 $248.26 $164.91 $109.66
12/31/95 $262.05 $152.63 $128.61
12/31/96 $1,448.20 $632.13 $161.89
12/31/97 $531.01 $480.22 $195.02
12/31/98 $89.65 $266.56 $300.49
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
---------------------------------------------------------------
COMPANY/INDEX/MARKET 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aegis Communications Group, Inc........... 100.00 248.26 262.05 1,448.20 531.01 89.65
Peer Group Index.......................... 100.00 164.91 152.63 632.13 480.22 266.56
Nasdaq Market Index....................... 100.00 109.66 128.61 161.89 195.02 300.49
</TABLE>
41
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary historical consolidated financial data
for the Company and its subsidiaries for each of the last five fiscal years,
which have been derived from the audited consolidated financial statements of
Aegis. The summary historical consolidated financial data for the nine month
periods ended September 30, 1998 and 1999 have been derived from the unaudited
consolidated financial statements of Aegis, which, in the opinion of management,
include all normal and recurring adjustments, necessary for a fair presentation
of the results for the unaudited periods. The summary historical consolidated
financial data set forth below should be read in conjunction with, and are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the accompanying notes thereto included elsewhere herein. The Company has
restated its September 30, 1998 and subsequent financial statements in
accordance with Emerging Issues Task Force Topic No. D-60 to reflect a
beneficial conversion feature contained in the subordinated debt issued to
Thayer Equity in July 1998. This beneficial conversion feature, which was not
originally recognized, resulted in a non-cash interest expense charge of
$3.1 million at the issuance date. See "Note 8 of Notes to Unaudited
Consolidated Financial Statements--Effect of Restatement."
<TABLE>
<CAPTION>
FIVE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
YEAR ENDED JULY 31,(1) DECEMBER 31, DECEMBER 31, (UNAUDITED)
------------------------------ ------------- --------------------- ---------------------
1994 1995 1996 1996(2) 1997(3) 1998 1998 1999
-------- -------- -------- ------------- -------- ---------- ---------- --------
(RESTATED) (RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices................... $31,033 $56,179 $57,543 $26,756 $115,609 $195,355 $138,137 $161,872
Marketing research services.... -- -- -- -- 18,223 32,683 24,256 19,036
------- ------- ------- ------- -------- -------- -------- --------
Total revenues................... 31,033 56,179 57,543 26,756 133,832 228,038 162,393 180,908
Gross profit..................... 11,457 18,207 16,834 6,092 45,642 66,677 55,337 50,099
SG&A expenses.................... 7,057 16,444 13,588 8,760 36,312 50,510 40,764 50,161
Depreciation..................... 907 856 1,314 969 4,501 10,018 6,894 9,691
Acquisition goodwill
amortization................... -- -- -- 55 1,592 2,876 2,020 2,213
Non-cash asset impairment
charge......................... -- -- -- -- -- -- -- 20,399
Restructuring and other
non-recurring charges.......... -- -- -- -- -- 8,395 3,624 541
------- ------- ------- ------- -------- -------- -------- --------
Operating income (loss)(4)....... 3,493 907 1,932 (3,692) 3,237 (5,122) 2,035 (32,906)
Other income, net................ 142 437 877 648 -- --
Interest expense, net............ 112 72 190 450 3,626 5,578 4,152 5,491
Non-cash interest expense........ -- -- -- -- -- 3,092 3,092 --
------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... 3,523 1,272 2,619 (3,494) (389) (13,792) (5,209) (38,397)
Income tax expense
(benefit)(1)................... 109 314 17 1,794 595 (2,989) (37) (6,078)
------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)(4)............. 3,414 958 2,602 (5,288) (984) (10,803) (5,172) (32,319)
Preferred stock dividends........ -- -- -- -- -- -- -- 466
------- ------- ------- ------- -------- -------- -------- --------
Net income (loss) available to
common stock................... $ 3,414 $ 958 $ 2,602 $(5,288) $ (984) $(10,803) $ (5,172) $(32,785)
======= ======= ======= ======= ======== ======== ======== ========
Basic and diluted earnings (loss)
per share...................... $ 0.14 $ 0.04 $ 0.11 $ (0.22) $ (0.04) $ (0.27) $ (0.14) $ (0.63)
======= ======= ======= ======= ======== ======== ======== ========
Weighted average shares
outstanding.................... 24,378 24,378 24,378 24,417 27,233 40,383 37,154 52,075
OPERATING DATA
EBITDA(4)(5)..................... $ 4,542 $ 2,200 $ 4,123 $(2,020) $ 9,330 $ 16,567 $ 14,573 $ (62)
Net cash provided by (used in)
operating activities........... $ 1,098 $ 368 $ 2,915 $ (139) $ 2,016 $ 7,127 $ 1,259 $(13,062)
Net cash provided by (used in)
investing activities........... $ (237) $(1,846) $(5,858) $ 1,596 $(25,794) $(16,213) $(11,050) $ (8,618)
Net cash provided by (used in)
financing activities........... $ (209) $ 2,113 $ 1,652 $ 665 $ 26,805 $ 14,478 $ 11,523 $ 11,339
Client service centers at end of
period......................... 19 20 25 26 23
Teleservices workstations at end
of period...................... 2,238 2,462 5,658 6,062 5,410
Marketing research facilities at
end of period.................. 10 10 9 10 8
Marketing research workstations
at end of period............... 371 360 254 360 226
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF DECEMBER 31, (UNAUDITED)
-------------------------------- ----------------------------
1996 1997 1998 ACTUAL AS ADJUSTED (6)
-------- -------- ---------- ---------- ---------------
(RESTATED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital....................................... $ 6,168 $ 17,624 $ 35,881 $(35,203) $ 35,565
Total assets.......................................... 52,014 101,736 180,544 161,502 161,502
Current portions of long-term obligations(7).......... 2,272 3,009 2,758 70,568 --
Long-term obligations, net of current portions........ 22,634 51,257 79,580 11,384 30,644
Total liabilities..................................... 41,464 71,163 108,716 109,561 67,561
Redeemable convertible preferred stock................ -- -- -- -- 45,457
Shareholders' equity.................................. 10,550 30,573 71,828 51,941 48,484
</TABLE>
- ------------------------------
(1) Through July 31, 1996, the Company had a fiscal year end of July 31. The
Company operated as a subchapter S-corporation through November 17, 1996, at
which time it became a C-corporation for tax purposes and changed its fiscal
year from July 31 to December 31.
(2) Represents operations of the Company for the period from August 1, 1996 to
December 31, 1996. Amounts include the acquisition of Lexi
International, Inc. ("Lexi") on November 22, 1996.
(3) Includes the acquisition of InterServ Services Corporation ("InterServ") as
of July 12, 1997 (the "InterServ Acquisition").
(4) The historical results of operations include certain non-recurring expenses,
which are summarized in the table below:
<TABLE>
<CAPTION>
NINE MONTHS
FIVE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
YEAR ENDED JULY 31,(1) DECEMBER 31, DECEMBER 31, (UNAUDITED)
------------------------------ ------------- ------------------- ----------------------
1994 1995 1996 1996(2) 1997(3) 1998 1998 1999
-------- -------- -------- ------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actual officer's salary....... $1,312 $7,063 $2,417 $ 116 $ -- $ -- $ -- $ --
Lexi and IQI bonuses and
compensation, legal and
audit fees, and software
licensing expenses.......... -- -- 810 2,490 443 -- -- --
Asset impairment charge....... -- -- -- -- -- -- -- 20,399
Restructuring and other non-
recurring charges........... -- -- -- -- -- 8,395 3,624 541
------ ------ ------ ------ ---- ------ ------ -------
Total non-recurring
expenses.................... $1,312 $7,063 $3,227 $2,606 $443 $8,395 $3,624 $20,940
====== ====== ====== ====== ==== ====== ====== =======
</TABLE>
(5) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization, and restructuring and other
non-recurring charges. While it should not be considered in isolation or as
a substitute for net income, cash flows from operating activities or other
measures of financial performance and liquidity under generally accepted
accounting principles ("GAAP"), EBITDA is presented here to provide
additional information about the Company's ability to meet its future debt
service, capital expenditure and working capital requirements. EBITDA is not
necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the method of calculation.
(6) Please see "Unaudited Pro Forma Financial Data" beginning on page 58 for a
description of the pro forma adjustments.
(7) The Company's revolving line of credit and long-term obligations were
restated as current liabilities at June 30, 1999 due to uncured covenant
defaults under the Company's Credit Agreement. It is anticipated that an
amendment to the Credit Agreement will be entered into as part of the
Questor Transaction and, as a result, these balances will be restored to
long-term status.
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: obtaining the requisite
shareholder, bank and regulatory approvals required to consummate the Questor
Investors financing; Aegis' reliance on certain major clients; realizing cost
reductions as a result of Aegis' site migration plan; the successful combination
of anticipated revenue growth with operating expense reduction to result in
improved profitability and cash flow; government regulation and tax policy;
economic conditions, competition and pricing; dependence on Aegis' labor force;
reliance on technology, telephone service dependence; and other operational,
financial or legal risks or uncertainties detailed in Aegis' SEC filings from
time to time. These risks and uncertainties could cause actual results or events
to differ materially from historical results or those anticipated. Investors
should not place undue reliance on such forward-looking statements, and the
Company undertakes no obligation to publicly update or revise any
forward-looking statements.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC"), completed the acquisition of IQI, Inc., a New York corporation ("IQI").
The acquisition was effected through the merger (the "Merger") of ATC Merger
Sub, Inc. ("Sub"), a New York corporation and wholly-owned subsidiary of ATC,
with and into IQI pursuant to an Agreement and Plan of Merger dated as of
April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.
The Merger has been accounted for as a reverse purchase, meaning that for
accounting purposes, IQI is the surviving corporation and is treated as having
acquired ATC in a purchase accounting transaction. Reported financial results
reflect the Merger and are those of IQI for the periods ended before the Merger
and of the combined company on a purchase accounting basis for the periods ended
after the Merger. See "Notes to Consolidated Financial Statements--4. Mergers
and Acquisitions."
The accompanying consolidated financial statements, in the opinion of the
Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the consolidated financial condition of the
Company and the consolidated results of its operations for the periods
indicated. The consolidated results of operations for interim periods reported
are not necessarily indicative of the results to be experienced for the entire
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>
FIVE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
JULY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------- ------------- --------------------- ---------------------
1995 1996 1996 1997 1998 1998 1999
-------- -------- ------------- -------- ---------- ---------- --------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services, excluding
depreciation and
amortization shown below.... 67.6% 70.7% 77.2% 65.9% 70.8% 67.7% 72.2%
----- ----- ----- ------ ------ ------ ------
Gross margin.................. 32.4% 29.3% 22.8% 34.1% 29.2% 32.3% 27.8%
Selling, general and
administrative
expenses.................... 29.3% 23.6% 32.7% 27.1% 22.1% 23.3% 27.8%
Depreciation.................. 1.5% 2.3% 3.6% 3.4% 4.4% 4.2% 5.7%
Acquisition good-will
amortization................ -- -- 0.2% 1.2% 1.3% 1.1% 1.2%
Asset impairment change....... -- -- -- -- -- -- --
Restructuring and other non-
recurring charges........... -- -- -- -- 3.7% 4.9% --
----- ----- ----- ------ ------ ------ ------
Total expenses............ 30.8% 25.9% 36.6% 31.7% 31.5% 33.5% 34.7%
----- ----- ----- ------ ------ ------ ------
Operating income (loss)....... 1.6% 3.4% (13.8%) 2.4% (2.2%) (1.3%) (6.9%)
Other income, net............. 0.8% 1.5% 2.4% -- -- -- --
Interest expense, net......... 0.1% 0.3% 1.7% 2.7% 2.4% 2.3% 3.1%
Non-cash interest expense
(Restated).................. -- -- -- -- 1.4% 4.2% --
----- ----- ----- ------ ------ ------ ------
Income (loss) before income
taxes (Restated)............ 2.3% 4.6% (13.1%) (0.3%) (6.0%) 7.8% (10.0%)
Income tax expense
(benefit)................... 0.6% 0.0% 6.7% 0.4% (1.3%) 0.9% (3.4%)
----- ----- ----- ------ ------ ------ ------
Net income (loss)
(Restated).............. 1.7% 4.5% (19.8%) (0.7%) (4.7%) (6.9%) (6.6%)
===== ===== ===== ====== ====== ====== ======
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
---------- --------
(RESTATED)
<S> <C> <C>
Revenues...................... 100.0% 100.0%
Cost of services, excluding
depreciation and
amortization shown below.... 65.9% 72.3%
------ ------
Gross margin.................. 34.1% 27.7%
Selling, general and
administrative
expenses.................... 25.1% 27.7%
Depreciation.................. 4.3% 5.4%
Acquisition good-will
amortization................ 1.2% 1.2%
Asset impairment change....... -- 11.3%
Restructuring and other non-
recurring charges........... 2.2% 0.3%
------ ------
Total expenses............ 32.8% 45.9%
------ ------
Operating income (loss)....... 1.3% (18.2%)
Other income, net............. -- --
Interest expense, net......... 2.6% 3.0%
Non-cash interest expense
(Restated).................. 1.9% --
------ ------
Income (loss) before income
taxes (Restated)............ (3.2%) (21.2%)
Income tax expense
(benefit)................... 0.0% (3.3%)
------ ------
Net income (loss)
(Restated).............. (3.2%) (17.9%)
====== ======
</TABLE>
44
<PAGE>
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
The Company experienced a net loss of $4.0 million, or 6.6% of revenues, for
the quarter ended September 30, 1999 as compared to a net loss of approximately
$5.1 million, or 6.9% of revenues, in the corresponding period in 1998.
Revenues generated during the quarter decreased 16.7% to approximately $61.1
million from $73.3 million in the third quarter a year ago. The net loss per
share for the quarter was $0.09 as compared to a net loss per share of $0.10 in
the prior year period. The decrease in revenues for the third quarter of 1999
versus 1998 was primarily due to the curtailment of certain outbound programs by
the Company's two largest telecommunications clients and a large financial
services client, and a decline in marketing research revenues. Outbound
teleservices revenues declined approximately $16.9 million, or 45%, for the
quarter ended September 30, 1999, while marketing research revenues dropped $0.9
million, or 11%, in the same period. These declines were offset somewhat by a
$5.5 million, or 20%, increase in inbound teleservices revenues for the quarter.
Revenues increased $18.5 million, or 11.4%, to $180.9 million during the
nine months ended September 30, 1999 as compared to revenues of approximately
$162.4 million generated in the prior year period. The increase in revenues for
the nine months ended September 30, 1999 was due primarily to the impact of
revenues contributed by ATC subsequent to the Merger. Including a non-cash asset
impairment charge of $20.4 million, or a loss of $0.39 per share, and
restructuring and other non-recurring charges of $0.5 million ($0.3 million, net
of taxes, or $0.01 per share), the Company experienced a net loss of
$32.3 million, or a loss of $0.63 per share, for the nine months ended
September 30, 1999 as compared to a net loss of approximately $5.2 million, or
$0.14 per share, in the prior year period. Excluding these charges, the net loss
for the nine month period of 1999 was approximately $11.6 million, or a loss of
$0.23 per share.
On a pro forma basis for the Merger, revenues decreased $29.4 million, or
14%, for the nine month period ended September 30, 1999 versus the prior year
period. This decrease was primarily the result of the curtailment of certain
outbound programs by the Company's largest telecommunications client and a large
financial services client, and a decline in marketing research revenues.
Outbound teleservices revenues declined $34.7 million, or 31%, for the nine
months ended September 30, 1999, while marketing research revenues dropped $5.2
million, or 22%, in the same period. These declines were offset somewhat by a
$10.5 million, or 14%, increase in inbound teleservices revenues for the nine
month period.
For the three and nine month periods ended September 30, 1998 and 1999, the
Company's actual mix of revenues was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outbound teleservices............... 51.6% 34.3% 62.3% 42.6%
Inbound teleservices................ 37.1% 53.6% 22.8% 46.9%
------ ------ ------ ------
Teleservices total................ 88.7% 87.9% 85.1% 89.5%
Marketing research services......... 11.3% 12.1% 14.9% 10.5%
------ ------ ------ ------
Total revenues.................... 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
45
<PAGE>
On a pro forma basis for the Merger, the Company's mix of revenues, for the
nine month periods ended September 30, 1998 and 1999, was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
----------- --------
(PRO FORMA)
<S> <C> <C>
Outbound teleservices................................. 53.2% 42.6%
Inbound teleservices.................................. 31.9% 46.9%
------ ------
Teleservices total.................................. 85.1% 89.5%
Marketing research services........................... 14.9% 10.5%
------ ------
Total revenues...................................... 100.0% 100.0%
====== ======
</TABLE>
Approximately 25% of the Company's revenues during the quarter ended
September 30, 1999 were generated by the Company's largest telecommunications
client and approximately 16% by its largest financial services client, as
compared to approximately 26% and 9%, respectively, in the quarter ended
September 30, 1998. For the nine months ended September 30, 1999, approximately
22% of the Company's revenues were generated by the Company's largest
telecommunications client and approximately 16% by its largest financial
services client, as compared to approximately 29% and 4% (26% and 9%, on a pro
forma basis for the Merger), respectively, in the same period in 1998.
The Company's objective is to secure recurring revenues from long-term
relationships with targeted, large corporate clients that utilize
telecommunications and marketing research strategies as integral, ongoing
elements in their marketing and customer service programs. In addition to
providing services on an outsourcing basis, in which the Company provides all or
a substantial portion of a client's teleservices and/or marketing research
needs, the Company also continues to perform project-based services for certain
clients. Project-based services, however, are frequently short-term and there
can be no assurance that these clients will continue existing projects or
provide new ones.
As part of the Company's site migration plan, Aegis closed its Addison,
Texas facility in August 1999. Work being performed at this center had been
migrated to two new client service centers in St. Joseph, Missouri and Sierra
Vista, Arizona during the second quarter of 1999. The lease on the Addison
client service center expired on October 31, 1999. The Company's site strategy
and center migration plan focuses on locating client service centers in what
management believes are more economically attractive markets than those in which
the Company has traditionally operated.
During the quarter ended September 30, 1999, Aegis began performing critical
customer care functions, including the handling of inbound orders and inquiries,
under an expanded customer service relationship with its largest
telecommunications client, AT&T. During the quarter, the new offering requires
the use of more than 700 workstations in Aegis client service centers in Irving
and Los Angeles. In addition, Aegis began providing outbound customer
acquisition services to CIDCO Inc., which develops and sells advanced network
appliances such as network feature telephones, Caller ID devices and Internet
appliances. Also during the third quarter, the Company's marketing research
division, Elrick & Lavidge Marketing Research ("E&L"), was retained by Marketing
Communication Systems, Inc. on behalf of Priceline.com Incorporated to provide
database sciences. Separately, E&L entered into an agreement to extend current
services with Universal Studios Recreation Group.
For the quarter ended September 30, 1999, gross profit earned on revenues
decreased approximately $6.7 million, or 28.2%, from the quarter ended
September 30, 1998. Gross profit for the nine months ended September 30, 1999
decreased $5.2 million, or 9.5%. Gross profit as a percentage of revenues
("gross margin") for the quarter and nine months ended September 30, 1999 was
27.8% and 27.7%, respectively, as compared to 32.3% and 34.1% in the comparable
prior year periods. The decreases in gross profit and gross margin for the three
and nine month periods were primarily due to a decline in capacity utilization
from the prior year periods resulting from lower volumes of business from the
Company's two largest telecommunications clients, a large financial services
client and our marketing
46
<PAGE>
research division, several new programs being billed at training rather than
production rates as they were being ramped-up, and redundant facilities and
training costs associated with the Addison, Texas client service center being
open simultaneously with two new centers in Sierra Vista, Arizona and St.
Joseph, Missouri for part of the third quarter. The Addison facility ceased
operations in August 1999 and its lease expired on October 31, 1999.
Selling, general and administrative ("SG&A") expenses decreased
approximately $0.1 million, or 0.6%, in the quarter and increased approximately
$9.4 million, or 23.1%, in the nine months ended September 30, 1999 versus the
comparable periods of 1998. As a percentage of revenues, SG&A expenses for the
quarter and nine months ended September 30, 1999 were 27.8% and 27.7%,
respectively, versus 23.3% and 25.1% in the comparable three and nine month
periods of 1998, respectively. The increases in SG&A expenses for the nine month
period and in SG&A expenses as a percentage of revenues for the three and nine
month periods are primarily attributable to the Merger with ATC. On a pro forma
basis for the Merger, SG&A expenses decreased approximately $2.6 million, or
4.8%, in the nine months ended September 30, 1999 as compared to the previous
year period. This decrease was primarily due to post-Merger reductions in
redundant overhead and SG&A staff reductions in response to lower than
anticipated business volumes.
Depreciation and amortization expenses increased $0.3 million, or 8.0%, in
the quarter and approximately $3.0 million, or 33.5%, in the nine months ended
September 30, 1999 as compared to the prior year periods. As a percentage of
revenues, depreciation and amortization expense was 6.9% in the quarter and 1999
and 6.6% in the first nine months of 1999 versus 5.3% and 5.5% in the prior year
periods, respectively. The increases in depreciation and amortization expense as
a percentage of revenues are due to the addition of ATC's depreciation and
amortization expenses subsequent to the Merger, additional amortization expense
resulting from the goodwill recorded in the Merger, and additional depreciation
resulting from investments in the completion of three new client service centers
and the expansion of three existing centers since the first quarter of 1998.
As a result of the performance of the Company's Elrick & Lavidge ("E&L")
marketing research division since its acquisition by IQI in July 1997, the
Company performed an analysis (based on E&L's estimated future cash flows) of
the carrying value of the goodwill associated with the purchase of E&L. As a
result of this evaluation, it was determined that the carrying value of the
goodwill associated with the purchase of E&L has been impaired. Accordingly, in
the first quarter of 1999, the Company adjusted the carrying value of E&L's
long-lived assets to their fair value resulting in a non-cash asset impairment
charge of $20.4 million, which reduced the amount of goodwill on the Company's
balance sheet by a corresponding amount. This reduction is expected to result in
a decrease in the Company's goodwill amortization expense of approximately $1.1
million annually.
On July 29, 1998, the Company announced that it would record pre-tax
restructuring charges of $13.0 million related to the Merger. Restructuring and
other related non-recurring charges must be matched to the time periods in which
associated restructuring actions are taken. Accordingly, the Company recorded
pre-tax charges of $8.4 million ($5.2 million, net of taxes) in the year ended
December 31, 1998 and $0.5 million ($0.3 million, net of taxes) in the first
quarter of 1999, as part of the total restructuring. These charges were
primarily attributable to one-time write-offs of redundant hardware and
software, severance costs and the consolidation of certain administrative
functions including costs to relocate offices and employees. Management believes
that all Merger-related restructuring efforts have been completed and all
related charges recorded. The Company does not anticipate recognizing additional
Merger-related restructuring charges in 1999 and none were recorded in the
quarter ended September 30, 1999.
Net interest expense increased approximately $0.2 million, or 10.9%, in the
third quarter and $1.3 million, or 32.2%, in the first nine months of 1999
versus the same periods in 1998, due to increased utilization of the Company's
revolving line of credit and the assumption of additional subordinated
indebtedness.
47
<PAGE>
Non-cash interest expense related to the beneficial conversion feature in
the subordinated debt financing provided by the Thayer-led group in July 1998
was recognized in 1998. The Company determined that a beneficial conversion
feature existed for subordinated debt issued in July 1998 and has quantified the
amount as non-cash interest expense of $3.1 million at the issuance date. See
Note 8 of "Notes to Unaudited Consolidated Financial Statements--Effect of
Restatement."
The Company's statutory state and federal income tax benefit rate for the
quarter and nine months ended September 30, 1999 was approximately 39.0%. The
Company's effective tax rate on reported taxable income or loss differs from the
statutory rate due primarily to the non-deductibility, for tax purposes, of the
Company's goodwill amortization expense and the asset impairment charge.
HISTORICAL YEAR ENDED DECEMBER 31, 1998 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1997
The Company experienced a net loss of approximately (restated)
$10.8 million, or 4.7% of revenues, for the year ended December 31, 1998.
Excluding approximately $8.4 million ($5.2 million, net of taxes) in
merger-related restructuring and other non-recurring charges, the Company
experienced a net loss of approximately $5.6 million, or 2.5% of revenues, in
1998 as compared to a net loss of approximately $1.0 million, or 0.7% of
revenues, in 1997.
Revenues generated during the year ended December 31, 1998 increased 70.4%
to $228.0 million from $133.8 million in the year ended December 31, 1997. The
increase in revenues was due primarily to the impact of revenues contributed by
ATC subsequent to the Merger and by InterServ, which was acquired by IQI on
July 12, 1997.
On a pro forma basis for the Merger, revenues grew $27.2 million, or 10.9%,
in 1998 as compared to 1997. The growth in revenues on a pro forma basis for the
Merger was primarily attributable to growth in volumes from certain existing
telecommunications and financial services clients and services performed for new
clients. This growth was somewhat offset by a decrease in service volumes from
the Company's largest client of approximately 13.6% and a decline in marketing
research revenues of approximately 12.0%. See "Notes to Consolidated Financial
Statements--Mergers and Acquisitions."
Approximately 27% of the Company's revenues during the year ended
December 31, 1998 were generated by the Company's largest telecommunications
client and approximately 11% by its largest financial services client as
compared to approximately 41% and nil, respectively, in the year ended
December 31, 1997. On a pro forma basis for the Merger, approximately 26% of the
Company's revenues during 1998 were generated by the Company's largest
telecommunications client and approximately 9% by its largest financial services
client as compared to approximately 33% and 9%, respectively, in 1997.
During the first quarter of 1998, the Company was awarded a renewal of its
agreement with Integrion Financial Network, a provider of interactive banking
and electronic commerce services to financial institutions in the United States
and Canada owned equally by 15 banks, Visa U.S.A. and IBM Corp. The Company also
signed a contract extension with one of its large telecommunications clients.
During the quarter ended March 31, 1998, the Company entered into a new contract
with and began providing customer acquisition services to America Online, Inc.,
a world leader in branded interactive services and content. The Company is no
longer providing services to America Online. During the quarter ended June 30,
1998, the Company entered into a new contract with and began providing inbound
customer services to a leading provider of rentable home entertainment. In
addition, the Company was chosen by VHA, Inc., a national healthcare alliance
based in Irving, Texas, to provide inbound customer service support for an 800
number which consumers call to access healthcare information. During the quarter
ended September 30, 1998, the Company was selected by Sony Computer
Entertainment America as the inbound technical support provider for its
products. The Company was also awarded a three-year renewal of ATC's
long-standing relationship with American Express. Under this agreement, the
Company continues to provide a variety of services to American Express and its
cardholders including customer care and customer acquisition. During the quarter
ended December 31, 1998, the Company began providing
48
<PAGE>
inbound customer services to State Communications, a provider of
telecommunications services primarily serving residential and small business
customers across the U.S.
The Company's objective is to secure recurring revenues from long-term
relationships with targeted, large corporate clients that utilize
telecommunications and marketing research strategies as integral, ongoing
elements in their marketing and customer service programs. In addition to
providing services on an outsourcing basis, in which the Company provides all or
a substantial portion of a client's teleservices and/or marketing research
needs, the Company also continues to perform project-based services for certain
clients. Project-based services, however, are frequently short-term and there
can be no assurance that these clients will continue existing projects or
provide new ones.
For the year ended December 31, 1998, gross profit earned on revenues
increased approximately $21.0 million, or 46.1%, from the year ended
December 31, 1997. The increase in gross profit was primarily due to the
addition of ATC's revenues as a result of the Merger. Gross profit as a
percentage of revenues ("gross margin") for 1998 was 29.2% as compared to 34.1%
in 1997. The decrease in gross margin was primarily due to the impact of the
addition of ATC's revenues, which are characterized by lower gross margins than
those of IQI, and a decline in capacity utilization in the fourth quarter of
1998 resulting from lower volumes of business from the Company's two largest
telecommunications clients.
SG&A expenses increased $14.2 million, or 39.1%, in 1998 versus 1997. The
increase in SG&A expenses was primarily attributable to the Merger with ATC. As
a percentage of revenues, SG&A expenses were 22.1% in 1998 and 27.1% in 1997.
The decrease in SG&A expenses as a percentage of revenues was primarily the
result of efficiencies of scale derived from growth in business volumes.
Depreciation and amortization expenses increased $6.8 million, or 111.6%, in
1998 as compared to 1997. As a percentage of revenues, depreciation and
amortization expense was 5.7% in 1998 versus 4.6% in 1997. The increase in
depreciation and amortization expense as a percentage of revenues was due to
additional depreciation resulting from investments in two new client service
centers, information technology and infrastructure, and additional goodwill
amortization resulting from the goodwill recorded in the Merger and in the
InterServ acquisition.
In connection with the Merger, the Company recorded restructuring and other
non-recurring charges of approximately $8.4 million ($5.2 million, net of taxes)
in the year ended December 31, 1998. These charges are primarily attributable to
one-time write-offs of redundant hardware and software, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees. Management expects the remainder of restructuring efforts
to be completed by March 31, 1999.
Net interest expense increased by approximately $1.9 million, or 53.8%, in
1998 over 1997 due to increased utilization of the Company's revolving line of
credit and the assumption of additional subordinated indebtedness.
Non-cash interest expense related to the beneficial conversion feature in
the subordinated debt financing provided by the Thayer-led group in July 1998
was recognized in 1998. The Company determined that a beneficial conversion
feature existed for subordinated debt issued in July 1998 and has quantified the
amount as non-cash interest expense of $3.1 million at the issuance date. See
Note 8 of "Notes to Consolidated Financial Statements--Effect of Restatement."
The Company's statutory state and federal income tax benefit rate for 1998
was approximately 40.0%. The Company's effective tax rate on reported taxable
income or loss differs from the statutory rate due primarily to the
non-deductibility, for tax purposes, of the Company's amortization expense of
the cost in excess of net assets required ("goodwill"). The non-deductibility of
such costs resulted in income tax expense in 1997 despite a reported pre-tax
loss.
Due to the factors described above, the net loss increased from
approximately $1.0 million in 1997 to approximately (restated) $10.8 million in
1998.
49
<PAGE>
HISTORICAL YEAR ENDED DECEMBER 31, 1997 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1996
The Company's revenues increased $71.0 million, or 113.1%, from
$62.8 million in 1996 to $133.8 million in 1997. The increase was primarily due
to the acquisition of Lexi in November 1996 (the "Lexi Acquisition") and the
InterServ Acquisition in July 1997. In the period from November 22 to
December 31, 1996, Lexi contributed revenues of $2.8 million, as compared to
Lexi's 1997 revenue contribution of $40.2 million. In 1997, the five and
one-half month revenue contribution from InterServ was $26.4 million. Without
Lexi's revenue contribution in 1996 and 1997, and without InterServ's
contribution in 1997, revenues would have increased from approximately
$60.0 million in 1996 to $67.1 million in 1997, an increase of approximately
$7.1 million, or 11.9%. This telemarketing revenue growth was principally caused
by increased volume generated by existing clients including bank credit card
issuers, regional and long distance telephone service providers and cable
television service providers.
Gross profit earned on revenues increased approximately $28.1 million, or
159.5%, from 1996. As a percentage of revenues, gross profit in 1997 was 34.1%
versus 28.0% in 1996. The increase in gross profit was due in part to increased
revenues as well as: (i) operating efficiency improvements in the
pay-for-performance programs, especially certain programs for a large
telecommunications client, and (ii) the addition of higher margin inbound
telemarketing business as a result of the InterServ Acquisition. Partially
offsetting the margin improvements were: (i) price reductions granted to a major
telecommunications client, (ii) higher teleservices personnel costs in
competitive labor markets, and (iii) new facility start-up expenses in Port St.
Lucie, Florida, and Fairmont, West Virginia.
SG&A expenses increased approximately $18.4 million, or 102.6%, from
$17.9 million in 1996 to $36.3 million in 1997. The Lexi Acquisition and the
InterServ Acquisition contributed to this increase. In 1996, Lexi contributed
SG&A expenses of approximately $1.3 million, and in 1997, Lexi contributed SG&A
expenses of approximately $13.1 million. In 1997, InterServ contributed SG&A of
approximately $5.6 million. Without the addition of Lexi in 1996 and 1997, and
InterServ in 1997, SG&A expenses would have increased from $16.6 million in 1996
to approximately $17.7 million, an increase of approximately $1.1 million, or
6.3%. In addition to the acquisitions of Lexi and InterServ, the Company opened
two new client service centers in 1997 in Port St. Lucie, Florida and Fairmont,
West Virginia, added to capacity in existing client service centers, and added
key corporate personnel to assist with the management of the expanded business.
Depreciation and amortization expense increased from $1.8 million in 1996 to
approximately $6.1 million in 1997, an increase of approximately $4.3 million,
or 235.7%. The increase was principally due to the addition of depreciation and
amortization of tangible and intangible assets acquired from Lexi and InterServ
and to added depreciation associated with $10.0 million of capital expenditures.
Goodwill amortization was approximately $0.1 million in 1996 and increased to
approximately $1.6 million in 1997.
Other income decreased from $0.3 million in 1996 to $0 in 1997. The 1996
amount was primarily interest income and management fee income.
Interest expense increased by $3.0 million, from approximately $0.6 million
in 1996 to $3.6 million in 1997, primarily due to increased borrowings.
Long-term debt rose from $22.6 million on December 31, 1996 to approximately
$51.3 million on December 31, 1997 primarily as a result of debt associated with
the InterServ Acquisition and the opening of two new client service center
facilities in September and October 1997.
Income taxes decreased by $1.6 million, from $2.2 million in 1996 to
approximately $0.6 million in 1997. In 1996, the Company's change from an
S-corporation to a C-corporation resulted in tax charges of approximately
$3.0 million.
Due to the factors described above, the net loss decreased from
$4.6 million in 1996 to approximately $1.0 million in 1997.
50
<PAGE>
HISTORICAL FIVE MONTHS ENDED DECEMBER 31, 1996 VS. HISTORICAL FIVE MONTHS ENDED
DECEMBER 31, 1995
The Company's revenues increased approximately $3.8 million, or 16.5%, from
approximately $23.0 million in 1995 to approximately $26.8 million in 1996.
These increased revenues relate primarily to the Lexi Acquisition. Without the
revenues of Lexi of $2.8 million for the period from November 22 to
December 31, 1996, revenues would have increased by approximately $1.0 million,
or 4.3%, from approximately $23.0 million in 1996 to approximately
$24.0 million in 1997. The increase in telemarketing revenue reflects volume
increases from major regional and long distance telecommunications companies.
Gross profit earned on revenues decreased approximately $0.8 million, or
11.0%, from the comparable period in 1995. As a percentage of revenues, gross
profit in 1996 was 22.8% versus 29.8% in 1995. The decrease in gross profit was
principally due to: (i) operations and quality problems associated with the
start-up of the Company's largest pay-for-performance program; (ii) start-up
expenses for a new client service center facility in Mesquite, Texas; and
(iii) price reductions granted to a large bank credit card client.
SG&A expenses increased by $4.0 million, or 85.0%, from $4.7 million in 1995
to $8.7 million in 1996. Without the increase in SG&A expenses of Lexi, totaling
approximately $1.3 million for the period from November 22 to December 31, 1996,
this increase would have been $2.7 million, or 57.7%, from $4.7 million in 1995
to $7.4 million in 1996. In 1996, the Company incurred additional expenses
associated with its recapitalization and the purchase of the Company's shares by
Thayer Equity.
Depreciation and amortization increased $0.6 million, or 146.7%, from
$0.4 million in 1995 to $1.0 million in 1996. Without the Lexi depreciation of
approximately $0.2 million for the period from November 22 to December 31, 1996,
the increase would have been from $0.4 million in 1995 to $0.8 million in 1996,
or 99.3%, primarily due to the addition of a new client service center facility
in Mesquite, Texas. Goodwill amortization was $0 in 1995 and increased to
approximately $0.1 million in 1996 as a result of the Lexi Acquisition.
Other income, net, increased from $0 to approximately $0.6 million from 1995
to 1996. The 1996 amount was comprised primarily of interest income and
management fee income.
Interest expense increased from approximately $0.1 million in 1995 to
approximately $0.5 million in 1996, or approximately $0.4 million. Without the
Lexi interest for the period from November 22 to December 31, 1996, the increase
would have been approximately the same. This increase includes interest on
additional borrowings resulting from the recapitalization of the Company and the
purchase of the Company's shares by Thayer Equity.
Income taxes increased from approximately $0.7 million in 1995 to
approximately $1.8 million in 1996 due to the change in the Company's tax status
from a subchapter S-corporation to a C-corporation in November 1996.
Due to the factors described above, net income decreased from approximately
$1.0 million in 1995 to a loss of approximately $5.3 million in 1996.
HISTORICAL YEAR ENDED JULY 31, 1996 VS. HISTORICAL YEAR ENDED JULY 31, 1995
Revenues increased by approximately $1.4 million, or 2.4%, from
approximately $56.2 million in 1995 to approximately $57.6 million in 1996. The
increase in telemarketing revenue reflects volume increases from major regional
and long distance telecommunications companies.
Gross profit earned on revenues decreased approximately $1.4 million, or
7.5%, from $18.2 million in 1995 to $16.8 million in 1996. As a percentage of
revenues, gross profit in 1996 was 29.3% versus 32.4% in 1995. The decrease in
gross profit was primarily due to price reductions granted to a large
telecommunications client and a large bank credit card issuer client.
51
<PAGE>
Operating expenses decreased by approximately $2.9 million, or 17.3%, from
$16.4 million in 1995 to $13.5 million in 1996. Included in operating costs and
expenses were officer's salaries of approximately $7.1 million in 1995 as
compared to $2.4 million in 1996. Offsetting this approximate $4.7 million
decrease in officer's salaries was an increase in operating expenses of
$0.9 million. Most of this increase was the result of the 1996 opening of three
new client service centers located in Pennsylvania, Minnesota and Ontario,
Canada.
Depreciation and amortization increased by $0.4 million, or 53.5%, from
approximately $0.9 million in 1995 to $1.3 million in 1996. This increase was
the result of capital spending related to the opening of three new client
service centers in 1996 and the full-year impact of two new client service
centers opened in 1995.
Other income, net, increased from $0.4 million to approximately
$0.9 million from 1995 to 1996. These amounts include primarily interest income
and management fee income.
Interest expense increased by $0.1 million, from approximately $0.1 million
in 1995 to approximately $0.2 million in 1996 as a result of increased debt
associated with the opening of the new call center facilities in 1996.
Due to the factors described above, income taxes decreased by approximately
$0.3 million, from $0.3 million in 1995 to $0.0 million in 1996 and net income
increased by $1.6 million, or 171.6%, from approximately $1.0 million in 1995 to
$2.6 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information from the Company's
statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED NINE MONTHS ENDED
YEAR ENDED JULY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------ --------------------- ---------------------
1994 1995 1996 1996 1997 1998 1998 1999
-------- -------- -------- ------------ -------- ---------- ---------- --------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by (used
in) operating
activities................ $1,098 $ 368 $ 2,915 $ (139) $ 2,016 $ 7,127 $ 1,259 $(13,062)
Net cash provided by (used
in) investing
activities................ (237) (1,846) (5,858) 1,596 (25,794) (16,213) (11,050) (8,618)
Net cash provided by (used
in) financing
activities................ (209) 2,113 1,652 665 26,805 14,478 11,523 11,339
Effect of exchange rates on
cash...................... -- -- 3 1 11 21 -- --
------ ------ ------- ------ ------- ------- -------- --------
Net change in cash and cash
equivalents............... $ 652 $ 635 $(1,289) $2,123 $ 3,038 $ 5,413 $ 1,732 $(10,341)
====== ====== ======= ====== ======= ======= ======== ========
</TABLE>
The Company has historically utilized cash flow from operations, available
borrowing capacity under its credit facilities, and subordinated indebtedness
provided by certain of its shareholders (primarily Thayer Equity) to meet its
liquidity needs. As a result of the liquidity matters discussed in Note 9 of the
Notes to the Unaudited Consolidated Financial Statements, if the Questor
Investors transaction is not consummated, management believes that the Company
will immediately need to seek other financing and that until such financing is
in place, the Company will continue to experience a lack of liquidity. Under
such circumstances, the Company may be required to undertake significant
cost-cutting measures, which could negatively affect ongoing operations. Thayer
Equity has previously provided the Company 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 that
Thayer Equity will continue to provide such financial support. If financing is
not available from Thayer Equity, the Company believes
52
<PAGE>
that it could rely on its borrowing base to obtain such financing from another
source. Absent adequate financing and financial support, the Company may
experience difficulty implementing its ongoing business plans and strategies.
During the nine months ended September 30, 1999, net cash provided by
operating activities decreased approximately $14.3 million versus the prior year
period primarily due to losses from operations.
Cash used in investing activities during the first nine months of 1999
consisted of capital expenditures, which totaled $8.6 million, representing a
$2.4 million, or 22.0%, decrease from the first nine months of 1998. The nine
month period of 1998 included $3.6 million of net acquisition costs in addition
to $7.4 million of capital expenditures. Capital expenditures primarily have
consisted of new telecommunications equipment and information technology
hardware and software required in the maintenance, upgrade and expansion of the
Company's operations including the build-out of two new client service centers
in the second quarter of 1999 and the upgrade or replacement of workstations in
the Company's existing facilities. Capital expenditures during the last twelve
months totaled $13.7 million and have been funded primarily with proceeds from
bank borrowings and subordinated indebtedness provided by Thayer Equity.
During the nine months ended September 30, 1999, financing activities
included net proceeds of approximately $6.4 million under the Company's credit
facility and the receipt of approximately $5.7 million of additional
subordinated indebtedness provided by Thayer Equity. (See discussion of credit
facility and subordinated indebtedness below.)
CREDIT FACILITY
In connection with the Merger, IQI entered into the Credit Agreement with
Scotiabank and CSFB whereby Scotiabank and CSFB rolled over and continued their
loan commitments to IQI aggregating $53.0 million and Scotiabank committed to
provide IQI an additional $12.0 million in revolving loans, resulting in a total
facility of $65.0 million. The proceeds of the additional loan were used to
refinance the bank indebtedness of Advanced Telemarketing Corporation, a
wholly-owned subsidiary of ATC ("Advanced"), to pay transaction expenses, and
for general corporate and working capital needs of IQI and Advanced. As part of
the amendment of the Credit Agreement, the Company and Advanced agreed to
guarantee the IQI indebtedness and grant blanket security interests in their
assets to secure repayment of the banks' loans. The Company also pledged its
shares of Advanced common stock to the banks to secure repayment of the banks'
loans.
The Credit Agreement contains various covenants that limit, among other
things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the Company and requires the operating
subsidiaries to meet certain financial covenants. Similarly, under the terms of
the Company's guaranty of its operating subsidiaries' obligations, the Company
is subject to certain covenants limiting, among other things, its ability to
incur indebtedness, enter into guaranties, and acquire other companies. The
Credit Agreement is secured by liens on the operating subsidiaries' accounts
receivable, furniture and equipment, and is guaranteed by the Company.
On March 30, 1999, the Company entered into the Third Amendment to the
Credit Agreement (the "Third Amendment") whereby Scotiabank and CSFB waived the
Company's defaults under certain of the covenants at December 31, 1998 and
provided for new levels for existing financial covenants and a new covenant
related to EBITDA. At June 30, 1999, Aegis was in not in compliance with certain
of its financial covenants contained in the Third Amendment. Accordingly, the
long-term portion of this debt has been reclassified as current at June 30,
1999.
On August 6, 1999, the Company entered into the Fourth Amendment to its
Credit Agreement (the "Fourth Amendment") with Scotiabank and CSFB whereby
Scotiabank and CSFB committed to provide the Company an additional $7.5 million
in term debt, resulting in a total facility of approximately $68.0 million, and
waived the Company's defaults under certain of the covenants through August 31,
1999.
53
<PAGE>
The proceeds of the additional loan have been used for the Company's general
corporate and working capital needs. As part of the Fourth Amendment, Thayer
Equity agreed to guarantee the Company's additional $7.5 million of
indebtedness. In consideration of such guarantee, the Company issued Thayer
Equity a warrant to purchase up to 800,000 shares of the Company's Common Stock,
exercisable only if the guarantee is drawn upon and at an exercise price based
on the then market price of such stock. As part of its settlement of an
indemnification claim made by the Company related to the Merger, Thayer Equity
waived its right to this contingent warrant. The Company is currently
negotiating an amendment of its Credit Agreement, which management expects would
cure the Company's defaults.
SUBORDINATED INDEBTEDNESS
Prior to the Merger, on July 6, 1998, the Company received an additional
financing commitment from Thayer Equity and certain other shareholders of IQI.
Under the commitment, the Thayer-led group agreed to lend the Company, at its
election, up to an additional $4.0 million in subordinated indebtedness at any
time within 90 days after the Merger. As of October 23, 1998, the Company had
drawn the full commitment amount of $4.0 million. In connection with this
commitment and effective upon the Merger, the Company issued the Thayer-led
group additional warrants to purchase up to 350,000 shares of the Company's
Common Stock at an exercise price of $2.375 per share and provided certain
anti-dilution protection. This indebtedness is convertible into the Company's
Common Stock at a conversion price of $2.375 per share. This debt is in addition
to, and on the same basic terms as, the subordinated debt that Thayer Equity had
previously loaned to the Company.
In connection with the Merger, Thayer Equity provided the Company with
$6.8 million in subordinated indebtedness as well as a guarantee for
$2.0 million in bridge financing to assist in funding the Company's working
capital needs. This subordinated indebtedness is convertible into shares of the
Company's Common Stock at a conversion price of $2.00 per share. In connection
with the guarantee, and for additional consideration of $110,000, the Company
issued to Thayer Equity warrants to purchase 1,100,000 shares of the Company's
Common Stock at an exercise price of $1.96. This indebtedness is convertible
into the Company's Common Stock at a conversion price of $2.00 per share. As
discussed in Note 8 of "Notes to Unaudited Consolidated Financial
Statements--Effect of Restatement," the Company has restated its 1998 financial
statements to account for a beneficial conversion feature related to certain
convertible subordinated debt issued in 1998.
On March 30, 1999, Thayer Equity provided the Company with approximately
$5.7 million in additional subordinated indebtedness. Approximately one-half of
the proceeds from this financing were used to pay down bank debt and the
remainder for working capital purposes. The additional indebtedness is
convertible into the Company's Common Stock at a conversion price of $1.15 per
share. This debt is in addition to, and on the same basic terms as, the
subordinated debt that Thayer Equity had previously loaned to the Company.
In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's largest shareholder, Thayer Equity,
agreed to convert approximately $12.1 million of its subordinated debt into two
new series of convertible preferred stock. The 77,300 shares of new Series D
Preferred Stock ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.00 per share, and
the 44,018 shares of new Series E Preferred ($.01 par value per share, $100 per
share liquidation preference) are convertible into Company Common Stock at
$2.375 per share. Both series earn cumulative dividends (payable-in-kind in
additional shares of the respective series of Preferred Stock) at the annual
rate of 15%, and are non-voting except on specified matters. In consideration of
the conversion of the subordinated debt into preferred stock, the Company issued
the Thayer-led group warrants to purchase an additional 1,000,000 shares of
Company Common Stock at $0.90625 per share, the closing price of such stock on
the conversion date.
54
<PAGE>
NOTE RECEIVABLE
Michael G. Santry, the Company's Co-Chairman, owes the Company approximately
$2.0 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. In June 1999, the Company extended the maturity date of the note
to March 31, 2000, and increased the note's annual interest rate to 7%. In
addition, Mr. Santry agreed to pledge additional collateral as security for
repayment of the note.
PROPOSED FINANCING
On August 26, 1999, the Company entered into an agreement with the Questor
Investors whereby the Questor Investors have agreed to purchase $46.75 million
of newly issued senior voting convertible preferred stock of the Company. The
Company intends to use the net proceeds from the sale of the preferred stock
primarily to reduce outstanding debt. Such reduction is expected to deleverage
the Company and put the Company in a better position to renegotiate or refinance
its existing bank revolving credit agreement in order to cure the current
defaults, provide needed flexibility for the Company under the financial
covenants and provide access to working capital to fund future operations.
The maximum number of shares of common stock issuable upon conversion of the
46,750 shares of Series F Preferred Stock proposed to be issued (assuming a
conversion price of $1.00 per share) is 46,750,000, or approximately 47% of the
issued and outstanding shares of common stock following conversion. On a fully
diluted and as converted basis, the Questor Investors would hold approximately
38% of the Company's common stock and common stock equivalents. No assurance can
be given, however, that the transaction will be consummated. The transaction is
subject to shareholder, bank and regulatory approvals, the amendment of Aegis'
charter in certain respects to facilitate the Questor Investors' investment, and
other customary terms and conditions. The transaction is expected to be
completed in the fourth quarter of 1999.
Since the Merger, the Company has experienced declines in revenues and
continued operating losses, the latter primarily as a result of restructuring
and other non-recurring charges. Further, due to covenant defaults in its bank
agreement, the Company recorded a reclassification of long-term debt as current
indebtedness for the quarter ended September 30, 1999. As a result of these
developments, at September 30, 1999, the Company had a retained earnings deficit
of $41 million and negative working capital of $35 million. In addition, since
the Merger, the Company has relied upon the financial support of its largest
shareholder for additional capital and to maintain its existing credit
facilities. If the Questor transaction is not consummated, the Company will
require additional funding. The Company would seek such funding, and assistance
to correct the covenant defaults noted above, initially from its largest
shareholder, and if financing is not available from that source, from a third
party. There can be no assurance, however, that additional funding and financial
support will be available on acceptable terms. The Company could rely upon its
borrowing base to obtain any such financing and accordingly, believes that it
should be able to obtain adquate financing from some source. If such financing
cannot be obtained, the Company will be required to undertake significant
cost-cutting measures or a reorganization intended to streamline the Company's
operations and improve its financial results.
GROWTH STRATEGIES
The Company primarily operates in the teleservices industry, which is a
fast-growing, highly competitive industry. As such, the Company continues to
implement its site strategy and center migration plan, which focuses on locating
client service centers in what management believes are more economically
attractive markets than those in which the Company has traditionally operated.
Company growth and continued implementation of this site strategy will
necessitate additional client service centers and such
55
<PAGE>
facilities will have furniture, equipment and technological requirements
consistent with the Company's existing facilities. To that end, Aegis migrated
positions from its Addison, Texas facility to new client service centers in St.
Joseph, Missouri and Sierra Vista, Arizona in the second quarter of 1999 and
closed the Addison facility in August 1999. Management does not anticipate
opening additional new centers in 1999.
In addition to traditional growth strategies, from time to time, Aegis
engages in discussions with potential merger or acquisition candidates. Pursuant
to the Purchase Agreement for the Series F Preferred Stock, the Company may not
enter into discussions or negotiations regarding such mergers or acquisitions
without the consent of the Questor Investors.
Although no assurances can be made in this regard, management anticipates
that, based on the Company's ability to secure such financing to date, the
Company should be able to secure debt or equity funding for its future working
capital needs, the capital equipment requirements of future client service
center facilities and potential acquisition opportunities.
YEAR 2000 UPDATE
GENERAL
Aegis' company-wide Year 2000 Project (the "Project") is proceeding on
schedule. The Project is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 (the "Year 2000 Issue"). In 1998, Aegis began the Project to determine the
level of its Year 2000 compliance and to plan for the remediation of any
non-compliant systems or infrastructure. The Project has focused most intently
on production systems upon which the Company is dependent for the provision of
services and the generation of revenue. The Company has determined that
remediation of its production systems is substantially complete. In
October 1999, one of the Company's production systems suppliers notified the
Company that three computers supporting three automatic call distributors were
not Year 2000 compliant and, therefore, should be replaced. Prior to this
notification, the hardware supplier had certified these systems as Year 2000
compliant. These computers are expected to be replaced with Year 2000 compliant
systems and tested by the end of November 1999. The Company anticipates that its
production systems will be fully Year 2000 compliant by the end of
November 1999. Any remaining business software programs or hardware systems are
expected to be made Year 2000 compliant through the Project, including those
supplied by vendors, or they will be retired or supplanted by a contingency
plan. In the fourth quarter of 1998, the Company began contingency planning for
the impact of the Year 2000 Issue that may occur despite efforts to remediate
and mitigate such impact. Such contingency planning has been completed. The
contingency planning effort included the amendment of the Company's disaster
recovery plans to include Year 2000 contingencies. None of the Company's other
information technology projects have been delayed due to the implementation of
the Year 2000 Project.
THE PROJECT
Aegis' Project is divided into four major categories: (i) production systems
and software applications (the "Production Platform"), (ii) support systems and
applications (the "Support Systems"), (iii) infrastructure and facilities and
(iv) suppliers and clients. Aegis created a Year 2000 team and has assigned
responsibility for each category requiring remediation. The Company also has
engaged third parties, including Year 2000 consultants, to assist in the
completion of various phases of the Project. The general phases common to all
categories of the Project are: (i) inventorying Year 2000 items, (ii) assigning
priorities to identified items, (iii) assessing the Year 2000 compliance of
items determined to be material to the Company, (iv) repairing or replacing
material items that are determined not to be Year 2000 compliant, (v) testing
material items and (vi) designing and implementing contingency and business
continuation plans for each organization and Company location.
The inventory and priority assessment phases of each section of the Project
have been completed. The remediation phase, including repair and replacement, is
substantially complete. Material items are those
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<PAGE>
believed by the Company to have a risk that may affect revenues and related cash
flows. The Company, its Year 2000 consultants and certain of its technology
suppliers are performing the testing phases of the Project.
The Production Platform category consists of hardware and systems software
used to directly produce revenue and is typically client specific. The
remediation of this category is complete. The testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced. In addition, in
the normal course of operations, production systems may require frequent
modifications to conform to changing client specifications. At such times,
regression testing is performed. All activities related to the Production
Platform, including definition, testing and implementation of Year 2000-ready
products, have been completed. Contingency planning for this category commenced
in the first quarter of 1999 and has been completed.
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 software conversion phase of this category has been completed. The
testing phase was conducted as the software was replaced and has been completed.
Contingency planning for this category began in the first quarter of 1999 and
has been completed.
The infrastructure and facilities category consists of hardware and systems
software used in the Company's networking and systems back-up infrastructure and
Aegis' physical facilities. The remediation of this category is complete. The
testing phase is ongoing as hardware or systems software is remediated, upgraded
or replaced. All activities related to the infrastructure and facilities
category have been completed. Contingency planning for this category commenced
in the first quarter of 1999 and has been completed.
The suppliers and clients category includes the process of identifying and
prioritizing critical suppliers and clients at the direct interface level, and
communicating with them about their plans and progress in addressing the Year
2000 Issue. Detailed evaluations of the most critical third parties have been
initiated. The process of evaluating these suppliers and clients began in the
third quarter of 1998 and has been completed, with follow-up reviews scheduled
through the remainder of 1999. These evaluations were followed by the
development of contingency plans as necessary. Contingency planning for this
category commenced in the first quarter of 1999 and has been completed. The
Company has completed
"end-to-end" testing of connected or shared systems with its largest clients,
where appropriate.
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 expected to be
approximately $2.2 million. This total does not include estimates of liability
for non-compliance, if any. As of October 31, 1999, the Company had expended
approximately $2.1 million on the Project.
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
57
<PAGE>
about the Year 2000 Issue and, in particular, about the Year 2000 compliance and
readiness of its material suppliers and clients. The Company believes that, with
the implementation of new business systems and completion of the Project, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's Annual Report on Form 10-K,
as amended for the year ended December 31, 1998.
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<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated balance sheet as of
September 30, 1999, the unaudited pro forma statement of operations for the nine
months ended September 30, 1999 and the twelve months ended December 31, 1998
have been prepared to reflect the Questor Transaction as if such transaction had
occurred on January 1, 1998.
The unaudited pro forma financial information has been derived from the
application of pro forma adjustments to the Company's historical consolidated
financial statements. The pro forma financial information is unaudited and does
not purport to be indicative of the Company's financial condition or the results
that actually would have been obtained had the Questor Transaction been
consummated as of the assumed dates and for the periods presented, nor are they
indicative of the Company's results of operations or financial condition for any
future period or date. The pro forma adjustments, as described in the notes
below, are based on available information and upon certain assumptions which
management believes are reasonable.
59
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
SEPTEMBER 30, 1999 ADJUSTMENTS AS ADJUSTED
------------------- ----------- -------------------
<S> <C> <C> <C>
ASSETS
Current assets.................................. $ 62,974 $ 62,974
Property and equipment, net..................... 35,062 35,062
Goodwill, net................................... 48,713 48,713
Deferred tax assets............................. 12,582 12,582
Deferred financing costs, net................... 1,889 1,889
Other assets.................................... 282 282
-------- -------- --------
$161,502 $ -- $161,502
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit...................... 30,000 (20,300)(2) --
(9,700)(8)
Current portions of long-term obligations..... 40,568 (21,500)(3) --
(19,068)(8)
Other current liabilities..................... 27,609 (200)(4) 27,409
-------- -------- --------
Total current liailities.................... 98,177 (70,768) 27,409
Revolving line of credit........................ -- 9,700 (8) 9,700
Long-term obligations, net of current
portions...................................... -- 19,068 (8) 19,068
Capital lease obligations....................... 1,876 1,876
Subordinated indebtedness due to affiliates..... 9,508 9,508
-------- -------- --------
109,561 (42,000) 67,561
-------- -------- --------
Commitments and contingencies................... -- -- --
Redeemable convertible preferred stock (6)...... -- 46,750 (1) 45,457
(4,750)(5)
3,457 (7)
Shareholders' equity:
Preferred stock............................... 2 2
Common stock.................................. 525 525
Additional paid-in capital.................... 94,027 94,026
Treasury shares, at cost...................... (1,321) (1,321)
Cumulative translation adjustment............. 60 60
Retained earnings (deficit)................... (41,352) (3,457)(7) (44,808)
-------- -------- --------
Total shareholders' equity.................. 51,941 (3,457) 48,484
-------- -------- --------
$161,502 $ -- $161,502
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects the proceeds from the issuance of 46,750 shares of Series F
preferred stock, $.01 par value.
The anticipated use of $46,750 in proceeds from the issuance of the Preferred F
Shares is as follows:
<TABLE>
<S> <C>
(2) Pay down revolving line of credit...................... $ 20,300
(3) Pay down bank term loan................................ $ 21,500
(4) Pay accrued interest expense........................... $ 200
(5) Transaction costs...................................... $ 4,750
</TABLE>
(6) As a consequence of the holders' ability to require redemption of the
Preferred F Shares in the event of a change of control transaction, for
accounting purposes the Preferred F Shares are classified as "redeemable
convertible preferred stock." Accordingly, the Preferred F Shares are not
included in shareholders' equity.
(7) Reflects the payment of cumulative dividends on the Preferred F Shares at
an annual rate of 9.626% on a quarterly basis.
(8) The Company's revolving line of credit and long-term obligations were
reclassified as current liabilities at June 30, 1999 due to uncured covenant
defaults under the Company's Credit Agreement. It is anticipated that an
amendment to the Credit Agreement will be entered into as part of the
Questor Transaction and, as a result, these balances will be restored to
long-term status.
60
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, 1998 SEPTEMBER 30, 1999
1998 ADJUSTMENTS AS ADJUSTED 1999 ADJUSTMENTS AS ADJUSTED
------------- ----------- ------------- -------------- ----------- --------------
(RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $228,038 $228,038 $180,908 $180,908
Cost of services, excluding
depreciation and amortization
shown below....................... 161,361 161,361 130,809 130,809
-------- -------- -------- --------
Gross profit...................... 66,677 66,677 50,099 50,099
Selling, general and administrative
expenses.......................... 50,510 50,510 50,161 50,161
Depreciation........................ 10,018 10,018 9,691 9,691
Acquisition goodwill amortization... 2,876 2,876 2,213 2,213
Non-cash asset impairment charge.... -- -- 20,399 20,399
Restructuring and other
non-recurring charges............. 8,395 8,395 541 541
-------- -------- -------- --------
Operating income (loss)........... (5,122) (5,122) (32,906) (32,906)
Interest expense, net............... 5,578 (3,472)(1) 2,106 5,491 (2,577)(2) 2,914
Non-cash interest expense........... 3,092 3,092 -- --
-------- ------- -------- -------- ------- --------
Income (loss) before income
taxes........................... (13,792) 3,472 (10,320) (38,397) 2,577 (35,820)
Income tax expense (benefit)........ (2,989) 1,354 (3) (1,635) (6,078) 1,005 (3) (5,073)
-------- ------- -------- -------- ------- --------
Net income (loss)................. (10,803) 2,118 (8,685) (32,319) 1,572 (30,747)
Preferred stock dividends:
Series B, D and E................. -- -- 466 466
Series F.......................... -- 4,665 (4) 4,665 -- 3,457 (4) 3,457
-------- ------- -------- -------- ------- --------
Net loss available to common
stock............................. $(10,803) $(2,547) $(13,350) $(32,785) $(1,885) $(34,670)
======== ======= ======== ======== ======= ========
Basic and diluted loss per share.... $ (0.27) $ (0.06) $ (0.33) $ (0.63) $ (0.04) $ (0.67)
======== ======= ======== ======== ======= ========
Weighted average shares
outstanding....................... 40,383 40,383 52,075 52,075
</TABLE>
- --------------------------
(1) Reflects the reduction in interest expense due to the pay down of revolving
line of credit and long-term obligations. Average interest rates for the
year ended December 31, 1998 were 8.05% on the revolving line of credit and
8.55% on long-term obligations.
(2) Reflects the reduction in interest expense due to the pay down of revolving
line of credit and long-term obligations. Interest rates for the nine months
ended September 30, 1999 were 8.08% on the revolving line of credit and
8.36% on long-term obligations.
(3) Reflects the reduction in income tax benefit, at a 39% tax rate, due to the
reduction in interest expense.
(4) Reflects the payment of cumulative dividends on the Preferred F Shares at an
annual rate of 9.626% on a quarterly basis.
61
<PAGE>
COMPARATIVE CAPITAL STRUCTURE DATA
UNAUDITED DIFFERENCES IN SEPTEMBER 30, 1999 AND PRO FORMA CAPITAL STRUCTURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 PRO FORMA
CAPITAL STRUCTURE CAPITAL STRUCTURE
------------------- -------------------
<S> <C> <C>
Stated amount of preferred stock
29,778, $.36 cumulative Series B shares...... $ 104 $ --
77,300, 15% cumulative Series D shares....... 7,730 7,730
44,018, 15% cumulative Series E shares....... 4,402 4,402
46,750, 9.626% cumulative Series F shares.... -- 46,750
------------------- -------------------
Total...................................... $ 12,236 $ 58,882
Dividend rate on preferred stock
Series B..................................... $ 0.36 per share Not applicable
Series D..................................... 15% payable in kind 15% payable in kind
Series E..................................... 15% payable in kind 15% payable in kind
Series F..................................... Not applicable 9.626%
Principal amount of revolving line of credit... $ 30,000 $ 9,700
Interest rate on revolving line of credit...... 8.08% 8.08%
Principal amount of long-term obligations...... $ 40,568 $ 19,068
Interest rate on long-term obligations......... 8.36% 8.36%
</TABLE>
UNAUDITED PRO FORMA ANNUAL IMPACT ON NET INCOME AND NET INCOME AVAILABLE TO
COMMON STOCK
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 PRO FORMA
CAPITAL STRUCTURE CAPITAL STRUCTURE
----------------- -----------------
<S> <C> <C>
Interest expense
On revolving line of credit, net of taxes................. $(1,478) $ (478)
On long-term obligations, net of taxes.................... (2,069) (972)
------- -------
Annual impact on net income............................. $(3,547) $(1,450)
------- -------
Cumulative preferred stock dividends
Series B.................................................. (11) (11)
Series D.................................................. (1,272) (1,272)
Series E.................................................. (725) (725)
Series F.................................................. -- (4,665)
------- -------
Annual impact on net income available
to common stock......................................... $(2,008) $(6,673)
------- -------
Total annual impact on net income
available to common stock............................. $(5,555) $(8,123)
======= =======
Pro forma annual impact from change in
capital structure (1)............................... $(2,569)
=======
</TABLE>
- ------------------------
(1) Equal to the difference in each capital structure's annual impact on net
income available to common stock.
62
<PAGE>
DEADLINE FOR STOCKHOLDER PROPOSALS AT 2000 ANNUAL MEETING
Stockholders proposals intended for inclusion in the Company's proxy
materials for its 2000 Annual Meeting of Stockholders must be submitted in
writing to the Company no later than December 20, 1999. Stockholder proposals
should be directed to the Secretary of the Company, Jerry L. Sims, Jr., 7880
Bent Branch Drive, Suite 150, Irving, Texas 75063. Under Rule 14a-8 promulgated
under the Exchange Act, proposals of stockholders must conform to certain
requirements as to form and may be omitted from the proxy materials under
certain circumstances. To avoid unnecessary expenditures of time and money by
stockholders and the Company, stockholders are urged to review this Rule and, if
questions arise, consult legal counsel prior to submitting a proposal to the
Company.
OTHER MATTERS
The management of the Company is not aware of any other matters to be
presented for action at the Meeting; however, if any such matters are properly
presented for action, it is the intention of the persons named in the enclosed
form of proxy to vote in accordance with their best judgment on such matters.
WE URGE YOU, REGARDLESS OF THE NUMBER OF SHARES OF COMPANY COMMON STOCK YOU
OWN, TO DATE, SIGN AND RETURN THE ENCLOSED PROXY. YOUR COOPERATION IN GIVING
THESE MATTERS YOUR IMMEDIATE ATTENTION AND IN PROMPTLY RETURNING YOUR PROXY IS
APPRECIATED.
By Order of the Board of Directors,
/s/ JERRY L. SIMS, JR.
--------------------------------------
Jerry L. Sims, Jr.,
SECRETARY
November 29, 1999
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-1
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations for the Year Ended
July 31, 1996, the Five Months Ended December 31, 1996 and
the Years Ended December 31, 1997 and 1998 (restated)..... F-3
Consolidated Balance Sheets at December 31, 1997 and 1998
(restated)................................................ F-4
Consolidated Statements of Shareholders' Equity for the Year
Ended July 31, 1995 and 1996, the Five Months Ended
December 31, 1996 and the Years Ended December 31, 1997
and 1998 (restated)....................................... F-5
Consolidated Statements of Cash Flows for the Year Ended
July 31, 1996, the Five Months Ended December 31, 1996 and
the Years Ended December 31, 1997 and 1998 (restated)..... F-6
Notes to Consolidated Financial Statements.................. F-8
Schedule II--Valuation and Qualifying Accounts for the Five
Months Ended December 31, 1996 and the Years Ended
December 31, 1997 and 1998 (restated)..................... F-31
Consolidated Balance Sheets at December 31, 1998 (restated)
and September 30, 1999 (unaudited)........................ F-32
Unaudited Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 (restated) and 1999
and the Nine Months ended September 30, 1998 and 1999..... F-33
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 (restated) and 1999....... F-34
Notes to Unaudited Consolidated Financial Statements........ F-35
</TABLE>
All other schedules are omitted since the required information is not
applicable or is not material or because the information required is included in
the consolidated financial statements and notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aegis Communications Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of shareholders' equity, and cash flows present
fairly, in all material respects, the financial position of Aegis Communications
Group, Inc. (formerly IQI, Inc.) and its subsidiaries (the "Company") at
December 31, 1998, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
As discussed in Note 3, the Company has restated its 1998 financial statements
to account for a beneficial conversion feature related to certain convertible
subordinated debt issued in 1998.
PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 1999, except as
to Note 3 and 21, which are
as of November 8, 1999.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Aegis Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Aegis
Communications Group, Inc. and subsidiaries (formerly IQI, Inc.) as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997, the
five months ended December 31, 1996, and the year ended July 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Lexi
International, Inc., a wholly owned subsidiary which statements reflect total
revenues of $2,803,000 for the six weeks ended December 31, 1996. Those
statements were audited by other auditors whose report has been furnished to us
and, our opinion, insofar as it relates to data included for Lexi
International, Inc. for the six weeks ended December 31, 1996, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Aegis Communications Group, Inc.
(formerly IQI, Inc.) at December 31, 1997, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1997, the five
months ended December 31, 1996, and the year ended July 31, 1996 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
April 17, 1998
F-2
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -------------------------
1996 1996 1997 1998
-------- ------------ --------- ----------
(RESTATED)
<S> <C> <C> <C> <C>
Revenues......................................... $57,543 $26,756 $133,832 $228,038
Cost of services, excluding depreciation and
amortization shown below....................... 40,709 20,664 88,190 161,361
------- ------- -------- --------
Gross profit..................................... 16,834 6,092 45,642 66,677
Selling, general and administrative expenses..... 13,588 8,760 36,312 50,510
Depreciation..................................... 1,314 969 4,501 10,018
Excess purchase price amortization............... -- 55 1,592 2,876
Restructuring and other non-recurring charges
(Note 5)....................................... -- -- -- 8,395
------- ------- -------- --------
Total expenses................................. 14,902 9,784 42,405 71,799
------- ------- -------- --------
Operating income (loss).......................... 1,932 (3,692) 3,237 (5,122)
Other income, net................................ 877 648 -- --
Interest expense, net (Notes 7, 8 and 9)......... 190 450 3,626 5,578
Non-cash interest expense (Restated--Note 3)..... -- -- -- 3,092
------- ------- -------- --------
Income (loss) before income taxes
(Restated--Note 3)............................. 2,619 (3,494) (389) (13,792)
Income tax expense (benefit) (Note 12)........... 17 1,794 595 (2,989)
------- ------- -------- --------
Net income (loss) (Restated--Note 3)........... $ 2,602 $(5,288) $ (984) $(10,803)
======= ======= ======== ========
Basic and diluted earnings (loss) per common and
common equivalent share (Note 11)
(Restated--Note 3)............................. $ 0.11 $ (0.22) $ (0.04) $ (0.27)
======= ======= ======== ========
Basic and diluted weighted average common and
common equivalent shares outstanding (Note
11)............................................ 24,378 24,417 27,233 40,383
</TABLE>
See accompanying notes.
F-3
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
-------- ----------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,288 $ 10,701
Accounts receivable--trade, less allowance for doubtful
accounts of $550 in 1997 and $1,337 in 1998............. 25,576 49,585
Notes receivable--related parties (Note 18)............... -- 2,185
Current deferred tax assets (Note 12)..................... 1,415 884
Prepaid expenses and other current assets................. 2,720 1,662
-------- --------
Total current assets.................................... 34,999 65,017
Property and equipment (Notes 2, 6 and 9):
Equipment & software...................................... 24,429 41,262
Leasehold improvements.................................... 4,569 6,112
Furniture and fixtures.................................... 4,232 7,827
Construction in progress--computer software............... 206 --
-------- --------
33,436 55,201
Accumulated depreciation and software amortization........ 11,813 19,924
-------- --------
21,623 35,277
Cost in excess of net assets acquired, net of accumulated
amortization of $1,647 in 1997 and $4,523 in 1998 (Notes 2
and 4).................................................... 43,558 71,325
Deferred tax assets (Note 12)............................... -- 6,502
Deferred financing costs, net (Note 2 and 7)................ 1,242 2,099
Other assets................................................ 314 324
-------- --------
$101,736 $180,544
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of long-term obligations................. $ 1,101 $ 2,758
Due to shareholders....................................... 1,908 --
Accounts payable.......................................... 867 7,059
Accrued compensation expense and related liabilities...... 4,543 6,414
Accrued interest expense.................................. 579 1,263
Other accrued expenses.................................... 4,089 9,417
Other current liabilities................................. 4,288 2,225
-------- --------
Total current liabilities............................... 17,375 29,136
Revolving line of credit (Note 7)........................... 15,000 28,100
Long-term obligations, net of current portions (Note 7)..... 35,257 36,829
Subordinated indebtedness due to affiliates (Note 8)........ 1,000 14,651
Deferred income taxes....................................... 2,331 --
Other long-term liabilities................................. 200 --
Commitments and contingencies (Notes 9 and 14).............. -- --
Shareholders' equity (Notes 10 and 16):.....................
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative Series B
shares issued and outstanding in 1998................... -- 0
Common stock, $.01 par value, 100,000,000 shares
authorized; 29,865,950 and 52,311,450 shares issued and
outstanding in 1997 and 1998, respectively.............. 299 523
Additional paid-in capital (Restated--Note 3)............. 28,025 81,259
Treasury shares, at cost.................................. -- (1,421)
Cumulative translation adjustment......................... 13 34
Retained earnings (deficit) (Restated--Note 3)............ 2,236 (8,567)
-------- --------
Total shareholders' equity.............................. 30,573 71,828
-------- --------
$101,736 $180,544
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED
STOCK
-------------------
SERIES C COMMON STOCK TREASURY STOCK
------------------- ---------------------- ------------------- ADDITIONAL
PAR PAR PAR PAID-IN
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL
-------- -------- ----------- -------- -------- -------- ----------
(RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995.................... -- $-- 24,378,250 $ 244 -- $ -- $ (241)
Foreign currency translation adjustment... -- -- -- -- -- -- --
Net income................................ -- -- -- -- -- -- --
------ --- ----------- -------- ------- ------- --------
BALANCE AT JULY 31, 1996.................... -- $-- 24,378,250 $ 244 -- $ -- $ (241)
Cash contributions by shareholder......... -- -- -- -- -- -- 4,675
Issuance of common stock in exchange for
contribution of affiliates.............. -- -- 1,092,146 11 -- -- (11)
Repurchase of common stock in connection
with IQI agreement...................... -- -- (10,050,567) (101) -- -- (21,683)
Issuance of common stock in connection
with Lexi acquisition................... -- -- 10,002,571 100 -- -- 21,068
Foreign currency translation adjustment... -- -- -- -- -- -- --
Reclassification of undistributed
S-corporation earnings.................. -- -- -- -- -- -- 3,266
Net loss.................................. -- -- -- -- -- -- --
------ --- ----------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996................ -- $-- 25,422,400 $ 254 -- $ -- $ 7,074
Repurchase of common stock................ -- -- (42,993) -- -- -- (90)
Issuance of common stock in connection
with InterServ merger................... -- -- 3,832,972 39 -- -- 14,754
Exercise of stock options................. -- -- 40,858 -- -- -- 5
Capital contributions..................... -- -- -- -- -- -- 4,475
Issuance of common stock pursuant to
exercise of warrants.................... -- -- 612,713 6 -- -- 1,994
Return of capital to shareholder.......... -- -- -- -- -- -- (187)
Foreign currency translation adjustment... -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
------ --- ----------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997................ -- $-- 29,865,950 $ 299 -- $ -- $ 28,025
Issuance of stock pursuant to InterServ
earnout................................. -- -- 251,486 2 -- -- --
Issuance of stock and adjustment of
capital pursuant to ATC/IQI merger...... 29,778 -- 21,839,625 218 361,000 (1,421) 49,876
Exercise of stock options................. -- -- 353,055 4 -- -- 266
Purchase of subsidiary minority
interest................................ -- -- 1,334 -- -- -- --
Foreign currency translation adjustment... -- -- -- -- -- -- --
Issuance of convertible subordinated debt
with beneficial conversion feature
(Restated--Note 3)...................... -- -- -- -- -- -- 3,092
Net loss (Restated--Note 3)............... -- -- -- -- -- -- --
------ --- ----------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998................ 29,778 $-- 52,311,450 $ 523 361,000 $(1,421) $ 81,259
====== === =========== ======== ======= ======= ========
<CAPTION>
TOTAL
CUMULATIVE RETAINED SHARE-
TRANSLATION EARNINGS HOLDERS'
ADJUSTMENT (DEFICIT) EQUITY
----------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
BALANCE AT JULY 31, 1995.................... $-- $ 9,172 $ 9,175
Foreign currency translation adjustment... 1 -- 1
Net income................................ -- 2,602 2,602
--- -------- --------
BALANCE AT JULY 31, 1996.................... $ 1 $ 11,774 $ 11,778
Cash contributions by shareholder......... -- -- 4,675
Issuance of common stock in exchange for
contribution of affiliates.............. -- -- --
Repurchase of common stock in connection
with IQI agreement...................... -- -- (21,784)
Issuance of common stock in connection
with Lexi acquisition................... -- -- 21,168
Foreign currency translation adjustment... 1 -- 1
Reclassification of undistributed
S-corporation earnings.................. -- (3,266) --
Net loss.................................. -- (5,288) (5,288)
--- -------- --------
BALANCE AT DECEMBER 31, 1996................ $ 2 $ 3,220 $ 10,550
Repurchase of common stock................ -- -- (90)
Issuance of common stock in connection
with InterServ merger................... -- -- 14,793
Exercise of stock options................. -- -- 5
Capital contributions..................... -- -- 4,475
Issuance of common stock pursuant to
exercise of warrants.................... -- -- 2,000
Return of capital to shareholder.......... -- -- (187)
Foreign currency translation adjustment... 11 -- 11
Net loss.................................. -- (984) (984)
--- -------- --------
BALANCE AT DECEMBER 31, 1997................ $13 $ 2,236 $ 30,573
Issuance of stock pursuant to InterServ
earnout................................. -- -- 2
Issuance of stock and adjustment of
capital pursuant to ATC/IQI merger...... -- -- 48,673
Exercise of stock options................. -- -- 270
Purchase of subsidiary minority
interest................................ -- -- --
Foreign currency translation adjustment... 21 -- 21
Issuance of convertible subordinated debt
with beneficial conversion feature
(Restated--Note 3)...................... -- -- 3,092
Net loss (Restated--Note 3)............... -- (10,803) (10,803)
--- -------- --------
BALANCE AT DECEMBER 31, 1998................ $34 $ (8,567) $ 71,828
=== ======== ========
</TABLE>
F-5
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR FIVE MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
JULY 31, DECEMBER 31, ---------------------
1996 1996 1997 1998
-------- ------------ -------- ----------
(RESTATED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (Restated--Note 3)................. $ 2,602 $ (5,288) $ (984) $(10,803)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:........
Depreciation and amortization...................... 1,314 1,024 6,093 12,895
Assets written-off................................. -- -- -- 5,807
Deferred income taxes.............................. -- 1,782 (796) (2,889)
Non-cash interest expense (Restated--Note 3)....... -- -- -- 3,092
Other.............................................. 2 (116) (30) 21
Changes in operating assets and liabilities:
Bank overdrafts.................................. 1,236 (1,476) (313) --
Accounts and notes receivable--related parties... -- -- -- 1,958
Accounts and notes receivable--other............. (2,586) 1,664 818 (3,375)
Prepaid and other current assets................. (258) 26 1,836 1,127
Other assets..................................... (450) 458 (138) 306
Due to related parties........................... -- 2,384 (249) --
Accounts payable and other accrued liabilities... 485 (877) (2,597) 2,208
Other current liabilities........................ 570 280 (1,624) (3,220)
------- -------- -------- --------
Net cash provided by (used in) operating
activities....................................... 2,915 (139) 2,016 7,127
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (3,488) (3,866) (10,018) (12,520)
Acquisition costs, ATC............................... -- -- -- (3,989)
Net cash acquired from acquisition of ATC............ -- -- -- 296
Net cash acquired from acquisition of Lexi........... -- 5,462 -- --
Acquisition of InterServ, net of cash acquired....... -- -- (15,776) --
Loans and advances to affiliate...................... (2,370) -- -- --
------- -------- -------- --------
Net cash provided by (used in) investing
activities....................................... (5,858) 1,596 (25,794) (16,213)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.......................... 3,600 19,600 30,225 4,477
Proceeds from affiliate debt......................... -- -- -- 13,650
Principal payments on long-term debt................. (3,657) (3,967) (6,200) (1,572)
Payments on capital lease obligations................ -- (59) (773) (1,380)
Proceeds from sale leaseback......................... 1,688 -- -- --
Repurchase of common stock........................... -- (18,784) (90) --
Return of capital to shareholder..................... -- -- (187) --
Proceeds from shareholder............................ 63 -- -- --
Principal payments to shareholder.................... (42) -- -- --
Proceeds from exercise of stock options.............. -- -- 5 269
Deferred financing costs............................. -- (800) (650) (966)
Capital contributions................................ -- 4,675 4,475 --
------- -------- -------- --------
Net cash provided by financing activities.......... 1,652 665 26,805 14,478
Effect of exchange rates on cash....................... 3 1 11 21
------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents... (1,288) 2,123 3,038 5,413
Cash and cash equivalents at beginning of period....... 1,415 127 2,250 5,288
------- -------- -------- --------
Cash and cash equivalents at end of period............. $ 127 $ 2,250 $ 5,288 $ 10,701
======= ======== ======== ========
</TABLE>
F-6
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR FIVE MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
JULY 31, DECEMBER 31, ---------------------
1996 1996 1997 1998
-------- ------------ -------- ----------
(RESTATED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIODS
FOR:
Interest............................................. $ 177 $ 218 $ 3,046 $ 4,886
Income taxes......................................... 88 458 1,206 894
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock to effect acquisition of ATC....... $ -- $ -- $ -- $ 45,320
Issuance of stock to effect acquisition of
Interserv.......................................... -- -- 13,321 --
Issuance of stock to effect acquisition of Lexi...... -- 21,168 -- --
Capital lease obligations entered into............... -- 2,356 37 1,299
Contribution of capital.............................. -- -- 2,000 --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
On July 9, 1998, the Company acquired the common stock of ATC Communications
Group, Inc. in exchange for common stock valued at $45,320.
During 1996, 1997 and 1998, the Company purchased equipment and furniture
under financing leases totaling $2,356, $37 and $1,299, respectively.
During 1997, a shareholder forgave $2,000 of subordinated notes payable by
the Company, which was treated as a contribution of capital.
On July 12, 1997, the Company acquired the outstanding stock of InterServ
Services Corporation in exchange for cash of $15,415, common stock valued at
$13,321 and options valued at $1,472. In accordance with the InterServ purchase
agreement, the Company accrued $1,908 as consideration for additional purchase
price of InterServ, which was paid in 1998 in cash and stock in the same
proportion as the initial transaction.
On November 22, 1996, the Company acquired the common stock of Lexi
International, Inc. in exchange for common stock valued at $21,168.
See accompanying notes.
F-7
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On July 9, 1998, Aegis Communications Group, Inc. ("Aegis"), formerly known
as ATC Communications Group, Inc. ("ATC"), completed the acquisition of
IQI, Inc., a New York corporation ("IQI"). The acquisition was effected through
the merger (the "Merger") of ATC Merger Sub, Inc. ("Sub"), a New York
corporation and wholly-owned subsidiary of ATC, with and into IQI pursuant to an
Agreement and Plan of Merger dated as of April 7, 1998 (the "Merger Agreement")
by and between ATC, Sub and IQI. The acquisition has been accounted for as a
reverse purchase, meaning that for accounting purposes, IQI is the surviving
corporation and is treated as having acquired ATC in a purchase accounting
transaction. Accordingly, the pre-Merger consolidated financial information
reported is that of IQI. In connection with the Merger, each share of IQI Common
Stock was converted into 9.7513 shares of Common Stock. In order to provide
consistency in reporting, historical share information for periods prior to 1998
was converted on this basis.
The accompanying consolidated financial statements include the accounts of
Aegis, IQI (formerly Edward Blank Associates), ATC, EBA Direct, Inc. Lexi
International, Inc. ("Lexi") which was acquired on November 22, 1996, and
InterServ Services Corporation ("InterServ") and its subsidiaries, which were
acquired on July 12, 1997 (collectively, "Aegis" or the Company). See "Note 4.
Mergers and Acquisitions." All intercompany accounts have been eliminated in
consolidation. The accompanying consolidated financial statements give effect to
the acquisitions of ATC, Lexi and InterServ as of their respective effective
acquisition dates.
Effective November 18, 1996, IQI, certain of its affiliates, Edward Blank,
the sole shareholder of IQI and The Edward Blank 1995 Grantor Retained Annuity
Trust (collectively, "Edward Blank") and Thayer Equity Investors III, L.P.
("Thayer") entered into a stock purchase agreement, ("the IQI Agreement"),
whereby: i) IQI redeemed 10,050,567 shares of its common stock held by Edward
Blank for cash, notes and a warrant, aggregating $21,168 and ii) Thayer acquired
additional common shares for cash from Edward Blank such that Thayer owned
approximately 80% of the outstanding shares of common stock of IQI, after giving
effect to i) above. The consideration paid for the redemption of the
10,050,567 shares was recorded as treasury stock, including related expenses of
$783. Prior to November 18, 1996, the Company was treated as an S-corporation
for tax purposes. On November 18, 1996, the Company became a C-corporation and
became subject to income taxes on that basis. As a result of the Company's
change from an S-corporation, undistributed retained earnings of $3,266 on
November 17, 1996 have been reclassified to additional paid in capital.
The Company provides outsourced telecommunications-based marketing and
customer service to large companies in various industries through strategically
located client service centers throughout the United States and Canada. The
Company also provides, through its InterServ subsidiary, customer service,
client service center management, and marketing research services.
F-8
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED)
At December 31, 1998, Aegis had the following operating subsidiaries:
<TABLE>
<CAPTION>
STATE OF DATE PERCENTAGE
NAME INCORPORATION ACQUIRED OWNERSHIP PRINCIPAL BUSINESS ACTIVITY
- ---- ------------- -------- ---------- --------------------------------
<S> <C> <C> <C> <C>
Advanced Telemarketing Nevada Jul-98 98.9% Client service center management
Corporation (d/b/a ATC
Communications)
("Advanced")
InterServ Services Delaware Jul-97 100.0% Client service center management
Corporation and marketing research services
Lexi International, Inc. California Nov-96 100.0% Client service center management
IQI, Inc. New York N/A 100.0% Client service center management
EBA Direct, Inc. Canada N/A 100.0% Client service center management
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aegis and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) REVENUES. Teleservices revenues earned under contracts based on hours
worked are recognized when the related services are performed at rates expected
to be realized under the contracts. Teleservices revenues earned under contracts
based on successful sales are recognized on the date such sale is verified by
the customer. Marketing research services revenue is recognized when services
are performed in accordance with contract terms. Principally all clients have
the contractual right to, and from time to time do, audit documentation in
support of their respective billings. While management believes all such
billings are proper and accurate, the Company periodically records reserves
against revenues representing management's best estimate of billing adjustments
or concessions that may be made as a result of such audits.
(c) PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Equipment, furniture and fixtures, and
computer software are depreciated over five-year to eight-year lives. Leasehold
improvements are amortized over the asset life or lease term, whichever is
shorter. Assets acquired under capitalized lease arrangements are recorded at
the present value of the minimum lease payments. Maintenance and repairs are
charged to operations as incurred while renewals or improvements to such assets
are capitalized.
(d) COST IN EXCESS OF NET ASSETS ACQUIRED. The cost in excess of net
assets acquired recognized is amortized using the straight-line method over
periods of 20 to 25 years.
(e) DEFERRED FINANCING COSTS. Deferred financing costs are amortized over
the term of the related debt using the straight-line method.
F-9
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Company's management
of financial market risk, the Company entered into an interest rate collar
agreement with off-balance sheet risk. The Company entered into this agreement
in order to manage the interest rate sensitivity associated with its
variable-rate indebtedness. The differential to be paid or received in
connection with this interest rate hedging agreement is recognized as interest
rates change and is charged or credited to interest expense over the life of the
agreement. Any gain or loss for early termination of such agreement, if
terminated, will be recognized as an adjustment to interest expense over the
remaining portion of the original life of the terminated contract.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement SFAS No. 133 as of the beginning of
any fiscal quarter after issuance. SFAS No. 133 cannot be applied retroactively.
SFAS No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 and, at the company's
election, before January 1, 1998. Based on the Company's current operations,
SFAS No. 133 will not materially impact the Company's disclosure or reporting.
(g) FOREIGN CURRENCY TRANSLATION. The financial position and results of
operations of the Company's Canadian subsidiary ("EBA Direct") are measured
using local currency as the functional currency. Assets and liabilities are
translated using the end of period exchange rates while the statements of
operations are translated at the average exchange rate prevailing during the
period. The translation adjustment arising from the use of different exchange
rates from period to period is a cumulative translation adjustment in
stockholders' equity.
(h) INCOME TAXES. Aegis joins with its subsidiaries in filing a
consolidated federal income tax return. Income taxes are presented based on the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Deferred income taxes are calculated
utilizing an asset and liability approach whereby deferred taxes are presented
for the tax effects of basis differences for assets and liabilities arising from
differing treatments for financial and income tax reporting purposes. Valuation
allowances are established for deferred tax assets where management believes it
is more likely than not that the deferred tax asset will not be realized.
(i) STATEMENTS OF CASH FLOWS. For the purposes of the statements of cash
flows, the Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.
(j) RECLASSIFICATIONS. Certain prior year balances have been reclassified
to conform to the 1998 presentation.
F-10
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair market value of
financial instruments is determined by reference to various market data and
other valuation techniques as appropriate. The Company believes that the fair
values of financial instruments approximate their recorded values.
(l) CONCENTRATION OF CREDIT RISK. The Company sells to clients in
diversified industries throughout the United States. A large percentage of the
Company's business is currently concentrated in the telecommunications industry.
The Company performs periodic credit evaluations of its clients' financial
conditions and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses from clients have been within management's
expectations. The Company currently has certain clients which each comprise more
than 10% of the Company's revenues. See "Note 15. Major Clients".
(m) IMPAIRMENT OF LONG-LIVED ASSETS. In the event that facts and
circumstances indicate that the value of property and equipment, costs in excess
of net assets acquired or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required.
(n) ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock based
Compensation" ("SFAS No. 123") was issued. This statement requires the fair
value of stock options and other stock-based compensation issued to employees to
either be included as compensation expense in the income statement or the pro
forma effect on net income and earnings per share of such compensation expense
to be disclosed in the footnotes to the Company's financial statements. The
Company applies SFAS No. 123 on a disclosure basis only. As such, SFAS No. 123
does not impact the Company's consolidated balance sheet or results of
operations.
(o) USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(p) EARNINGS PER SHARE. In February 1997, Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") was issued.
The Company has adopted SFAS No. 128, which establishes standards for computing
and presenting earnings per share ("EPS"). This statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and the denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic and diluted EPS are computed
by dividing net income applicable to common stock by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Basic EPS excludes the effect of potentially dilutive securities while
diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised, converted into or resulted
in the issuance of common stock. Common stock equivalents consist of common
stock issuable under the assumed exercise of stock options and warrants,
computed based on the treasury stock method, and the assumed conversion of the
Company's issued and outstanding preferred stock. Common stock equivalents are
not included in diluted EPS calculations to the extent their inclusion would be
anti-dilutive.
F-11
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(q) COMPREHENSIVE INCOME. Effective January 1, 1998 the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The adoption
of this standard did not have a material effect on the Company's consolidated
results of operations or financial position. No separate statement of
comprehensive income was presented as the amounts are immaterial for all
periods.
(r) SEGMENT REPORTING. In December 1997, Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued. This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements. In fiscal 1998, the Company adopted
SFAS No. 131 and applied the standard to the previous fiscal periods reported.
See "Note 19. Segments".
3. EFFECT OF RESTATEMENT
The Company has restated its September 30, 1998 and subsequent financial
statements in accordance with Emerging Issues Task Force Topic No. D-60 to
reflect a beneficial conversion feature contained in the subordinated debt
issued to Thayer Equity in July 1998 (see Note 8). This beneficial conversion
feature, which was not originally recognized, resulted in a non-cash interest
expense charge of $3.1 million at the issuance date of the debt in the September
30, 1998 restated financial statements.
In connection with the restatement, the Company determined the fair value of
the beneficial conversion feature to be $3.1 million based on its fair value at
the issuance date and recorded the discount for the beneficial conversion
feature as paid in capital. As the $8.7 million in subordinated debt was
immediately convertible upon issuance, the Company recognized $3.1 million in
non-cash interest expense in the quarter ended September 30, 1998. There was no
impact to the Company's tax provision for the quarter ended September 30, 1998
as the beneficial conversion feature represents a permanent difference for tax
purposes.
The restatements of the 1998 financial statements for the matter described
above had no effect on the Company's total assets or total liabilities and
shareholders' equity. The Company's additional-paid in capital, retained
earnings, net loss and basic and diluted loss per common share for the year
ended December 31, 1998, as previously reported and as restated, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Net loss--previously reported............................... $ (7,711)
Adjustment related to recalculation of beneficial conversion
feature on convertible subordinated debt.................. (3,092)
Net loss--as restated....................................... $(10,803)
========
Net loss per common share (basic and diluted)--previously
reported.................................................. $ (0.19)
========
Net loss per common share (basic and diluted)--as
restated.................................................. $ (0.27)
========
</TABLE>
F-12
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
3. EFFECT OF RESTATEMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Additional paid-in capital--previously reported............. $78,167
Adjustment related to beneficial conversion feature on
convertible subordinated debt............................. 3,092
-------
As restated............................................... $81,259
=======
Retained earnings--previously reported $(5,475)
Adjustment related to beneficial conversion
feature on convertible subordinated debt.................. (3,092)
-------
As restated............................................... $(8,567)
=======
</TABLE>
4. MERGERS AND ACQUISITIONS
LEXI INTERNATIONAL, INC.
Effective November 22, 1996, Lexi entered into a purchase agreement with
Thayer whereby: i) Lexi issued common stock to Thayer for approximately $9,000
and ii) certain former Lexi shareholders sold shares in Lexi to Thayer for
approximately $6,600. After giving effect to such transactions, Thayer owned
approximately 73% of Lexi.
On January 3, 1997, Lexi entered into a merger with a newly formed
subsidiary of IQI, whereby: i) the issued and outstanding shares of Lexi owned
by Thayer were acquired by the newly formed subsidiary for 748,194 shares of IQI
common stock, ii) the remaining 27% of Lexi not previously acquired by Thayer
was acquired by IQI in exchange for 277,574 shares of IQI common stock, and iii)
the newly formed subsidiary was merged into IQI and Lexi became a wholly owned
subsidiary of IQI (collectively, the Lexi Merger). The consolidated financial
statements give effect to the Lexi Merger on November 22, 1996, the date of
purchase by Thayer.
INTERSERV SERVICES CORPORATION
Effective July 12, 1997, IQI, certain of its affiliates and ITC Holding
Company (ITC) the former owner of InterServ, entered into a stock purchase
agreement, (the InterServ Agreement), whereby IQI purchased all of the
outstanding common shares of InterServ for a combination of stock and cash,
based on a formula, valued at $32,142, including the assumption of approximately
$6,200 of InterServ indebtedness. Included in the purchase price is additional
performance-based consideration of $1,908 to the former shareholders of
InterServ based on a formula contained in the InterServ Agreement. The
additional consideration is payable in cash and stock in the same proportion as
the initial transaction and was paid in 1998 in cash and stock in the same
proportion as the initial transaction.
THE MERGER OF ATC COMMUNICATIONS GROUP, INC. AND IQI, INC.
On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC"), completed the acquisition of IQI, Inc., a New York corporation ("IQI").
The acquisition was effected through the merger (the "Merger") of ATC Merger
Sub, Inc. ("Sub"), a New York corporation and wholly-owned subsidiary of
F-13
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
4. MERGERS AND ACQUISITIONS (CONTINUED)
ATC, with and into IQI pursuant to an Agreement and Plan of Merger dated as of
April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.
Pursuant to the Merger Agreement, each former holder of common stock, $.001
par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of IQI Common Stock and IQI stock options and warrants in
a tax-free exchange. The acquisition has been accounted for as a reverse
purchase, meaning that for accounting purposes, IQI is the surviving corporation
and is treated as having acquired ATC in a purchase accounting transaction.
Accordingly, the pre-Merger consolidated financial information reported is that
of IQI. Effective upon the Merger, the Company formally changed its name to
Aegis Communications Group, Inc. and its Nasdaq National Market System symbol to
"AGIS".
The Merger Agreement also contains a provision extending the maturity date
of one-half of the principal amount of the promissory note payable to the
Company by an officer of the Company to March 31, 1999. At December 31, 1998,
the principal and accrued but unpaid interest on the note totaled approximately
$1,900. See "Note 18. Related Party Transactions."
The acquisitions of Lexi and InterServ and the merger of ATC and IQI were
accounted for by the purchase method of accounting, whereby purchase price is
allocated to assets and liabilities assumed based on management's estimate of
the relative fair values of the assets and liabilities assumed at the date of
acquisition, as follows:
<TABLE>
<CAPTION>
LEXI INTERSERV ATC
-------- --------- --------
<S> <C> <C> <C>
Purchase Price:
Issuance of common stock............................... $21,168 $14,793 $45,320
Additional common stock issued in 1998................. -- 874 --
Cash purchase price.................................... -- 15,415 --
Additional cash consideration paid in 1998............. -- 1,034 --
Debt assumed........................................... -- 6,200 --
Other liabilities assumed.............................. 5,340 4,754 --
Intrinsic value of ATC stock options................... -- -- 2,090
Transaction costs...................................... 1,140 1,342 4,177
------- ------- -------
27,648 44,412 51,587
Fair Market Value of Assets Acquired and
Liabilities Assumed.................................... 12,140 14,693 20,966
------- ------- -------
Excess of Purchase Price over Fair Value of Assets
Acquired and Liabilities Assumed ("Goodwill").......... $15,508 $29,719 $30,621
======= ======= =======
</TABLE>
In 1997 and 1998, the Company recorded additional excess purchase price
relating to the Lexi acquisition of $283 and $22, respectively, pertaining to
the resolution of certain pre-acquisition contingencies.
F-14
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
The following unaudited condensed consolidated pro forma statements of
operations data present the consolidated results of operations of the Company as
if the ATC and the Interserv acquisitions had occurred on January 1, 1997 and
are not necessarily indicative of what would have occurred had the acquisitions
been made as of that date or of the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
--------- ----------
(RESTATED)
(UNAUDITED)
<S> <C> <C>
Total revenues.............................................. $248,763 $275,984
Cost of services............................................ 170,685 196,066
-------- --------
Gross profit.............................................. 78,078 79,918
Operating expenses.......................................... 81,770 77,970
Restructuring and other non-recurring charges............... -- 8,395
-------- --------
Operating income (loss)................................... (3,692) (6,447)
Interest expense, net....................................... 5,786 6,176
Litigation settlement....................................... -- 1,900
Non-cash interest expense (Restated--Note 3)................ 3,092
-------- --------
Income (loss) before income taxes (Restated--Note 3)........ (9,478) (17,615)
Income tax expense (benefit)................................ (1,473) (4,190)
-------- --------
Net loss (Restated--Note 3)............................... $ (8,005) $(13,425)
======== ========
Pro forma net loss per share:
Basic and diluted (Restated--Note 3)...................... $ (0.16) $ (0.26)
======== ========
Weighted average shares outstanding (in thousands).......... 50,164 51,882
</TABLE>
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On July 29, 1998, the Company announced that it would record a pre-tax
restructuring reserve of $13,000 related to the Merger. Current and future
expenses related to the restructuring decision which meet the specific generally
accepted accounting principles ("GAAP") criterion for accrual have been referred
to herein as "restructuring" charges, and a restructuring accrual has been
recorded to the extent the related amounts have not been paid. Expenses related
to the restructuring decision which do not meet the specific GAAP criterion for
accrual have been referred to herein as "other" charges. "Other" charges have
not been accrued, but are recognized as the related expenses are incurred.
Accordingly, the Company recorded pre-tax charges of approximately $8,395
($5,247, net of taxes) in the year ended December 31, 1998, as a part of the
total restructuring. These charges are primarily attributable to one-time
write-offs of redundant hardware and software, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees. At December 31, 1998 approximately $100 of the
restructuring and other non-recurring charges had been accrued but remained
unpaid. The Company expects to recognize additional restructuring and other
charges, as previously announced, through the first quarter of 1999 as
restructuring related efforts continue.
F-15
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
The following table details the restructuring and other non-recurring
charges related to the Merger as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Write-offs of redundant hardware and software............... $4,713
Severance costs and consolidation of certain administrative
functions................................................. 661
Other non-recurring charges................................. 3,021
------
Total..................................................... $8,395
======
</TABLE>
6. PROPERTY AND EQUIPMENT
Construction in progress includes capitalized software costs of $206 at
December 31, 1997. Such capitalized software costs were written-off as redundant
software in the restructuring and other non-recurring charges associated with
the Merger. See "Note 5. Restructuring and Other Non-recurring Charges".
7. LONG-TERM DEBT
In connection with the original IQI Agreement, the Company obtained a
$19,600 term loan and a revolving loan commitment for a maximum principal amount
of $10,000, including a $2,000 letter of credit subfacility and a $2,000 swing
line loan subfacility (the "Bank Loan"). The Bank Loan originally matured in
November 2002. The swing line subfacility provided the Company with the ability
to obtain immediate borrowing. In connection with the IQI Agreement, the Company
borrowed $19,600 under the term loan commitment. The term loan requires
quarterly principal payments through December 2002. IQI incurred $800 of costs
related to the Bank Loan.
In May 1997, the Bank Loan was amended whereby, among other matters,
borrowings under the Bank Loan are available for Lexi and Lexi's results are
included in the determination of the aforementioned covenants, as amended.
In June 1997, the Bank Loan was amended again to provide financing for the
acquisition of InterServ. The Bank Loan was increased to a $35,000 term loan and
a revolving loan commitment for a maximum amount of $18,000. The $2,000 letter
of credit subfacility and $2,000 swing line loan subfacility which are part of
the revolving loan commitment were unchanged. The Company paid additional loan
costs of $650 for the amendments in 1997.
In July 1998, the Bank Loan was amended again to provide financing for the
Merger and to include Aegis as a guarantor of the Bank Loan (the "Amended Bank
Loan"). The revolving loan commitment under the Bank Loan was increased to a
maximum amount of $30,000. At December 31, 1998, $1,900 remained undrawn on the
revolving loan commitment. The term loan letter of credit sub-facility and swing
line loan sub-facility were unchanged. The Company paid additional loan costs of
$911 for the amendment in 1998.
F-16
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. LONG-TERM DEBT (CONTINUED)
IQI may elect that the loans accrue interest at a fluctuating rate per
annum--Base Rate Loans, as defined, equal to the sum of the Alternate Base Rate,
as defined, plus the Applicable Margin for Base Rate loans, as defined (which is
dependent on IQI's Debt to EBITDA Ratio, as defined, and ranges from 0.25% to
1.5% for the Revolving Loan and 1.5% and 2.0% for the Term Loan). Alternatively,
IQI may elect that the loans accrue interest on a fixed rate basis, as defined.
Interest on swing line loans is at the aforementioned base rate and is not
entitled to be converted into LIBO rate loans. Interest is payable quarterly for
Base Rate Loans, and on the last day of each applicable Interest Period, as
defined, for LIBO Rate Loans. At December 31, 1997 and 1998, amounts outstanding
for accrued interest based on the LIBO Rate were $482 and $474, respectively.
IQI is to pay commitment fees equal to 0.5% or 0.375% if the Debt to EBITDA
Ratio as defined, is greater than or equal to 3:1 or less than 3:1,
respectively, based on the average daily unused portion of the revolving loan
commitment amount.
IQI is subject to various covenants, as defined, including, among others,
Debt to EBITDA ratios, Interest Coverage Ratios, Cash Flow Coverage ratios and
restricted Capital Expenditure amounts. At December 31, 1997, IQI was in default
of certain covenants and, on March 30, 1998, obtained from its bank an amendment
to its Bank Loan regarding these covenants. Under the amended terms, IQI was in
compliance with these covenants at December 31, 1997. IQI was in compliance with
all other covenants at December 31, 1997.
At December 31, 1998, IQI was in default of certain covenants and on March
30, 1999, obtained from its bank an amendment to its Amended Bank Loan regarding
these covenants. Under the amended terms, management believes that it was in
compliance with these covenants at December 31, 1998 and that it was in
compliance with all other covenants at December 31, 1998.
The Company has granted to the banks a security interest in all of the
assets of the Company including, without limitation, the pledge of all the
capital stock of Lexi, InterServ and Advanced owned by the Company. In addition,
Lexi, InterServ and Advanced have guaranteed the obligations of the Company. The
Bank Loan also prohibits the Company from paying dividends on its Common Stock
until all the bank's commitments have been terminated and all of the Company's
obligations under the Bank Loan have been satisfied.
At December 31, 1997 and 1998, the Company had an interest rate collar
agreement with an original notional principal amount of $19,600 whereby the
Company pays interest at LIBO rates, subject to a floor of 5.6% and a cap of
8.0%. The agreement terminates on March 31, 2000. The effect of this agreement
on interest expense for the years ended December 31, 1997 and 1998, was
immaterial.
F-17
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
7. LONG-TERM DEBT (CONTINUED)
Long-term debt at December 31, 1997 and 1998, is summarized below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Bank revolving loan............................... $15,000 $28,100
Bank term loan.................................... 34,825 33,475
Capital lease obligations (See Note 9)............ 1,533 6,112
Subordinated indebtedness due to affiliates
(See Note 8).................................... 1,000 14,651
------- -------
52,358 82,338
Less current maturities........................... (1,101) (2,758)
------- -------
$51,257 $79,580
======= =======
</TABLE>
Future maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $ 2,758
2000........................................................ 2,500
2001........................................................ 1,781
2002........................................................ 474
2003 and thereafter......................................... 74,826
-------
$82,339
=======
</TABLE>
8. SUBORDINATED INDEBTEDNESS
In connection with the redemption of shares of common stock in 1996, IQI
issued a subordinated note payable to a shareholder aggregating $3,000, due
November 2003. In December 1997, the Company and the shareholder consummated an
agreement to settle outstanding issues between the shareholder, the Company and
Thayer (the Company's principal shareholder). As part of such settlement, the
aggregate principal balance of the notes was reduced to $1,000, the interest
rate increased from 8% to 12% on the remaining note and the shareholder waived
the right to receive interest in the total amount of $30, but shall retain the
right to receive all other accrued but unpaid interest. The $2,000 reduction to
the shareholder note was treated as a contribution of capital by the
shareholder.
In connection with the March 1998 amendment to the Bank Loan, IQI issued a
subordinated note payable to Thayer of $2,000 due August 31, 2003 with interest
payable quarterly at an annual rate of 15%. Proceeds from the note payable were
used for working capital purposes and to pay down $1,000 of the term portion of
the Bank Loan. Payments under the note payable are subordinate to the Bank Loan.
Therefore, quarterly accrued interest is rolled into the principal balance of
the note payable. At December 31, 1998, the balance due on the note payable was
approximately $2,224 and IQI recognized $224 in interest expense during 1998
pursuant to the note payable.
In connection with the Merger, on July 9, 1998, the Company issued a
subordinated note payable to Thayer of $6,872 due August 31, 2003, bearing
interest at a 12% annual rate and convertible into shares of
F-18
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
8. SUBORDINATED INDEBTEDNESS (CONTINUED)
the Company's Common Stock at a conversion price of $2.00 per share. Proceeds
from the note payable were used to pay-off certain obligations of ATC and for
transaction expenses related to the Merger. Payments under the note payable are
subordinate to the Bank Loan. Therefore, quarterly accrued interest is rolled
into the principal balance of the note payable. At December 1, 1998, the balance
due on the note payable was approximately $7,279 and the Company recognized $407
in interest expense during 1998 pursuant to the note payable. See note 3
regarding the existence of a beneficial conversion feature related to this debt.
Also in connection with the Merger, the Company obtained a commitment from
Thayer and a Thayer-led group of shareholders to provide up to $4,000 of
additional working capital to the Company. On July 9, 1998 and October 3, 1998,
the Company executed notes payable aggregating $1,900 and $2,100, respectively,
pursuant to this commitment. The notes payable mature on August 1, 2003 with
interest payable quarterly at an annual rate of 12%. Payments under the note
payable are subordinate to the Bank Loan. Therefore, quarterly accrued interest
is rolled into the principal balance of the note payable. At December 1, 1998,
the balance due on the note payable was approximately $4,148 and the Company
recognized $148 in interest expense during 1998 pursuant to the notes payable.
The notes payable are also convertible into shares of the Company's Common Stock
at a conversion price of $2.375 per share. See note 3 regarding the existence of
a beneficial conversion feature related to this debt.
9. LEASES
The Company has capital leases covering certain equipment. Capital leases
are included in the accompanying consolidated balance sheet under the following
captions at December 31, 1998:
<TABLE>
<S> <C>
Equipment............................................... $ 8,584
Less accumulated depreciation........................... (4,256)
-------
$ 4,328
=======
</TABLE>
Future minimum lease payments for all noncancelable leases with initial or
remaining terms of one year or more at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- -------- ---------
<S> <C> <C>
1999................................................... $2,409 $ 4,852
2000................................................... 2,150 4,136
2001................................................... 1,430 3,679
2002................................................... 124 3,115
2003 and thereafter.................................... -- 4,746
------ -------
Total minimum future lease payments.................... $6,113 $20,528
=======
Less: amounts representing interest.................... (808)
------
Present value of future lease payments................. $5,305
======
</TABLE>
F-19
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
9. LEASES (CONTINUED)
In July 1996, IQI entered into a sale leaseback transaction related to
certain telecommunication and computer equipment under a Master Lease Agreement.
The note was secured by a first security interest in the equipment acquired with
the proceeds of the note. Payments, including interest at 8.05% per annum, were
due monthly in the amount of $53. In connection with the IQI Agreement, the note
was prepaid in full on November 9, 1996.
Rent expense on operating leases for the year ended July 31, 1996, the five
months ended December 1, 1996, and the years ended December 1, 1997 and 1998 was
$1,199, $470, $3,455, and $7,792, respectively.
10. SHAREHOLDERS' EQUITY
In connection with the IQI Agreement, all of the issued and outstanding
common shares of stock were automatically changed into $.001 par value common
shares at a rate of 100,000 shares for each share issued and outstanding. The
accompanying consolidated financial statements and footnotes show the
retroactive effect of such recapitalization. In connection with the IQI
Agreement, Ed Blank contributed all of the shares he owned of CEPC and Direct,
two affiliated entities, to IQI in exchange for 1,092,146 common shares of IQI.
In connection with the IQI Agreement, IQI issued warrants to a shareholder
to purchase an aggregate of 919,060 common shares for $3,000. The right to
exercise the warrants expires at the earlier of i) repayment of the subordinated
notes payable--shareholder, ii) the date the Company consummates an underwritten
public offering of common stock, iii) the consummation date of a sale of the
Company, as defined, or iv) November 003. The warrants were valued at $186.
In December 997, the Company and one of its shareholders settled a dispute
whereby the shareholder would i) reduce the principal balance of the notes
payable--shareholder from $3,000 to $1,000 and ii) purchase two-thirds of the
common shares subject to warrants (612,714 shares) by paying the exercise price
of $2,000. The balance of the warrants remains outstanding and subject to their
original terms. As part of the settlement, the entire escrow fund of
approximately $2,475 held under the Escrow Agreement entered into pursuant to
the IQI Agreement was returned to Thayer who, in turn, contributed the amounts
released to the Company.
As a result of the Merger, each share of IQI Common Stock was converted into
9.7513 shares of the Company's Common Stock. In order to provide the consistency
in reporting, historical share information for years prior to 1998 was converted
on this basis.
At December 31, 1998, 29,778 shares of $0.01 par value Series B preferred
stock were issued and outstanding. Such shares were previously issued by ATC,
are convertible into shares of Common Stock at a conversion ratio of one share
of Series B preferred stock for two shares of Common Stock, and pay a cumulative
cash dividend at the annual rate of $0.36 per share.
In connection with the Merger, Thayer provided a guarantee for $2,000 in
bridge financing to assist in funding ATC's working capital needs. In connection
with the guarantee, and for additional consideration of $110, the Company issued
to Thayer warrants to purchase 1,100,000 shares of the Company's Common Stock at
an exercise price of $1.96 per share. The warrants were valued at $188.
On July 6, 1998, the Company received an additional financing commitment
from a Thayer-led group to advance to the Company up to an additional $4,000 in
subordinated indebtedness. In connection with
F-20
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
this commitment the Company issued the Thayer-led group warrants to purchase up
to 350,000 shares of the Company's Common Stock at an exercise price of $2.375
per share. The warrants were valued at $95. See "Note 8. Subordinated
Indebtedness."
11. EARNINGS PER SHARE
Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options and warrants, computed based on the treasury stock
method, and the assumed conversion of the Company's issued and outstanding
preferred stock. Common stock equivalents are not included in diluted EPS
calculations to the extent their inclusion would have an anti-dilutive effect.
Basic and diluted weighted average shares outstanding for the year ended
July 1, 1996, the five month period ended December 1, 1996 and the years ended
December 1, 1997 and 1998 were computed as follows:
<TABLE>
<CAPTION>
YEAR FIVE MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -------------------
1996 1996 1997 1998
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
BASIC AND DILUTED (1)(2)
Weighted average common shares
outstanding........................ 24,378 24,417 27,233 40,744
------ ------ ------ ------
24,378 24,417 27,233 40,744
Weighted average treasury shares..... -- -- -- (361)
------ ------ ------ ------
Shares used in EPS calculation..... 24,378 24,417 27,233 40,383
====== ====== ====== ======
</TABLE>
- ------------------------
(1) For the five month period ended December 1, 1996 and the years ended
December 1, 1997 and 1998, common stock equivalents are not included in
diluted EPS calculations because their inclusion would have an anti-dilutive
effect.
(2) The weighted average shares outstanding for IQI have been adjusted to
reflect the effects of the Merger by multiplying the historical weighted
average shares by the Merger exchange ratio of 9.7513. For the five month
period ended December 31, 1996 and the years ended December 31, 1997 and
1998, weighted average shares do not include common stock equivalents
because their effect would be anti-dilutive.
F-21
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
12. INCOME TAXES
The components of the income tax expense (benefit) applicable to continuing
operations for the year ended July 31, 1996, the five month period ended
December 31, 1996 and the years ended December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
JULY 31, DECEMBER 31, -------------------
1996 1996 1997 1998
---------- -------------- -------- --------
<S> <C> <C> <C> <C>
Current
Federal...................... $-- $ 10 $1,175 --
State........................ 17 2 216 --
Deferred
Federal...................... -- 1,492 (672) (2,617)
State........................ -- 290 (124) (372)
--- ------ ------ --------
Total income tax expense
(benefit) per the statements
of operations................ $17 $1,794 $ 595 $ (2,989)
=== ====== ====== ========
</TABLE>
A reconciliation of the expected statutory federal income tax provision
(benefit) to the actual provision (benefit) based on pre-tax income (loss) for
the year ended July 31, 1996, the five month period ended December 31, 1996 and
the years ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FIVE MONTHS DECEMBER 31,
YEAR ENDED ENDED -------------------
JULY 31, 1996 DECEMBER 31, 1996 1997 1998
-------------- ------------------ -------- --------
<S> <C> <C> <C> <C>
Expected federal tax (benefit)
at the statutory rate........ $-- $ (822) $ (217) (3,638)
State taxes, net of federal
benefit...................... 17 (336) (225) (535)
Goodwill amortization and
acquisition costs............ -- 123 798 1,151
Valuation allowance............ -- -- 103 --
Termination of S-corporation
status....................... -- 3,043 -- --
Other items.................... -- (214) 136 33
--- ------ ------ --------
$17 $1,794 $ 595 $ (2,989)
=== ====== ====== ========
</TABLE>
F-22
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
12. INCOME TAXES (CONTINUED)
The components of deferred taxes included in the accompanying consolidated
balance sheets as of December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserve........................................ $ 764 674
Accrued expenses........................................ 523 910
Net operating loss carryforwards........................ 103 8,407
Deferred income......................................... 60 60
Tax credits............................................. -- 1,142
Other................................................... 68 79
------- --------
Gross deferred tax assets................................. 1,518 11,272
Deferred tax liabilities:
Effect of cash to accrual accounting change............. (2,222) (1,502)
Depreciation............................................ (496) (1,550)
Other................................................... (125) (125)
------- --------
Gross deferred tax liabilities............................ (2,843) (3,177)
Valuation allowance....................................... (103) (709)
------- --------
Net deferred tax asset (liability)........................ $(1,428) $ 7,386
======= ========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $21,000 and tax credits of approximately $1,100. Due to an
ownership change and the separate return limitation year rules, the utilization
of net operating losses and tax credits may be limited in future years. The net
operating loss carryforwards and tax credits expire in 2013. Management has
established a valuation allowance for deferred taxes where management believes
it is more likely than not that the deferred tax asset will not be realized.
IQI was taxed as an S-corporation through November 17, 1996, when its
election to be taxed as such terminated. Therefore, no provision for federal and
certain state income taxes was provided for any periods prior to November 17,
1996. The current tax provisions for the year ended July 31, 1996 and for the
period from August 1, 1996 to November 17, 1996 consist of state income taxes
for the jurisdictions in which the Company did not have S-corporation status.
In 1996, Lexi recorded reserves of $2,400 for liabilities related to tax,
interest and penalties with respect to deductions claimed in previous tax return
filings for certain payments to, and on behalf of, shareholders. During 1997,
Lexi's tax return for the year ended September 30, 1995, was examined by the
Internal Revenue Service and the Company reached a settlement agreement with the
IRS. As part of the settlement, the Company agreed to amend its returns for the
years ended September 30, 1994 and September 30, 1996. At December 31, 1997, the
$2,400 reserve was reduced to $200 and the escrow receivable was eliminated due
to the resolution of these matters. These items were both charged to goodwill.
F-23
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
13. BILLING SETTLEMENT
In 1995, Lexi entered into an agreement to reimburse its principal customer
for billing discrepancies in the amount of $2,700. Reimbursements commenced in
1995 and concluded in March 1997.
The consolidated financial statements at December 31, 1996, reflect $1,198
of obligations to four customers relating to billing discrepancies. During 1997,
management settled these matters for a total amount of $1,114.
14. COMMITMENTS AND CONTINGENCIES
As a result of the Merger, the Company assumed certain commitments of ATC
including: (a) Advanced renegotiated the employment agreement with a former
officer of ATC and entered into a consulting agreement with the former officer
through December 1998. The agreement specified a monthly consulting fee of $15,
and (b) ATC entered into a release and separation agreement with an officer of
ATC pursuant to which he continued to receive bimonthly payments based on his
previous annual base salary rate of $400 for a period of one year. These
payments ceased in October 1998.
IQI had employment agreements with seven employees, five of whom were
employed as of December 31, 1997, which provide for, among other matters, annual
base compensation and certain additional compensation upon a change in control
of the Company, as defined. In 1997, the Company incurred $1,162 of additional
compensation related to these agreements, which is included in corporate
selling, general and administrative expenses.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have been
filed or are pending against the Company. Management believes that the claims
are without merit and that the ultimate resolution of such contingencies, for
which adequate reserves have been made, will not have a material adverse effect
on the financial position or results of operations of the Company.
15. MAJOR CLIENTS
The Company had sales to major clients (those clients representing 10% or
more of consolidated revenues) of the following amounts for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
CLIENT 1997 1998
- ------ -------- --------
<S> <C> <C>
AT&T:
Teleservices revenues..................................... $56,221 $61,242
Marketing research services revenues...................... 1,327 1,451
------- -------
Total AT&T revenues..................................... $57,548 $62,693
======= =======
American Express:
Teleservices revenues..................................... $ -- $26,071
Marketing research services revenues...................... -- --
------- -------
Total American Express revenues......................... $ -- $26,071
======= =======
</TABLE>
F-24
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
16. STOCK OPTIONS AND WARRANTS
In November 1996, IQI established the 1996 Incentive Stock Option Plan (the
"IQI Plan"). The Plan provides for the award of incentive stock options to
directors, officers, key employees and members of Thayer's Advisory Board. The
IQI Plan was administered by a Compensation Committee, as established by IQI's
Board of Directors. These options are intended to qualify as incentive stock
options ("ISOs") under the Internal Revenue Code or non-statutory stock options
("NSOs") which are not intended to qualify. IQI reserved 3,929,774 shares of
common stock for issuance under the IQI Plan.
Prior to the Merger, ATC shareholders approved two stock option plans which
provided for the granting of options to purchase up to 5,000,000 shares of
Common Stock to key employees, officers and directors of ATC and its operating
subsidiary (the "ATC Plans"). At the date of the Merger, options to purchase
4,447,000 shares of Common Stock granted pursuant to the ATC Plans were
outstanding.
In September 1998, the Company initiated the Aegis Communications
Group, Inc. 1998 Stock Option and Restricted Stock Plan (the "1998 Plan") which
provides for the granting of options to purchase up to a maximum of 7,500,000
shares of Common Stock to key employees, officers and directors of the Company
and its operating subsidiaries. Options granted pursuant to the 1998 Plan are
exercisable for 10 years from the date of the grant subject to vesting
schedules. The Company may grant additional options at any time prior to
September 2008. As a result of the adoption of the 1998 Plan, the Company will
not grant any future option to purchase shares of Common Stock pursuant to the
IQI Plan and ATC plans.
The following table summarizes certain information related to options for
common stock (information for periods prior to 1998 includes activity for the
IQI Plan only):
<TABLE>
<CAPTION>
IQI PLAN/ATC PLANS 1998 PLAN
------------------------- -------------------------
PRICE PER PRICE PER
SHARES SHARE SHARES SHARE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding at July 31, 1996........ -- -- -- --
Granted........................... 1,408,224 $ 2.09 -- --
--------- ------------- --------- -------------
Outstanding at December 31, 1996.... 1,408,224 $ 2.09 -- --
Granted........................... 2,580,886 $0.85 - $2.72 -- --
Forfeited......................... (207,527) $ 2.09 -- --
Exercised......................... (40,858) $0.85 - $2.72 -- --
--------- ------------- --------- -------------
Outstanding at December 31, 1997.... 3,740,725 $0.85 - $2.72 -- --
Granted........................... 134,666 $ 2.08 1,063,000 $1.25 - $2.81
ATC Options....................... 3,384,000 $1.00 - $4.00 -- --
Forfeited......................... (248,604) $0.85 - $2.72 -- --
Exercised......................... (353,055) $0.85 - $1.50 -- --
--------- ------------- --------- -------------
Outstanding at December 31, 1998.... 6,657,732 $0.85 - $4.00 1,063,000 $1.25 - $2.81
========= =========
</TABLE>
Included in options granted in 1997 are 69,915 options granted to certain
former option holders of InterServ which were issued at exercise prices below
the fair market value of IQI common stock. These options were issued as
replacements for similarly valued options held by such option holders prior to
the acquisition of InterServ by IQI. As a result of these arrangements, the
Company recorded additional goodwill of $1,472.
F-25
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
16. STOCK OPTIONS AND WARRANTS (CONTINUED)
Included in options exercised in 1998 are 255,000 options granted pursuant
to the ATC Plans, which were exercised subsequent to the Merger at prices
ranging from $1.00 to $1.50.
Information with respect to stock options outstanding is as follows
(information for periods prior to 1998 includes activity for the IQI Plan only):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average exercise price per
share................................... $ 2.09 $ 1.96 $ 1.97
Exercisable options....................... 345,128 1,378,005 5,141,003
Options available for future grants....... 341,471 143,802 6,437,000
Weighted average remaining contractual
life.................................... 9.9 years 9.0 years 8.3 years
</TABLE>
The fair values of options issued prior and subsequent to the Merger were
estimated on the dates of grant based on the fair value method and the
Black-Scholes option pricing model, respectively, with the following
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life in years........................ 5.0 years 5.0 years 6.0 years
Risk-free interest rate....................... 6.30% 6.30% 5.40%
Dividend yield................................ -- -- --
Volatility factor............................. -- -- 63.9%
</TABLE>
These option valuation models require input of highly subjective
assumptions. Because the Company's stock options issued prior to the Merger have
characteristics significantly different from those of traded options, and
because change in the subjective input assumptions can materially affect the
fair-value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ---------------------
1996 1997 1998
------------- -------- ----------
(RESTATED)
<S> <C> <C> <C>
Net loss, as reported (Restated--Note 3)............. $(5,288) $ (984) $ (10,803)
Amortization of stock options' fair value............ 128 178 695
------- ------- ---------
Pro forma net loss................................... $(5,416) $(1,162) $ (11,498)
======= ======= =========
Net loss per share, basic and diluted
(Restated--Note 3)................................. $ (0.04) $ (0.22) $ (0.29)
======= ======= =========
</TABLE>
F-26
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
16. STOCK OPTIONS AND WARRANTS
In April 1993, Advanced initiated the Advanced Telemarketing Corporation
1993 Stock Option Plan which provides for the granting of options to Advanced's
key employees, officers, and directors to purchase shares of Advanced's common
stock ("Advanced Common"). In December 1996, ATC initiated the ATC
Communications Group, Inc. 1996 Stock Exchange Rights Plan (the "Rights Plan")
which provides for holders of options to purchase shares of Advanced Common to
exchange shares of Advanced Common received upon exercise of such options for
shares of Common Stock. The shares exchanged pursuant to the Rights Plan are
exchanged on the ratio of two shares of Common Stock for one share of Advanced
Common. At December 31, 1998, fully vested options to purchase 11,668 shares of
Advanced Common were outstanding. The options to purchase Advanced Common
outstanding at December 31, 1998 are subject to the Rights Plan as discussed
above.
17. EMPLOYEE BENEFIT PLANS
During 1991, Advanced adopted a defined contribution 401(k) plan (the
"Advanced Plan") covering all eligible employees, as defined. Eligible employees
could elect to contribute up to 20% of their compensation, not to exceed $10 per
year. The Company could, at its discretion, match employee contributions. There
was no employer matching contribution made in 1998.
IQI has two qualified defined contribution 401(k) plans (the "IQI Plans")
covering all eligible employees of IQI. Under the IQI Plan which covered EBA and
Lexi employees, IQI contributed up to 4% of eligible employee salaries at the
rate of $0.50 for every dollar the employee contributed ($0.25 for every dollar,
for fiscal years ended July 31, 1996 and prior). Under the IQI Plan which
covered InterServ employees, IQI contributed amounts on a discretionary basis
equal to a percentage of each eligible employee's salary deferral, subject to
amounts allowed by the Internal Revenue Service. Contributions to the IQI Plans
for the year ended July 31, 1996, the five months ended December 31, 1996, and
the years ended December 31, 1997 and 1998, were approximately $103, $108, $231
and $84, respectively.
Subsequent to December 31, 1998, Aegis adopted a defined contribution 401(k)
plan (the "Plan") covering all eligible employees of Aegis. Under the Plan,
which replaces the Advanced Plan and the IQI Plans, the Company contributes up
to 3% of eligible employee salaries at the rate of $0.50 for every dollar the
employee contributes.
18. RELATED PARTY TRANSACTIONS
At December 31, 1998, an executive officer of the Company had outstanding
borrowings and accrued interest of approximately $1,888. The borrowing bears 6%
annual interest and is due in full on March 31, 1999. In connection with the
Merger discussed in "Note 4. Mergers and Acquisitions", the executive officer
paid one-half of the principal amount of the note. The remaining balance on the
note is secured by shares of the Company's Common Stock and options to purchase
shares of the Company's Common Stock held by the executive officer. Reported
interest income from the receivable amounted to approximately $58 in 1998. As of
March 31, 1999, the Company and the executive officer were discussing a further
extension of the maturity date of such amount, including terms relating to the
executive officer delivering additional security sufficient to adequately secure
repayment of the note.
F-27
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
18. RELATED PARTY TRANSACTIONS (CONTINUED)
Effective January 1, 1997, IQI entered into an agreement with an affiliate
of Thayer pursuant to which such affiliate provided IQI certain management and
consulting services. As consideration for the management and consulting services
provided, IQI was obligated to pay a quarterly fee of $138, plus certain direct
expenses. Effective with the Merger, this agreement with Thayer was terminated.
The Company provides services to certain clients, including its most
significant client, who, directly or through affiliates, have an ownership
interest in Thayer.
During the year ended July 31, 1996, an affiliate of IQI purchased a
building in which the Company is leasing space. IQI funded the purchase of this
building by lending the affiliate approximately $2,203. This loan earned
interest at the prime rate plus 1% and was due on November 30, 1996. In
connection with the IQI Agreement, the loan, including accrued interest, was
repaid in full on November 18, 1996. Total rent expense relating to this space
and additional space leased from this affiliate amounted to approximately $172,
$115, $300, and $395 for the year ended July 31, 1996, five months ended
December 31, 1996, the year ended December 31, 1997, and the year ended December
31, 1998, respectively. Interest income on the amounts due from this affiliate
amounted to approximately $109 for the year ended July 31, 1996 and $107 for the
five months ended December 31, 1996.
19. SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company classifies its operations into
two segments, teleservices and marketing research, which are managed separately
because each provides different services. The accounting policies of the
operating segments are the same as described in the summary of significant
accounting policies. See "Note--2. Summary of Significant Accounting Policies."
The teleservices segment provides large corporations with outsourced inbound and
outbound call handling services including customer service, help desk, customer
acquisition and retention, multilingual communications programs, facilities
management, order provisioning, and database management. The marketing research
segment provides its clients, representing a broad range of industries, with
customized marketing research services including customer satisfaction
F-28
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
19. SEGMENTS (CONTINUED)
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>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
REVENUES:
Teleservices.......................................... $115,609 $195,355
Marketing research services........................... 18,223 32,683
-------- --------
Total............................................. $133,832 $228,038
======== ========
OPERATING INCOME (LOSS):
Teleservices.......................................... $ 1,160 $ 1,361
Marketing research services........................... 2,077 1,912
Restructuring and other charges....................... -- (8,395)
-------- --------
Total............................................. $ 3,237 $ (5,122)
======== ========
TOTAL ASSETS:
Teleservices.......................................... $ 85,455 $161,699
Marketing research services........................... 16,281 18,845
-------- --------
Total............................................. $101,736 $180,544
======== ========
DEPRECIATION AND AMORTIZATION:
Teleservices.......................................... $ 4,092 $ 9,316
Marketing research services........................... 409 702
Acquisition goodwill amortization..................... 1,592 2,876
-------- --------
Total $ 6,093 $ 12,894
======== ========
</TABLE>
20. SUBSEQUENT EVENTS
At December 31, 1998, Aegis was in default under certain of its covenants
contained in Credit Agreement. On March 30, 1999, the Company entered into the
Third Amendment to the Credit Agreement (the "Third Amendment") whereby
Scotiabank and CSFB waived the Company's defaults under certain of the covenants
at December 31, 1998 and provided for new levels for existing covenants and a
new covenant related to EBITDA.
On March 30, 1999, Thayer provided $5,667 in subordinated indebtedness to
assist in funding the Company's working capital needs. The additional
indebtedness is convertible into the Company's Common Stock at a conversion
price of $1.15 per share. The indebtedness bears an annual interest rate of 12%
and matures on August 31, 2003. As payments under the indebtedness are
subordinate to the Bank Loan, quarterly accrued interest will be rolled into the
principal balance.
F-29
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
21. CURRENT FINANCIAL CONDITION
On August 26, 1999, the Company entered into an agreement with Questor
Investors whereby Questor Investors have agreed to purchase $46.75 million of
newly issued senior voting convertible preferred stock of the Company. The
Company intends to use the net proceeds from the sale of the preferred stock
primarily to reduce outstanding bank debt. Such reduction is expected to
deleverage the Company and put the Company in a better position to renegotiate
or refinance its existing bank credit agreement in order to cure the current
defaults, provide needed flexibility for the Company under the financial
covenants and provide access to working capital to fund future operations. The
maximum number of shares of common stock issuable upon conversion of the 46,750
shares of Series F Preferred Stock proposed to be issued (assuming a conversion
price of $1.00 per share) is 46,750,000, or approximately 47% of the issued and
outstanding shares of common stock following conversion. On a fully diluted and
as converted basis, the Questor Investors would hold approximately 38% of the
Company's common stock and common stock equivalents. No assurance can be given,
however, that the transaction will be consummated. The transaction is subject to
shareholder, bank and regulatory approvals, the amendment of Aegis' charter in
certain respects to facilitate the Questor Investors' investment, and other
customary terms and conditions. The transaction is expected to be completed in
the fourth quarter of 1999.
Since the Merger described in Note 4 above, the Company has experienced
declines in revenues and continued operating losses, the latter primarily as a
result of restructuring and other non-recurring charges (Note 5). Further, due
to covenant defaults in its bank agreement, the Company recorded a
reclassification of long-term debt as current indebtedness for the quarter ended
September 30, 1999. As a result of these developments, at September 30, 1999,
the Company had a retained earnings deficit of $41 million and negative working
capital of $3 million. In addition, since the Merger, the Company has relied
upon the financial support of its largest shareholder for additional capital and
to maintain its existing credit facilities. If the Questor transaction is not
consummated, the Company will require additional funding. The Company would seek
such funding, and assistance to correct the covenant defaults noted above,
initially from its largest shareholder, and if financing is not available from
that source, from a third party. The Company could rely upon its borrowing base
to obtain any such financing and accordingly, believes that it should be able to
obtain adequate financing from some source. There can be no assurance, however,
that additional funding and financial support will be available on acceptable
terms. If such financing cannot be obtained, the Company will be required to
undertake significant cost-cutting measures or a reorganization intended to
streamline the Company's operations and improve its financial results.
F-30
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
EARNINGS--
BALANCE AT BALANCE GENERAL AND BALANCE AT
BEGINNING OF ACQUIRED ADMINISTRATIVE NET END
DESCRIPTION YEAR IN MERGER EXPENSES WRITE-OFF OF YEAR
- ----------- ------------ --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
FIVE MONTHS ENDED JULY 31, 1996
Allowance for doubtful accounts....... $ -- $ -- $ 102 $ -- $ 102
Deferred tax asset valuation
allowance........................... $ -- $ -- $ -- $ -- $ --
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts....... $ 102 $ -- $ 486 $ (38) $ 550
Deferred tax asset valuation
allowance........................... $ -- $ -- $ 103 $ -- $ 103
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts....... $ 550 $ 334 $ 747 $ (294) $ 1,337
Deferred tax asset valuation
allowance........................... $ 103 $ -- $ 606 $ -- $ 709
</TABLE>
F-31
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMER 31, SEPTEMBER 30,
1998 1999
----------- -------------
(RESTATED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,701 $ 360
Accounts receivable, less allowance for doubtful
accounts................................................ 49,585 56,429
Notes receivable--related parties......................... 2,185 2,212
Current deferred tax assets............................... 884 884
Prepaid expenses and other current assets................. 1,662 3,089
-------- --------
Total current assets.................................... 65,017 62,974
Property and equipment, net of accumulated depreciation of
$19,924 in 1998 and $29,040 in 1999....................... 35,277 35,062
Goodwill, net of accumulated amortization of $4,523 in 1998
and $4,952 in 1999........................................ 71,325 48,713
Deferred tax assets......................................... 6,502 12,582
Deferred financing costs, net............................... 2,099 1,889
Other assets................................................ 324 282
-------- --------
$180,544 $161,502
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit.................................. $ -- $ 30,000
Current portions of long-term obligations................. 2,758 40,568
Accounts payable.......................................... 7,059 9,100
Accrued compensation expense.............................. 6,414 5,975
Accrued interest expense.................................. 1,263 2,052
Other accrued expenses.................................... 9,417 9,049
Other current liabilities................................. 2,225 1,433
-------- --------
Total current liabilities............................... 29,136 98,177
Revolving line of credit.................................... 28,100 --
Long-term obligations, net of current portions.............. 33,125 --
Capital lease obligations................................... 3,704 1,876
Subordinated indebtedness due to affiliates................. 14,651 9,508
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778, $.36 cumulative Series B shares
issued and outstanding in 1998 and 1999; 77,300, 15%
cumulative Series D shares issued and outstanding at
September 30, 1999; and, 44,018, 15% cumulative
Series E shares issued and outstanding at September 30,
1999.................................................... -- 2
Common stock, $.01 par value, 100,000,000 shares
authorized; 52,311,450 and 52,492,616 shares issued and
outstanding at December 31, 1998 and September 30, 1999,
respectively............................................ 523 525
Additional paid-in capital (Restated-Note 8).............. 81,259 94,027
Treasury shares, at cost.................................. (1,421) (1,321)
Cumulative translation adjustment......................... 34 60
Retained earnings (deficit) (Restated-Note 8)............. (8,567) (41,352)
-------- --------
Total shareholders' equity.............................. 71,828 51,941
-------- --------
$180,544 $161,502
======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1998 1999 1998 1999
---------- -------- ---------- ---------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues............................................ $ 73,337 $ 61,069 $162,393 $ 180,908
Cost of services, excluding depreciation and
amortization shown below.......................... 49,666 44,083 107,056 130,809
-------- -------- -------- ---------
Gross profit.................................... 23,671 16,986 55,337 50,099
Selling, general and administrative expenses........ 17,063 16,964 40,764 50,161
Depreciation........................................ 3,114 3,485 6,894 9,691
Acquisition goodwill amortization................... 803 744 2,020 2,213
Non-cash asset impairment charge.................... -- -- -- 20,399
Restructuring and other non-recurring charges....... 3,624 -- 3,624 541
-------- -------- -------- ---------
Total operating expenses........................ 24,604 21,193 53,302 83,005
-------- -------- -------- ---------
Operating income (loss)......................... (933) (4,207) 2,035 (32,906)
Interest expense, net............................... 1,723 1,911 4,152 5,491
Non-cash interest expense (Restated-Note 8)......... 3,092 -- 3,092 --
-------- -------- -------- ---------
Loss before income taxes........................ (5,748) (6,118) (5,209) (38,397)
Income tax benefit.................................. (695) (2,096) (37) (6,078)
-------- -------- -------- ---------
Net loss........................................ (5,053) (4,022) (5,172) (32,319)
Preferred stock dividends........................... -- 455 -- 466
-------- -------- -------- ---------
Net loss available to common stock.............. $ (5,053) $ (4,477) $ (5,172) $ (32,785)
======== ======== ======== =========
Basic and diluted loss per share.................... $ (0.10) $ (0.09) $ (0.14) $ (0.63)
======== ======== ======== =========
Weighted average shares outstanding................. 51,726 52,227 37,154 52,075
</TABLE>
See accompanying notes.
F-33
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
---------- --------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(5,172) $(32,319)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 8,914 11,904
Asset write-offs........................................ 2,503 64
Deferred income taxes................................... (1,002) (6,080)
Non-cash asset impairment charge........................ -- 20,399
Non-cash interest expense (Restated-Note 8)............. 3,092 --
Other................................................... 69 21
Changes in operating assets and liabilities:
Accounts receivable................................... (11,300) (6,844)
Notes receivable...................................... 1,986 (27)
Other current assets.................................. 344 (1,427)
Other assets.......................................... (2,043) 16
Accounts payable...................................... 1,328 2,041
Accrued liabilities................................... 4,741 (18)
Other current liabilities............................. (2,713) (792)
Other liabilities..................................... 512 --
------- --------
Net cash provided by (used in) operating activities..... 1,259 (13,062)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (7,403) (8,618)
Acquisition costs, ATC.................................... (3,943) --
Net cash acquired from ATC................................ 296 --
------- --------
Net cash used in investing activities................... (11,050) (8,618)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net......................... 3,822 1,900
Proceeds from bank term debt.............................. -- 7,500
Proceeds from affiliated debt............................. 10,772 6,990
Principal payments on long-term debt...................... (1,397) (3,008)
Payments on capital lease obligations..................... (1,025) (2,133)
Proceeds from issuance of common stock.................... -- 100
Proceeds from exercise of stock options................... 239 179
Deferred financing costs.................................. (888) (189)
------- --------
Net cash provided by financing activities............... 11,523 11,339
Net change in cash and cash equivalents..................... 1,732 (10,341)
Cash and cash equivalents at beginning of period............ 5,288 10,701
------- --------
Cash and cash equivalents at end of period.................. $ 7,020 $ 360
======= ========
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS:
Issuance of common stock to effect acquisition of ATC..... $45,320 $ --
Conversion of affiliated debt to preferred stock.......... -- 12,132
Issuance of preferred stock as paid-in-kind dividend...... -- 455
Capital lease obligation entered into during the period... -- 497
</TABLE>
See accompanying notes.
F-34
<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, 1998 and 1999 and for the year ended
December 31, 1998 have been prepared in accordance with generally accepted
accounting principles. Significant accounting policies followed by the Company
were disclosed in the notes to the consolidated financial statements included in
the Company's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1998.
2. THE MERGER
On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC"), completed the acquisition of IQI, Inc., a New York corporation ("IQI").
The acquisition was effected through the merger (the "Merger") of ATC Merger
Sub, Inc., a New York corporation and wholly-owned subsidiary of the ATC
("Sub"), with and into IQI pursuant to an Agreement and Plan of Merger dated as
of April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.
Pursuant to the Merger Agreement, each former holder of common stock, $.001
par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of IQI Common Stock and IQI stock options and warrants in
a tax-free exchange. The acquisition has been accounted for as a reverse
purchase, meaning that for accounting purposes, IQI is the surviving corporation
and is treated as having acquired ATC in a purchase accounting transaction.
Accordingly, the pre-Merger consolidated financial information reported is that
of IQI. Effective upon the Merger, the Company formally changed its name to
Aegis Communications Group, Inc.
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
F-35
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
2. THE MERGER (CONTINUED)
are not necessarily indicative of what would have occurred had the Merger been
completed as of that date or of the results which may occur in the future:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
----------- ---------
(PRO FORMA)
(RESTATED)
<S> <C> <C>
Total revenues........................................ $210,337 $ 180,908
Cost of services, excluding depreciation and
amortization shown below............................ 141,761 130,809
-------- ---------
Gross profit...................................... 68,576 50,099
Selling, general and administrative expenses.......... 52,717 50,161
Depreciation.......................................... 9,012 9,691
Acquisition goodwill amortization..................... 2,636 2,213
Asset impairment charge............................... -- 20,399
Restructuring and other non-recurring charges......... 3,624 541
-------- ---------
Total operating expenses.......................... 67,989 83,005
-------- ---------
Operating income (loss)........................... 587 (32,906)
Interest expense, net................................. 5,212 5,491
Non-cash interest expense (Restated-Note 8)........... 3,092 --
Litigation settlement................................. 1,900 --
-------- ---------
Loss before income taxes.......................... (9,617) (38,397)
Income tax benefit.................................... (1,309) (6,078)
-------- ---------
Net loss.......................................... (8,308) (32,319)
Preferred stock dividends............................. -- 466
-------- ---------
Net loss available to common stock................ $ (8,308) $ (32,785)
======== =========
Pro forma net loss per share--basic and diluted....... $ (0.16) $ (0.63)
======== =========
Weighted average shares outstanding................... 51,473 52,075
</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") criteria for accrual have been referred
to herein as "restructuring" charges. Expenses related to the restructuring
decision which do not meet the specific GAAP criteria for accrual have been
referred to herein as "other" charges. "Other" charges have not been accrued,
but are recognized as the related expenses are incurred. Accordingly, the
Company recorded pre-tax charges of approximately $8,395 ($5,247, net of taxes)
in the year ended December 31, 1998 and approximately $541 ($330, net of taxes)
in the quarter ended March 31, 1999, as a part of the total restructuring. These
charges are primarily attributable to one-time write-offs of redundant hardware
and software, severance costs and the consolidation of certain administrative
functions including
F-36
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
3. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
costs to relocate offices and employees. The Company does not anticipate
recognizing additional Merger-related restructuring charges in 1999 and none
were recorded in the quarters ended June 30, 1999 or September 30, 1999.
4. ASSET IMPAIRMENT CHARGE
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the estimated future
cash flows (undiscounted and without interest charges) estimated to be generated
by those assets are less than the assets' carrying value. SFAS No. 121 also
requires that when a group of assets being tested for impairment was acquired as
part of a business combination that was accounted for using the purchase method
of accounting, any goodwill that arose as part of the transaction must be
included as part of the asset grouping. In accordance with SFAS No. 121, the
Company reviews long-lived assets whenever events or changes in facts and
circumstances indicate that the carrying value of the assets may not be
recoverable. As a result of the performance of the Company's Elrick & Lavidge
("E&L") marketing research division since its acquisition (in a purchase
accounting transaction) by IQI in July 1997, the Company has performed an
analysis (based on E&L's estimated future cash flows) of the carrying value of
the goodwill associated with the purchase of E&L. As a result of this
evaluation, it was determined that the carrying value of the goodwill associated
with the purchase of E&L has been impaired. Accordingly, in the quarter ended
March 31, 1999, the Company adjusted the carrying value of E&L's long-lived
assets to their fair value resulting in a non-cash asset impairment charge of
$20.4 million, which reduced the amount of goodwill on the Company's balance
sheet. This reduction is expected to result in a decrease in the Company's
goodwill amortization expense of approximately $1.1 million annually.
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, as amended. 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
F-37
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
5. SEGMENTS (CONTINUED)
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,
------------------- --------------------
1998 1999 1998 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Teleservices.................................... $ 65,052 $ 53,693 $138,137 $ 161,872
Marketing research services..................... 8,285 7,376 24,256 19,036
-------- -------- -------- ---------
Total....................................... $ 73,337 $ 61,069 $162,393 $ 180,908
======== ======== ======== =========
OPERATING INCOME (LOSS):
Teleservices.................................... $ 2,171 $ (4,265) $ 4,189 $ (10,943)
Marketing research services..................... 520 58 1,470 (1,023)
Asset impairment charge......................... -- -- -- (20,399)
Restructuring and other non-recurring charges... (3,624) -- (3,624) (541)
-------- -------- -------- ---------
Total....................................... $ (933) $ (4,207) $ 2,035 $ (32,906)
======== ======== ======== =========
DEPRECIATION AND AMORTIZATION:
Teleservices.................................... $ 2,953 $ 3,345 $ 6,370 $ 9,226
Marketing research services..................... 161 140 524 465
Acquisition goodwill amortization............... 803 744 2,020 2,213
-------- -------- -------- ---------
Total....................................... $ 3,917 $ 4,229 $ 8,914 $ 11,904
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------
1998 1999
---------- ---------
(RESTATED)
<S> <C> <C>
TOTAL ASSETS:
Teleservices............................................ $150,220 $ 145,862
Marketing research services............................. 38,930 15,640
-------- ---------
Total............................................... $189,150 $ 161,502
======== =========
</TABLE>
6. CONVERSION OF SUBORDINATED INDEBTEDNESS
In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's largest shareholder, Thayer Equity
Investors III, L.P. ("Thayer Equity", and together the "Thayer-led group"),
agreed to convert approximately $12.1 million of its subordinated debt into two
new series of convertible preferred stock. The 77,300 shares of new Series D
Preferred Stock ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.00 per share, and
the 44,018 shares of new Series E Preferred ($.01 par value per share, $100 per
share liquidation preference) are convertible into Company Common Stock at
$2.375 per share. Both series earn cumulative dividends (payable-in-kind in
additional shares of the respective series of Preferred Stock) at the annual
rate of 15%, and are non-voting except on specified matters. The Company may, at
its option,
F-38
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
6. CONVERSION OF SUBORDINATED INDEBTEDNESS (CONTINUED)
redeem the Series D and E Preferred shares in cash or by the issuance of a
convertible promissory note bearing interest at a rate of 12%. In consideration
of the conversion of the subordinated debt into preferred stock, the Company
issued the Thayer-led group warrants to purchase an additional 1,000,000 shares
of Company Common Stock at $0.90625 per share, the closing price of such stock
on the date the debt was converted into equity. The excess of the fair value of
the convertible subordinated debt extinguished over the fair value of the
securities issued was $6.3 million which was recorded as an addition to paid-in
capital as a result of this capital transaction.
7. AMENDMENTS TO CREDIT FACILITY
On March 30, 1999, the Company entered into the Third Amendment to its
existing Credit Agreement (the "Third Amendment") with The Bank of Nova Scotia
("Scotiabank") and Credit Suisse First Boston ("CSFB") whereby Scotiabank and
CSFB waived the Company's defaults under certain of the covenants at
December 31, 1998 and provided for new levels for existing financial covenants
and a new covenant related to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). At June 30, 1999, Aegis was not in compliance with
certain of its financial covenants contained in the Third Amendment.
Accordingly, the long-term portion of this debt was restated as current at
June 30, 1999 and remains classified as current at September 30, 1999.
On August 6, 1999, the Company entered into the Fourth Amendment to its
Credit Agreement (the "Fourth Amendment") with Scotiabank and CSFB whereby
Scotiabank and CSFB committed to provide the Company an additional $7.5 million
in term debt, resulting in a total facility of approximately $68.0 million, and
waived the Company's defaults under certain of the covenants through August 31,
1999. The proceeds of the additional loan have been used for the Company's
general corporate and working capital needs. As part of the Fourth Amendment,
Thayer Equity agreed to guarantee the Company's additional $7.5 million of
indebtedness. In consideration of such guarantee, the Company issued Thayer
Equity a warrant to purchase up to 800,000 shares of the Company's Common Stock,
exercisable only if the guarantee is drawn upon and at an exercise price based
on the then market price of such stock. As part of its settlement of an
indemnification claim made by the Company related to the Merger, Thayer Equity
waived its right to this contingent warrant. In connection with the proposed
$46.75 million investment by Questor Partners Fund II, L.P. and related funds
(the "Questor Investors"), the Company is currently negotiating an amendment of
its Credit Agreement, which management expects would cure the Company's defaults
upon funding of the Questor Investors' investment.
8. EFFECT OF RESTATEMENT
The Company has restated its September 30, 1998 and subsequent financial
statements in accordance with Emerging Issues Task Force Topic No. D-60 to
reflect a beneficial conversion feature contained in the subordinated debt
issued to Thayer Equity in July 1998. This beneficial conversion feature, which
was not originally recognized, resulted in a non-cash interest expense charge of
$3.1 million at the issuance date of the debt.
In connection with the restatement, the Company determined the fair value of
the beneficial conversion feature to be $3.1 million based on its fair value at
the issuance date and recorded the discount for the beneficial conversion
feature as paid-in capital. As the $8.7 million in subordinated debt was
immediately convertible upon issuance, the Company recognized $3.1 million in
non-cash interest expense
F-39
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
8. EFFECT OF RESTATEMENT (CONTINUED)
in the quarter ended September 30, 1998. There was no impact to the Company's
tax provision for the quarter ended September 30, 1998 as the beneficial
conversion feature represents a permanent difference for tax purposes.
The restatements of the 1998 financial statements for the matter described
above had no effect on the Company's total assets or total liabilities and
shareholders' equity (deficit). The Company's net loss and basic and diluted
loss per common share for the three and nine months ended September 30, 1998, as
previously reported and as restated, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
-------------- --------------
<S> <C> <C>
Net loss--previously reported.............................. $ (1,961) $ (2,080)
Adjustment related to recalculation of beneficial
conversion feature on convertible subordinated debt...... (3,092) (3,092)
-------- --------
Net loss--as restated.................................. $ (5,053) $ (5,172)
======== ========
Net loss per share (basic and diluted)--previously
reported................................................. $ (0.04) $ (0.06)
======== ========
Net loss per share (basic and diluted)--as restated........ $ (0.10) $ (0.14)
======== ========
</TABLE>
9. CURRENT FINANCIAL CONDITION
On August 26, 1999, the Company entered into an agreement with Questor
Investors whereby the Questor Investors have agreed to purchase $46.75 million
of newly issued senior voting convertible preferred stock of the Company. The
Company intends to use the net proceeds from the sale of the preferred stock
primarily to reduce outstanding bank debt. Such reduction is expected to
deleverage the Company and put the Company in a better position to renegotiate
or refinance its existing bank credit agreement in order to cure the current
defaults, provide needed flexibility for the Company under the financial
covenants and provide access to working capital to fund future operations. The
maximum number of shares of common stock issuable upon conversion of the 46,750
shares of Series F Preferred Stock proposed to be issued (assuming a conversion
price of $1.00 per share) is 46,750,000, or approximately 47% of the issued and
outstanding shares of common stock following conversion. On a fully diluted and
as converted basis, the Questor Investors would hold approximately 38% of the
Company's common stock and common stock equivalents. No assurance can be given,
however, that the transaction will be consummated. The transaction is subject to
shareholder, bank and regulatory approvals, the amendment of Aegis' charter in
certain respects to facilitate the Questor Investors' investment, and other
customary terms and conditions. The transaction is expected to be completed in
the fourth quarter of 1999.
Since the Merger described in Note 2 above, the Company has experienced
declines in revenues and continued operating losses, the latter primarily as a
result of restructuring and other non-recurring charges (Note 3). Further, due
to covenant defaults in its bank agreement, the Company recorded a
reclassification of long-term debt as current indebtedness for the quarter ended
September 30, 1999. As a result of these developments, at September 30, 1999,
the Company had a retained earnings deficit of $41 million and negative working
capital of $35 million. In addition, since the Merger, the Company has relied
upon the
F-40
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)
9. CURRENT FINANCIAL CONDITION (CONTINUED)
financial support of its largest shareholder for additional capital and to
maintain its existing credit facilities. If the Questor transaction is not
consummated, the Company will require additional funding. The Company would seek
such funding, and assistance to correct the covenant defaults noted above,
initially from its largest shareholder, and if financing is not available from
that source, from a third party. There can be no assurance, however, that
additional funding and financial support will be available on acceptable terms.
The Company could rely upon its borrowing base to obtain any such financing and
accordingly, believes that it should be able to obtain adquate financing from
some source. If such financing cannot be obtained, the Company will be required
to undertake significant cost-cutting measures or a reorganization intended to
streamline the Company's operations and improve its financial results.
F-41
<PAGE>
APPENDIX A
SERIES F SENIOR VOTING CONVERTIBLE PREFERRED STOCK
PURCHASE AND REGISTRATION RIGHTS AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
1. Definitions.................................................................................................. A-1
2. Purchase and Sale of Shares.................................................................................. A-5
(a) Authorization of Shares.................................................................... A-5
(b) Sale and Purchase.......................................................................... A-5
3. Closing, Delivery and Payment................................................................................ A-5
(a) Closing.................................................................................... A-5
(b) Delivery................................................................................... A-6
4. Representations and Warranties of the Company................................................................ A-6
(a) Organization, Good Standing and Qualification.............................................. A-6
(b) Capitalization; Series F Preferred......................................................... A-6
(c) Authorization; Binding Obligations......................................................... A-7
(d) No Conflicts............................................................................... A-7
(e) SEC Reports................................................................................ A-7
(f) Litigation................................................................................. A-8
(g) Offering Valid............................................................................. A-8
(h) Financial Statements....................................................................... A-8
(i) Absence of Liabilities..................................................................... A-8
(j) Taxes...................................................................................... A-8
(k) Title to Property and Assets............................................................... A-9
(l) Employee Benefit Plans and Related Matters: ERISA.......................................... A-10
(m) Accounts Receivable........................................................................ A-11
(n) Material Contracts......................................................................... A-11
(o) Consents................................................................................... A-11
(p) Absence of Certain Changes................................................................. A-11
(q) Compliance with Law........................................................................ A-12
(r) Intellectual Property...................................................................... A-12
(s) Delaware General Corporation Law Section 203............................................... A-12
(t) Actions Regarding the Shareholder Rights Plan.............................................. A-12
(u) No Further Claims.......................................................................... A-12
(v) Information in Proxy Statement............................................................. A-12
5. Representations and Warranties of the Questor Investors...................................................... A-13
(a) Requisite Power and Authority.............................................................. A-13
(b) Investment Representations................................................................. A-13
(c) Information in Proxy Statement............................................................. A-14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
6. Representations and Warranties of the Existing Investors..................................................... A-14
(a) Requisite Power and Authority.............................................................. A-14
(b) No Further Claims.......................................................................... A-14
7. Required Registration........................................................................................ A-14
8. Incidental Registration...................................................................................... A-16
9. Registration Procedures...................................................................................... A-17
10. Expenses.................................................................................................... A-20
11. Indemnification............................................................................................. A-21
12. Reporting Requirements Under the Exchange Act............................................................... A-23
13. Stockholder Information..................................................................................... A-23
14. Financial Information....................................................................................... A-23
15. Stockholder Approval........................................................................................ A-24
(a) Stockholder Meeting........................................................................ A-24
(b) Proxy Statement............................................................................ A-24
(c) No False or Misleading Statements.......................................................... A-24
(d) Comfort Letter............................................................................. A-25
16. Conduct of Business Pending Closing......................................................................... A-25
(a) Organic Changes............................................................................ A-25
(b) Indebtedness............................................................................... A-25
(c) Disposition of Assets...................................................................... A-25
(d) Capital Expenditures....................................................................... A-25
(e) Other Actions.............................................................................. A-25
17. Conditions to Closing....................................................................................... A-26
(a) Conditions to the Questor Investors' Obligations at the Closing............................ A-26
(b) Conditions to Obligations of the Company................................................... A-27
18. Survival of Representations; Indemnity...................................................................... A-28
(a) Survival of Representations................................................................ A-28
(b) General Indemnity.......................................................................... A-28
(c) Procedures for Indemnification............................................................. A-29
(d) Limitation on Certain Indemnities.......................................................... A-30
19. Inquiries and Negotiations.................................................................................. A-30
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
20. Use of Proceeds............................................................................................. A-31
21. Termination................................................................................................. A-31
22. General Provisions.......................................................................................... A-31
(a) Forms...................................................................................... A-31
(b) Integration................................................................................ A-31
(c) Notices.................................................................................... A-31
(d) Choice of Law.............................................................................. A-32
(e) Severability............................................................................... A-32
(f) Parties in Interest........................................................................ A-32
(g) Counterparts............................................................................... A-32
(h) Modification, Amendment and Waiver......................................................... A-32
(i) Further Assurances......................................................................... A-32
(j) Headings................................................................................... A-32
(k) Gender and Number.......................................................................... A-33
(l) Attorneys' Fees............................................................................ A-33
(m) Broker's Fees.............................................................................. A-33
(n) Confidentiality............................................................................ A-33
(o) Expenses................................................................................... A-33
(p) Public Announcements....................................................................... A-33
(q) Additional Matters......................................................................... A-33
</TABLE>
iii
<PAGE>
SERIES F SENIOR VOTING CONVERTIBLE PREFERRED STOCK
PURCHASE AND REGISTRATION RIGHTS AGREEMENT
THIS SERIES F SENIOR VOTING CONVERTIBLE PREFERRED STOCK PURCHASE AND
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is entered into as of
August 25, 1999, by and among Aegis Communications Group, Inc., a Delaware
corporation (the "COMPANY"), Questor Partners Fund II, L.P., a Delaware limited
partnership ("Fund II"), Questor Side-by-Side Partners II, L.P., a Delaware
limited partnership (the "SIDE-BY-SIDE FUND"), and Questor Side-by-Side Partners
II 3(c)(1), L.P., a Delaware limited partnership (the "3(C)(1) FUND" and
together with Fund II and the Side-by-Side Fund, the "QUESTOR INVESTORS"),
Thayer Equity Investors III, L.P., a Delaware limited partnership ("THAYER
EQUITY"), TC Co-Investors, LLC, a Delaware limited liability company ("TC
CO-INVESTORS" and, together with Thayer Equity, "THAYER"), ITC Services Company
("ITC"), Edward Blank ("BLANK"), trusts created by Edward Blank as both grantor
and trustee under Article Fourth of The Edward Blank 1995 Grantor Retained
Annuity Trust, dated December 29, 1995, a trust organized under the laws of New
Jersey (the "BLANK TRUST," and, together with Thayer, ITC and Blank the
"EXISTING INVESTORS").
RECITALS
1. The Company has authorized the sale and issuance of an aggregate of
Forty Six Thousand Seven Hundred Fifty (46,750) shares (the "SHARES") of its
Series F Senior Voting Convertible Preferred Stock (the "SERIES F PREFERRED");
2. The Questor Investors desire to purchase the Shares on the terms and
conditions set forth herein; and
3. The Company desires to issue and sell the Shares to the Questor
Investors on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS. Unless the context otherwise requires, the terms defined
in this Section 1 shall have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of any of the
terms herein defined.
"ACTION" means any actual or threatened claim, action, suit,
arbitration, hearing, inquiry, proceeding, complaint, charge or
investigation by or before any Governmental Entity or arbitrator and any
appeal from any of the foregoing.
"AGREEMENT" means this Series F Senior Voting Convertible Preferred
Stock Purchase and Registration Rights Agreement.
"BANK APPROVAL" means all consents or amendments under the Credit
Agreement needed (i) to consummate the transactions contemplated by this
Agreement, including, without limitation, the use of proceeds contemplated
by Section 20, and (ii) to secure as of the Closing at least $15,000,000 of
immediately available funds under the revolving credit facility under the
Credit Agreement after taking account of all limitations on borrowing under
such Credit Agreement, including, without limitation, the borrowing base,
and after giving effect to the transactions contemplated by this Agreement,
including, without limitation, such use of proceeds.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, $.01 par value, of the Company.
A-1
<PAGE>
"CONVERSION SHARES" means Common Stock issued or issuable upon exercise
or conversion of the Shares issued pursuant to this Agreement.
"CREDIT AGREEMENT" means the Second Amended and Restated Credit
Agreement, dated as of July 9, 1998, among IQI, Inc., Aegis Communications
Group, Inc. The Bank of Nova Scotia, Credit Suisse First Boston and the
other parties enumerated therein, as amended.
"EQUITY SECURITY" means any stock or similar security of the Company or
any security (whether stock or indebtedness for borrowed money) convertible
or exchangeable, with or without consideration, into or for any such stock
or similar security, or any security (whether or not indebtedness for
borrowed money) carrying any warrant or right to subscribe to or purchase
any such stock or similar security, or any such warrant or right.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA AFFILIATE" means any Person which is (or at any relevant time
was) a member of a controlled group of corporations within the meaning of
Code Section 414(b), all trades or businesses under common control within
the meaning of Code Section 414(c), and all affiliated service group within
the meaning of Code Section 414(m), of which the Company is (or at any
relevant time was) a member.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"GOVERNMENTAL ENTITY" means any local, state, federal or foreign
(i) court, (ii) government or (iii) governmental department, commission,
instrumentality, board, agency or authority, including the IRS and other
taxing authorities.
"HOLDER" of any security means the record or beneficial owner of such
security.
"HOLDERS OF A MAJORITY OF THE REGISTRABLE SECURITIES" means the Person
or Persons who are the Holders of greater than 50% of the shares of
Registrable Securities then outstanding.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEBTEDNESS" means, when used with reference to any Person, without
duplication, (i) any liability of such Person created or assumed by such
Person, or any Subsidiary thereof, (A) for borrowed money, (B) evidenced by
a bond, note, debenture or similar instrument (including a purchase money
obligation, deed of trust or mortgage) given in connection with the
acquisition of, or exchange for, any property or assets (other than
inventory or similar property acquired and consumed in the ordinary course
consistent with past practice), including securities and other Indebtedness,
(C) in respect of letters of credit issued for such Person's account and
interest rate swap agreements and currency exchange rate agreements (and
other interest and currency exchange rate hedging agreements) to which such
Person is a party or (D) for the payment of money as lessee under leases
that should be, in accordance with generally accepted accounting principals,
recorded as capital leases for financial reporting purposes; (ii) any
liability of others described in the preceding clause (i) guaranteed as to
payment of principal or interest by such Person or in effect guaranteed by
such Person through an agreement, contingent or otherwise, to purchase,
repurchase or pay the related Indebtedness or to acquire the security
therefor; (iii) all liabilities or obligations secured by a Lien (other than
a Permitted Lien) upon property owned by such person and upon which
liabilities or obligations such person customarily pays interest or
principal, whether or not such Person has not assumed or become liable for
the payment of such liabilities or obligations; and (iv) any amendment,
renewal, extension, revision or refunding of any such liability or
obligations; provided, however, that Indebtedness shall not include any
liability for compensation of such Person's employees or for inventory of
similar property acquired and consumed in the ordinary course consistent
with past practice or for services.
A-2
<PAGE>
"INITIATING HOLDERS" means either (i) in the case of the Questor
Holders, the Questor Holders of greater than 50% of the shares of
Registrable Securities then outstanding and owned, beneficially or of
record, by the Questor Holders, or (ii) in the case of the Existing
Investors, the Holders of greater than 50% of the shares of Registrable
Securities then outstanding and owned, beneficially or of record, by the
Existing Investors.
"INTELLECTUAL PROPERTY" means all intellectual property or proprietary
rights owned or used by the Company and its Subsidiaries, including all
franchises, permits, licenses, software, trademarks, service marks, domain
names, trade rights, trade dress, patents, patent applications, copyrights,
inventions, know-how and other confidential information.
"IRS" means the United States Internal Revenue Service.
"LEGAL REQUIREMENT" means any statute, law, ordinance, rule, regulation,
permit, order, writ, judgment, injunction, decree or award issued, enacted
or promulgated by any Governmental Entity or any arbitrator.
"LIEN" means any mortgage, pledge, security interest, encumbrance,
community property interest, trust, option, lien or charge of any kind,
including, without limitation, any conditional sale or other title retention
agreement, any lease in the nature thereof and the filing of or agreement to
give any financing statement under the Uniform Commercial Code of any
jurisdiction and including any lien or charge arising by statute or other
law.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, financial condition, properties, profitability or operations of
the Company and its Subsidiaries taken as a whole.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means the Nasdaq National Market.
"OPTIONS" means all outstanding options, warrants and other rights to
acquire Common Stock.
"ORIGINAL STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated
July 9, 1998 by and among ATC Communications Group, Inc. and the other
parties enumerated therein.
"PERMITTED LIENS" means (a) Liens for ad valorem real or personal
property taxes or assessments not at the time due and (b) Liens in respect
of pledges or deposits under workers' compensation laws or similar
legislation, carriers', warehousemen's, mechanics', laborers' and
materialmen's, landlord's and similar liens, if the obligations secured by
such Liens are not then delinquent.
"PERSON" includes any natural person, corporation, trust, association,
company, partnership, limited liability company, joint venture and other
entity and any government, governmental agency, instrumentality or political
subdivision.
"PLAN" means any "employee benefit plan" within the meaning of Section
3(3) of ERISA and any other written or oral employee benefit plan,
arrangement, practice, contract, policy, or program (other than arrangements
merely involving the payment of wages) which are or at any time have been
established, maintained, or contributed to by the Company or any of its
Subsidiaries or any ERISA Affiliate for the benefit of current or former
employees, with respect to which the Company or any of its Subsidiaries or
an ERISA Affiliate has or may in the future have any liability or obligation
to contribute or make payments of any kind.
"PREFERRED STOCK" means Series B Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock.
"QUESTOR HOLDERS" means the Questor Investors and any Person that
acquires Registrable Securities from the Questor Investors.
A-3
<PAGE>
The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRABLE SECURITIES" means: (1) shares of Common Stock issued or
issuable on exercise or conversion of the Shares issued pursuant to this
Agreement, (2) shares of Common Stock issued or issuable upon exercise of
the Warrants, so long as they are owned by any of the Existing Investors,
any limited partner of Thayer or any affiliate (as defined in the Securities
Act) of any Existing Investor or Thayer's general partner, (3) shares of
Common Stock issued or issuable upon conversion of the Subordinated Notes,
so long as they are owned by any of the Existing Investors, any limited
partner of Thayer or any affiliate (as defined under the Securities Act) of
any Existing Investor or Thayer's general partner, and (4) the 24,814,509
shares of Common Stock owned by the Existing Investors as of the date hereof
so long as they are owned by any of the Existing Investors, any limited
partner of Thayer or any affiliate (as defined under the Securities Act) of
any Existing Investor or Thayer's general partner, (5) any securities issued
or issuable with respect to any of the securities referred to in clauses
(1) through (4) above by way of a stock dividend or stock split or in
connection with a combination of shares, reclassification, recapitalization,
merger or consolidation, reorganization or other similar event; provided,
however, that such shares of Common Stock shall only be treated as
Registrable Securities if and so long as they have not been (i) sold to or
through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (ii) sold (other than to a partner or
affiliate (as defined under the Securities Act) of the Existing Investors or
Questor Investors or to a Questor Holder) in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act
under Section 4(l) thereof so that all transfer restrictions and restrictive
legends with respect to such Common Stock are removed upon the consummation
of such sale and the seller and purchaser of such Common Stock receive an
opinion of counsel for the Company, which shall be in form and content
reasonably satisfactory to the seller and buyer and their respective
counsel, to the effect that such Common Stock in the hands of purchaser is
freely transferable without restriction or registration under the Securities
Act in a public or private transaction.
"RIGHTS PLAN" means the Rights Agreement, dated as of December 16, 1998,
between the Company and Harris Trust and Savings Bank.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES B PREFERRED STOCK" means Series B Preferred Stock, $.01 par
value per share, of the Company.
"SERIES D PREFERRED STOCK" means Series D Preferred Stock, $.01 par
value per share, of the Company.
"SERIES E PREFERRED STOCK" means Series E Preferred Stock, $.01 par
value per share, of the Company.
"SERIES F PREFERRED STOCK" means Series F Preferred Stock, $.01 per
share, of the Company, to be issued pursuant to the Certificate.
"SHAREHOLDER" means an owner of the issued and outstanding shares of
Common Stock or Preferred Stock.
"STOCK PLANS" means all stock option plans and other stock or
equity-related plans of the Company.
"SUBSIDIARY" of a Person means any corporation, partnership, association
or other business entity at least 50% of the outstanding voting power of
which is at the time owned or controlled directly or indirectly by such
Person or by one or more of such Subsidiary entities, or both.
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"TAX" shall mean any Federal, state, local or foreign income, gross
receipts, license, payroll, unemployment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including, without
limitation, taxes under Code Section 59A), customs duties, capital stock,
franchise, profits, withholding, social security (or similar), employment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated tax or
other tax, assessment or charge of any kind whatsoever, including, without
limitation, any interest, fine, penalty or addition thereto, whether
disputed or not.
"TAX RETURN" means any return, declaration, report, claim for refund or
information, or statement relating to Taxes, and any exhibit, schedule,
attachment or amendment thereto.
"VOTING AGREEMENT" means the Stockholders and Voting Agreement, dated as
of the date hereof, among the Questor Investors and the stockholders of the
Company listed therein.
"WARRANTS" mean (a) Warrant to Purchase One Million One Hundred Thousand
(1,100,000) Shares of Common Stock, $.01 Par Value, dated April 7, 1998, at
the price of $1.96 per share, held by Thayer Equity Investors III, L.P.;
(b) Warrants to purchase 350,000 shares of Common Stock issued pursuant to a
commitment letter from Thayer to the Company at an exercise price of $2.375;
(c) Series Four Warrant to Purchase Nine Hundred Seven Thousand Nine Hundred
Eighty-Four (907,984) Shares of Common Stock, $.01 Par Value, dated
June 30, 1999, at the price of $.90625 per share, held by Thayer Equity
Investors III, L.P.; (d) Series Four Warrant to Purchase Forty-Two Thousand
Ninety-One (42,091) Shares of Common Stock, $.01 Par Value, dated June 30,
1999, at the price of $.90625 per share, held by Edward Blank;
(e) Series Four Warrant to Purchase Nine Thousand Nine Hundred Seventy-Eight
(9,978) Shares of Common Stock, $.01 Par Value, dated June 30, 1999, at the
price of $.90625 per share, held by Edward Blank 1995 Grantor Retained
Annuity Trust; (f) Series Four Warrant to Purchase Thirty-Nine Thousand Nine
Hundred Forty-Seven (39,947) Shares of Common Stock, $.01 Par Value, dated
June 30, 1999, at the price of $.90625 per share, held by ITC Service
Company; or (g) Stock Purchase Warrant, dated as of December 17, 1997, from
IQI, Inc. to Edward Blank, to purchase 25,403 shares for $808,600 and the
Stock Purchase Warrant, dated as of December 17, 1997, from IQI, Inc., to
purchase 6,013 shares for $191,400 (such two Stock Purchase Warrants to
purchase IQI, Inc. shares having been converted into warrants to purchase
306,347 shares, in aggregate, of Common Stock at an exercise price of $3.26
per share).
2. PURCHASE AND SALE OF SHARES. (a) AUTHORIZATION OF SHARES. The Company
has authorized (a) the sale and issuance to the Questor Investors of the Shares
and (b) the issuance, upon conversion of the Series F Preferred in accordance
with the terms of Certificate of Designation of the Series F Preferred, in the
form attached hereto as EXHIBIT A (the "CERTIFICATE"), of the Conversion Shares.
The Shares shall have the rights, preferences and privileges set forth in the
Certificate.
(b) SALE AND PURCHASE. Subject to the terms and conditions hereof, at
the Closing (as hereinafter defined) the Company hereby agrees to issue and
sell to the Questor Investors and the Questor Investors agree to purchase
from the Company the Shares at a purchase price of One Thousand Dollars
($1,000) per share, or the aggregate purchase price of Forty Six Million
Seven Hundred and Fifty Thousand Dollars ($46,750,000) (the "PURCHASE
PRICE").
3. CLOSING, DELIVERY AND PAYMENT. (a) CLOSING. The closing of the sale
and purchase of the Shares under this Agreement (the "CLOSING") shall take place
three business days following the satisfaction of the conditions to closing in
Section 17(a)(xi) (Proxy Statement), the conditions to closing in Section
17(a)(xv) (HSR) and the conditions to closing in Section 17(a)(x) (Lender
Agreements), at the offices of Hughes & Luce, L.L.P., 1717 Main Street,
Suite 2800, Dallas, Texas 75201 or at such other time or place as the Company
and the Questor Investors may mutually agree (such date is hereinafter referred
to as the "CLOSING DATE").
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(b) DELIVERY. At the Closing, subject to the terms and conditions
hereof, the Company will deliver to the Questor Investors certificates
representing the 46,750 shares of the Series F Preferred being purchased by
the Questor Investors, in the name of the Questor Investors (each Questor
Investor to receive a certificate for that portion of the aggregate number
of Shares as is specified in writing by the Questor Investors), against
payment to the Company of the Purchase Price therefor by wire transfer to
such accounts specified in writing by the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Questor Investors as of the date of this
Agreement as follows:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the Company
and its Subsidiaries is a corporation validly existing and in good standing
under the laws of its jurisdiction of organization with all requisite
corporate power and authority to own and operate its properties and assets
and to carry out its business as presently conducted. The Company has the
corporate power and authority to execute and deliver this Agreement, to
issue and sell the Shares and the Conversion Shares, and to carry out the
provisions of this Agreement and the Certificate. Each of the Company and
its Subsidiaries has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
jurisdiction in which the nature of its business or location of its
properties requires such qualification, except where the failure to so
qualify would not reasonably be expected, individually or in the aggregate,
to result in a Material Adverse Effect.
(b) CAPITALIZATION; SERIES F PREFERRED. As of the date hereof, the
authorized capital stock of the Company, consists of 100,000,000 shares of
Common Stock, 52,492,616 shares of which are issued and outstanding, 29,778
shares of Series B Preferred Stock, of which 29,778 are issued and
outstanding, 231,902 shares of Series D Preferred Stock, of which 77,300
shares are issued and outstanding and 132,053 shares of Series E Preferred
Stock, of which 44,018 shares are issued and outstanding. Section (b) of the
Disclosure Schedules attached hereto (the "DISCLOSURE SCHEDULES") sets forth
a complete and accurate list of (i) all holders of Options, indicating the
type and number of shares of Common Stock subject to each Option, the name
of the plan and the vesting schedule and the exercise price thereof, and
(ii) all of the Stock Plans. All of the issued and outstanding shares of
Common Stock and Preferred Stock are, and all shares of Common Stock that
may be issued upon exercise of Options after the date hereof and prior to
the Closing Date will be, duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. Other than as set forth on
Section (b) of the Disclosure Schedules (i) there are no existing options,
warrants, rights, calls or commitments of any character relating to shares
of Common Stock, (ii) there are no outstanding securities or other
instruments convertible into or exchangeable for shares of the Company's
capital stock and no commitments to issue such securities or instruments and
(iii) no Person has any right of first refusal, preemptive right,
subscription right or similar right with respect to any shares of the
Company's capital stock either pursuant to any agreement or arrangement with
the Company, or, to the Company's knowledge, pursuant to any agreement or
arrangement with any other party. The offer, issuance and sale of all issued
and outstanding shares of Common Stock and Preferred Stock were
(i) registered under, or exempt from the registration and prospectus
delivery requirements of, the Securities Act, (ii) registered or qualified
(or exempt from registration or qualification) under the registration or
qualification requirements of all applicable state securities laws and
(iii) accomplished in conformity with all other Legal Requirements. Except
for the Original Stockholders Agreement, there are no voting agreements,
voting trusts or similar arrangements or understandings to which the Company
or any of its Subsidiaries is a party or is bound with respect to the voting
of the capital stock of the Company or its Subsidiaries. None of the awards,
grants or other agreements pursuant to which Options were issued have
provisions which accelerate the vesting or right to exercise such Options or
warrants upon the execution of this Agreement or the consummation of the
transactions contemplated hereby. Except as set forth on Section (b) of the
Disclosure Schedules, the Company is not under any obligation to register
any securities of the Company. The rights, preferences, privileges and
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restrictions of the Shares are as stated in the Certificate. The rights,
preferences, privileges and restrictions of the other series of Preferred
Stock are as stated in their respective Certificates of Designation. The
Company's previously designated Series A Preferred Stock and Series C
Preferred Stock are no longer outstanding and such designated preferred
stock has resumed the status of authorized but unissued preferred stock. The
Shares are duly authorized and, when issued and paid for in accordance with
the terms hereof, will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens and restrictions, other than
Liens that might have been created by the Questor Investors and restrictions
imposed by the Securities Act and the Stockholders Agreement (as hereinafter
defined). The Conversion Shares have been duly and validly reserved for
issuance and, when issued in compliance with the provisions of the
Certificate, will be validly issued, fully paid and nonassessable, free and
clear of all Liens and other restrictions, other than Liens that might have
been created by the Questor Investors and restrictions imposed by the
Securities Act and the Stockholders Agreement.
(c) AUTHORIZATION; BINDING OBLIGATIONS. Subject to obtaining
Stockholder Approval (as hereinafter defined), all corporate action on the
part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement, the performance of all obligations of
the Company hereunder and thereunder at the Closing and the authorization,
sale, issuance and delivery of the Shares pursuant hereto and the Conversion
Shares pursuant to the Certificate has been taken. Subject to obtaining
Stockholder Approval, this Agreement, when executed and delivered, will be
the valid and binding obligation of the Company, enforceable in accordance
with its terms. The sale of the Shares contemplated hereby and the
subsequent conversion of the Shares into Conversion Shares in accordance
with the Certificate are not subject to any preemptive rights or rights of
first refusal.
(d) NO CONFLICTS. Subject to compliance with the applicable
requirements of the Securities Act, the Exchange Act, any applicable state
securities laws and the HSR Act, obtaining Stockholder Approval and the Bank
Approval, filing of the Certificate as required by the Delaware General
Corporation Law and the amended Certificate of Incorporation as contemplated
by Section 17(a)(xvi) hereof, the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
by the Company will not (a) conflict with or result in a breach or violation
of any term or provision of, or constitute a default under (with or without
notice or passage of time, or both), or otherwise give any Person a basis
for accelerated or increased rights or termination or nonperformance under,
any indenture, mortgage, deed of trust, loan or credit agreement, lease,
license or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound or affected or to which any of the property or assets of the
Company or any of its Subsidiaries is bound, (b) result in the violation of
the provisions of the Certificate of Incorporation or Bylaws of the Company
or any of its Subsidiaries or any Legal Requirement applicable to or binding
upon the Company or any of its Subsidiaries, (c) result in the creation or
imposition of any Lien upon any property or asset of the Company or any of
its Subsidiaries or (d) otherwise adversely affect the contractual or other
legal rights or privileges of the Company or any of its Subsidiaries except
in the case of clauses (a), (c) and (d) above where such conflict, breach,
violation, default, rights, termination, non-performance, Lien or adverse
effect would not reasonably be expected, individually or in the aggregate,
to result in a Material Adverse Effect or have a material adverse effect
upon the consummation of the transactions contemplated hereby. Section
(d) of the Disclosure Schedules sets forth a list of all agreements to which
the Company or any of its Subsidiaries is a party requiring the consent of
any party thereto to any of the transactions contemplated hereby.
(e) SEC REPORTS. The Company has timely filed all forms, reports,
statements and schedules required to be filed with the Commission since
January 1, 1998. The Company has made available to the Questor Investors
copies of its Annual Report on Form 10-K under the Exchange Act, for the
year ended December 31, 1998, and all other reports filed by the Company
under the Exchange Act since
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January 1, 1999 (collectively, the "SEC FILINGS"). As of their respective
dates, the SEC Filings did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The audited
financial statements and unaudited interim financial statements of the
Company included in the SEC Filings comply as to form in all material
respects with applicable accounting requirements and the published
rules and regulations of the Commission with respect thereto. The SEC
Filings, as of the respective dates of filing, complied as to form with the
requirements of the Exchange Act and the Rules and Regulations thereunder.
The Company's disclosure regarding "Year 2000" issues in its Form 10-Q for
the quarter ended June 30, 1999 is an accurate description of the Company's
and its Subsidiaries' status regarding those issues, and such disclosure
does not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) LITIGATION. Except as disclosed in Section (f) of the Disclosure
Schedules, there is no action, suit, proceeding or investigation pending or
to the Company's knowledge currently threatened against the Company or any
of its Subsidiaries or their respective properties, assets, businesses,
officers, shareholders, directors or employees, that questions the validity
of this Agreement or the right of the Company to enter into this Agreement,
or to consummate the transactions contemplated hereby, or that could
reasonably be expected to result, either individually or in the aggregate,
in a Material Adverse Effect.
(g) OFFERING VALID. Assuming the accuracy of the representations and
warranties of the Questor Investors contained in Section 5(b) hereof, the
offer, sale and issuance of the Shares will be exempt from the registration
requirements of the Securities Act, and from any registration or filing
requirement under applicable state securities laws.
(h) FINANCIAL STATEMENTS. The Company has furnished to the Questor
Investors a complete and correct copy of the following financial statements
(collectively, including all notes thereto, the "FINANCIAL STATEMENTS"):
(i) the Company's audited balance sheet, statements of operations, changes
in stockholders' equity and cash flows for the fiscal year ended
December 31, 1998 and for the twelve-month period then ended, and (ii) the
Company's unaudited balance sheet (the "BALANCE SHEET") as of June 30, 1999
(the "BALANCE SHEET DATE") and statements of operations and cash flow for
the six months period ended as of the Balance Sheet Date (the "MOST RECENT
FINANCIAL STATEMENTS"). The Financial Statements have been prepared from the
books and records of the Company and present fairly the financial condition,
results of operations, changes in stockholders equity and cash flows of the
Company, as of the dates and for the periods indicated, and have been
prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied, except that the Most Recent Financial
Statements lack footnotes and other presentation items and are subject to
normal year-end audit adjustments, which are not reasonably expected to be
material in the aggregate.
(i) ABSENCE OF LIABILITIES. Except as disclosed in Section (i) of the
Disclosure Schedules, at the Balance Sheet Date, neither the Company nor its
Subsidiaries had any liabilities of any type that in the aggregate exceeded
$500,000, whether absolute or contingent, which were not fully reflected on
the Balance Sheet, and since the Balance Sheet Date the Company and its
Subsidiaries have not incurred or otherwise become subject to any such
liabilities or obligations except in the ordinary course of business.
(j) TAXES. (i) All material Tax Returns required to be filed through
and including the date hereof by, or in connection with the operations of,
the Company and its Subsidiaries are true, complete and correct in all
respects and have been properly and timely filed. Neither the Company nor
any Subsidiary has requested any extension of time within which to file any
Tax Return, which Tax Return has not since been filed. Questor has
heretofore been granted access by the Company to true, correct and complete
copies of each Tax Return of the Company and each material Tax Return of
each Subsidiary with respect to the past three taxable years, and of all
reports of, and communications from, any Governmental Entities relating to
such Tax Returns.
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(ii) All material Taxes required to be paid or withheld and deposited
through and including the date hereof by, or in connection with the
operations of, the Company and its Subsidiaries have been duly and timely
paid or deposited by the Company or its Subsidiaries. The Company and its
Subsidiaries have properly withheld or collected all amounts required by
law for material income Taxes, employment Taxes and withholding Taxes
relating to its employees, creditors, independent contractors and other
third parties, and for all material Taxes on sales, and has properly and
timely remitted such withheld or collected amounts to the appropriate
Governmental Entity.
(iii) The Company and its Subsidiaries have made adequate provisions
on their respective books of account for all material Taxes with respect
to their respective businesses, properties and operations through Balance
Sheet Date, and the accruals for Taxes in the Balance Sheet are adequate
to cover all material liabilities for Taxes of the Company and its
Subsidiaries for all periods ending on or before the Closing Date.
(iv) Neither the Company nor any Subsidiary has heretofore (i) had a
material tax deficiency proposed, asserted or assessed against it,
(ii) executed any waiver of any statute of limitations on the assessment
or collection of any material Taxes, or (iii) been delinquent in the
payment of any material Taxes.
(v) Except as set forth in Section (j) of the Disclosure Schedules,
no material Tax Return of the Company or any Subsidiary for which the
applicable statute of limitations (taking into account any waivers or
extensions) has not expired has been audited or the subject of other
Action by any Governmental Entity. Neither the Company nor any Subsidiary
has received any notice from any Governmental Entity of any pending
examination or any material proposed deficiency, addition, assessment,
demand for payment or adjustment relating to or affecting the Company or
any Subsidiary or its respective assets or properties, and neither the
Company nor any Subsidiary has any reason to believe that any
Governmental Entity may assess (or threaten to assess) any material taxes
for any periods ending on or prior to the Closing Date.
(vi) Neither the Company nor any Subsidiary (i) has filed any consent
or agreement pursuant to Code Section 341(f), and no such consent or
agreement will be filed at any time on or before the Closing Date;
(ii) has made any payments, is obligated to make any payments or is a
party to any agreement that under certain circumstances could obligate it
to make any payments that will not be deductible under Code
Section 280G; (iii) is a United States real property holding corporation
within the meaning of Code Section 897(c)(2); (iv) is a party to a tax
allocation or sharing agreement; (v) has any liability for Taxes of
another Person because it is or was a member of an affiliated group
(other than any group of which the Company is currently the common
parent) within the meaning of Code Section 1504(a) (or similar or
analogous provision of state or local income Tax law); (vi) has within
the preceding six years applied for a tax ruling from a Governmental
Entity; (vii) has ever filed or been the subject of an election under
Code Section 338(g) or Code Section 338(h)(10) or caused or been the
subject of a deemed election under Code Section 338(e); (viii) has
participated in, or cooperated with, an international boycott within the
meaning of Section 999 of the Code; and (ix) has issued or assumed any
acquisition indebtedness as defined in Section 279(b) of the Code.
(vii) Set forth in Section (j) of the Disclosure Schedule is the
amount, as of the most recent practicable date, of any net operating
loss, net capital loss, unused investment or other credit, unused foreign
tax credits or excess charitable contribution of the Company and its
Subsidiaries.
(k) TITLE TO PROPERTY AND ASSETS. The Company and its Subsidiaries
have good title to or a valid leasehold interest in all of their respective
properties and assets, which comprise all of the properties and assets
reflected in the Balance Sheet (except those disposed of since the Balance
Sheet Date in the ordinary course of business) and all of the properties and
assets necessary or useful for the
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conduct of their respective businesses, and none of such properties or
assets is subject to any Lien of any nature whatsoever, other than those the
material terms of which are described in the Financial Statements or
Section (k) of the Disclosure Schedules.
(l) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS: ERISA. (i) EMPLOYEE
BENEFIT PLANS. Section (l) of the Disclosure Schedule sets forth a complete
and correct list of each Plan (other than any Plan that has been filed with
the Commission as a material contract). Except as set forth on Section (l)
of the Disclosure Schedule, neither the Company nor any of its Subsidiaries
has communicated to any current or former employee, officer or director of
the Company or any of its Subsidiaries, or the beneficiaries or dependents
of any such persons (collectively, the "EMPLOYEES") any intention or
commitment to modify any Plan or to establish or implement any other
material employee or retiree benefit or compensation plan or arrangement.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any
material liability as to which adequate reserves have not been
established, each Plan intended to be qualified under section 401(a) of
the Code, and the trust (if any) forming a part thereof, (A) has received
a favorable determination letter from the IRS as to its qualification
under the Code and to the effect that each such trust is exempt from
taxation under section 501(a) of the Code, and nothing has occurred since
the date of such determination letter that could adversely affect such
qualification or tax-exempt status or (B) a timely application for such a
favorable determination letter was filed or will be filed prior to the
expiration of the "remedial amendment period" (as defined under Treasury
Regulation Section 1.401(b)-1) and the Company has no reason to believe
that such a favorable determination letter will not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is
reasonably expected to be incurred under or pursuant to Title I or IV of
ERISA or the penalty, excise Tax or joint and several liability
provisions of the Code relating to employee benefit plans that is or
would be material to the Company and its Subsidiaries, taken as a whole.
(B) Each of the Plans has been operated and administered in all
respects in compliance with its terms, all applicable laws and all
applicable collective bargaining agreements, except for any failures
so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or
obligation on the part of the Company or any of its Subsidiaries that
would be material to the Company and its Subsidiaries, taken as a
whole. There are no pending or threatened claims by or on behalf of
any of the Plans, by any Employee or otherwise involving any such
Plan or the assets of any Plan (other than routine claims for
benefits, all of which have been fully reserved for on the regularly
prepared balance sheets of the Company) which would reasonably be
expected to result in any liability to the Company or any of its
Subsidiaries.
(C) Each Plan that is subject to the minimum funding standards of
ERISA or the Code satisfies such standards under sections 412 and 302
of the Code and ERISA, respectively, and no such Plan has incurred an
"accumulated funding deficiency" within the meaning of such sections,
whether or not waived.
(D) No Employee is or will become entitled to any material
post-employment benefits of any kind by reason of employment with the
Company or any of its Subsidiaries, including, without limitation,
death or medical benefits (whether or not insured), other than (x)
coverage mandated by section 4980B of the Code, (y) retirement
benefits payable under any Plan qualified under section 401(a) of the
Code or (z) deferred compensation accrued as a liability on the
regularly prepared balance sheets of the Company. The consummation of
the transactions contemplated by this Agreement will not result in a
material increase in the
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amount of compensation or benefits or the acceleration of the vesting
or timing of payment of any compensation or benefits payable to or in
respect of any Employee.
(m) ACCOUNTS RECEIVABLE. All accounts receivable of the Company and
its Subsidiaries reflected in the Balance Sheet (on a net basis) and all
accounts receivable of the Company and its Subsidiaries that have arisen
since the Balance Sheet Date, were valid and enforceable claims against the
account debtor at the date recorded, and the goods and services sold and
delivered that gave rise to such accounts were sold and delivered in
conformity with all applicable express and implied warranties, purchase
orders, agreements and specifications.
(n) MATERIAL CONTRACTS. All material contracts, leases, agreements and
arrangements to which the Company or any of its Subsidiaries is a party are
legally valid, binding and enforceable in accordance with their terms and in
full force and effect, and the Company has provided the Questor Investors
with the opportunity to review and copy all such documents. The Company and,
to the knowledge of the Company, all other parties to such contracts,
leases, agreements and arrangements have complied in all material respects
with the provisions of such contracts, leases, agreements and arrangements,
and neither the Company nor any of its Subsidiaries and, to the knowledge of
the Company, no other party is, in default thereunder, and no event has
occurred which, but for the passage of time or the giving of notice or both,
would constitute a default thereunder that could reasonably be expected to
have a Material Adverse Effect thereunder. Set forth in Section (n) of the
Disclosure Schedules is a list of all such material contracts, leases,
agreements and arrangements to which the Company or any of its Subsidiaries
is a party which either are not included as an exhibit to the SEC Filings,
cannot be terminated or do not terminate within 12 months or less without
cause, or obligate the Company or any of its Subsidiaries for amounts in
excess of $100,000. Except as set forth in Section (n) of the Disclosure
Schedules, none of such contracts, leases, agreements or arrangements will,
by its terms, terminate as a result of the transactions contemplated hereby
or require any consent from any obligor thereto in order to remain in full
force and effect following the consummation of the transactions contemplated
by this Agreement, including the issuance of the Shares or the Conversion
Shares.
(o) CONSENTS. Subject to compliance with the applicable requirements
of the Securities Act and any applicable state securities laws, the HSR Act
and the filing of the Certificate as required by the Delaware General
Corporation Law and the amended Certificate of Incorporation as contemplated
by Section 17(a)(xvi) hereof and the Bank Approval, no consent, approval,
authorization, license, permit or other action by, or filing with, any
governmental or regulatory authority is required in connection with the
execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated hereby, including the
issuance of the Shares or the Conversion Shares, except for such consents,
approvals, authorizations, licenses, permits, actions or filings as will
have been obtained, taken or filed at or prior to the Closing.
(p) ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, neither
the Company nor any of its Subsidiaries has made or suffered any change in,
or condition affecting, their respective condition (financial or otherwise),
properties, profitability or operations other than changes, events or
conditions in the ordinary course, none of which, individually or in the
aggregate, has had, or which the Company can reasonably foresee will have, a
Material Adverse Effect; PROVIDED, HOWEVER, that, subject to the immediately
succeeding proviso, any such change resulting from the loss of (i) any
customer or client or customer or client program since the Balance Sheet
Date will be viewed in the aggregate after taking into account any customer
or client or customer or client programs gained since the Balance Sheet
Date; PROVIDED FURTHER that the loss of (i) any customer or client set forth
on Section (p) of the Disclosure Schedules, or (ii) any program of any such
customer or client the loss of which program in itself could reasonably be
expected to have a Material Adverse Effect, will in each case be deemed to
constitute a Material Adverse Effect.
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(q) COMPLIANCE WITH LAW. The Company and its Subsidiaries are in
compliance in all material respects with all Legal Requirements in
connection with the operation of their businesses and the ownership and
maintenance of their assets and properties. To the Company's knowledge, all
filings and notices required to be made by the Company and its Subsidiaries
with any Governmental Entity in connection with the operation of their
businesses or the ownership and maintenance of their assets or properties
have been made or given in a timely fashion.
(r) INTELLECTUAL PROPERTY. The Company or its Subsidiaries are the
exclusive owner of all right, title and interest in and/or have the valid
and legal right to use all Intellectual Property necessary to conduct their
businesses as now being conducted. Such use of Intellectual Property owned
by the Company, and to the knowledge of the Company and its Subsidiaries,
such use of Intellectual Property licensed to the Company and its
Subsidiaries, does not conflict with or infringe upon any valid rights of
others except for infringements or conflicts which could not reasonably be
expected to result, either individually or in the aggregate, in a Material
Adverse Effect. Neither the Company nor any of its Subsidiaries has received
any written notice that the conduct of its business infringes upon or
conflicts with the asserted intellectual property or proprietary rights of
others and has no knowledge that any person is infringing upon or in
conflict with its asserted rights.
(s) DELAWARE GENERAL CORPORATION LAW SECTION 203. The Board has taken
such action as necessary to approve for purposes of Section 203 of the
Delaware General Corporation Law this Agreement and the transactions
contemplated hereby and any future sales by the Questor Investors,
including, without limitation, all action necessary to prevent the Questor
Investors or any transferee of the Questor Investors from being deemed an
interested person as defined in such Section 203.
(t) ACTIONS REGARDING THE SHAREHOLDER RIGHTS PLAN. The Company has
taken all actions to amend the Rights Plan (i) as necessary to ensure that
this Agreement and the consummation of any of the transactions contemplated
hereby and any future issuance or purchase of shares of capital stock of the
Company by the Questor Investors or their Affiliates or transferees,
including without limitation the issuance of the Shares and the Conversion
Shares and the subsequent sale of any such Shares and Conversion Shares,
will not result in the distribution of separate rights certificates, the
occurrence of a "Distribution Date" or in any such person being deemed to be
an "Acquiring Person" under the Rights Plan, and (ii) subject to the
Closing, to provide that the "Final Expiration Date" thereunder will be the
Closing Date.
(u) NO FURTHER CLAIMS. As of the Closing Date, neither the Company nor
any of its Subsidiaries shall have any claims outstanding against any of the
Existing Investors pursuant to any indemnity provision or otherwise,
including any indemnity claim pursuant to the Agreement and Plan of Merger,
dated as of April 7, 1998, by and among IQI, Inc., ATC Communications
Group, Inc. and ATC Merger Sub, Inc.
(v) INFORMATION IN PROXY STATEMENT. None of the information supplied
by the Company for inclusion or incorporation by reference in the Proxy
Statement will, and the Proxy Statement (or any amendment thereof or
supplement thereto) will not, at the date it becomes effective and at the
time of the Special Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading , except that no
representation is made by the Company with respect to statements made
therein based on information supplied by the Questor Investors in writing
for inclusion in the Proxy Statement. The Proxy Statement will comply as to
form and otherwise in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
(w) REQUIRED VOTE. The voting power listed in Annex A to the Voting
Agreement besides the names of the stockholders of the Company who are
parties to such Voting Agreement is sufficient to
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adopt and approve this Agreement, the Amended and Restated Certificate of
Incorporation, the election of directors and the other transactions
contemplated by this Agreement.
5. REPRESENTATIONS AND WARRANTIES OF THE QUESTOR INVESTORS. The Questor
Investors, jointly and severally, hereby represent and warrant to the Company as
of the date of this Agreement as follows:
(a) REQUISITE POWER AND AUTHORITY. Each of the Questor Investors has
all necessary power and authority under all applicable provisions of law to
execute and deliver this Agreement and to carry out its provisions. All
action on each of the Questor Investors' part required for the lawful
execution and delivery of this Agreement have been taken. Upon its execution
and delivery, this Agreement will be valid and binding against the Questor
Investors, enforceable in accordance with its terms.
(b) INVESTMENT REPRESENTATIONS. The Questor Investors understand that
neither the Shares nor the Conversion Shares have been registered under the
Securities Act. The Questor Investors also understand that the Shares are
being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon the Questor Investors'
representations contained in this Agreement. The Questor Investors hereby
represent and warrant as follows:
(i) THE QUESTOR INVESTORS BEAR ECONOMIC RISK. The Questor
Investors have substantial experience in evaluating and investing in
private placement transactions of securities in companies similar to the
Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own
interests. The Questor Investors must bear the economic risk of this
investment indefinitely unless the Shares (or the Conversion Shares) are
registered pursuant to the Securities Act, or an exemption from
registration is available. The Questor Investors also understand that
there is no assurance that any exemption from registration under the
Securities Act will be available and that, even if available, such
exemption may not allow the Questor Investors to transfer all or any
portion of the Shares or the Conversion Shares under the circumstances,
in the amounts or at the times the Questor Investors might propose.
(ii) ACQUISITION FOR OWN ACCOUNT. The Questor Investors are
acquiring the Shares and the Conversion Shares for their own account for
investment only, and not with a view towards their distribution, provided
the Questor Investors may resell the Conversion Shares in a transaction
registered under the Securities Act or exempt from the registration
requirements of the Securities Act.
(iii) THE QUESTOR INVESTORS CAN PROTECT THEIR INTEREST. The Questor
Investors represent that by reason of their, or of their management's,
business or financial experience, the Questor Investors have the capacity
to protect their own interests in connection with the transactions
contemplated in this Agreement.
(iv) ACCREDITED INVESTOR. Each of the Questor Investors is either
(i) an accredited investor as such term is defined in Rule 501
promulgated under the Securities Act, or (ii) by reason of its business
or financial experience, a sophisticated investor who has the capacity to
protect its interest in connection with the transactions contemplated
hereunder and has both appropriate knowledge and experience with the
current business operations and prospects of the Company and its
Subsidiaries and in financial business matters to evaluate the merits and
risks of the Series F Preferred Stock and the Common Stock and the
related transactions contemplated hereunder.
(v) COMPANY INFORMATION. The Questor Investors have received and
read the SEC Filings and have had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the
Company's operations and facilities. The Questor Investors have also had
the
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opportunity to ask questions of, and receive answers from, the Company
and its management regarding the terms and conditions of this investment.
(c) INFORMATION IN PROXY STATEMENT. None of the information supplied
in writing by any of the Questor Investors for inclusion or incorporation by
reference in the Proxy Statement will, at the date mailed to shareholders
and at the time of the Special Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
6. REPRESENTATIONS AND WARRANTIES OF THE EXISTING INVESTORS. Each of the
Existing Investors severally hereby represent and warrant to the Questor
Investors as of the date of this Agreement as follows:
(a) REQUISITE POWER AND AUTHORITY. Each of Existing Investors has all
necessary power and authority under all applicable provisions of law to
execute and deliver this Agreement and to carry out its provisions. All
action required of each Existing Investor for the lawful execution and
delivery of this Agreement have been taken. Upon its execution and delivery,
this Agreement will be valid and binding against each of the Existing
Investors, enforceable in accordance with its terms.
(b) NO FURTHER CLAIMS. None of the Existing Investors have any claims
outstanding against the Company or its Subsidiaries pursuant to any
indemnity provision or otherwise, including any indemnity claim pursuant to
the Agreement and Plan of Merger, dated as of April 7, 1998, by and among
IQI, Inc., ATC Communications Group, Inc. and ATC Merger Sub, Inc.
7. REQUIRED REGISTRATION. (a) Commencing after the filing of the
Certificate, if and whenever the Company shall receive a written request
therefor from Initiating Holders, the Company agrees to prepare and file
promptly a registration statement under the Securities Act covering the shares
of Registrable Securities which are the subject of such request and agrees to
use its best efforts to cause such registration statement to become effective as
expeditiously as possible. Upon the receipt of such request (which request will
specify the intended method or methods of distribution of Registrable
Securities), the Company agrees to give prompt written notice to all Holders of
Registrable Securities that such registration is to be effected. The Company
agrees to include in such registration statement such shares of Registrable
Securities for which it has received written requests to register such shares by
the Holders thereof within thirty (30) days after the receipt of written notice
from the Company.
(b) The Company shall be obligated to prepare, file and cause to become
effective upon request of the Initiating Holders a total of 2 registrations
on a form other than S-3 (one initiated by the Existing Investors and one
initiated by the Questor Holders) and 6 registrations on form S-3 (three
initiated by the Existing Investors and three initiated by the Questor
Holders), which may be in respect of a shelf registration pursuant to
Commission Rule 415 (a "SHELF REGISTRATION") if so requested by the
Initiating Holders; provided, however, that if the Company is not eligible
to effect a registration on form S-3 at the time of any request for
registration due to any failure by the Company to timely make any required
filings with the Commission, the Company shall be obligated to prepare, file
and cause to become effective upon the request of the Initiating Holders a
registration statement on form S-1 (or form S-2 if available) in lieu of the
registrations on form S-3 provided for in the preceding clause. A
registration statement which becomes effective pursuant to a request for
registration under this Section 7 shall not be counted for purposes of such
limitations, (i) if, within 120 days after the registration relating to any
such request has become effective, such registration is interfered with by
any stop order, injunction or other order or requirement of the Commission
or other governmental agency or court for any reason and the Company fails
to have such stop order, injunction or other order or requirement removed,
withdrawn or resolved to the Initiating Holder's reasonable satisfaction
within 30 days, (ii) the conditions to closing specified in the underwriting
agreement or purchase agreement entered into in connection with the
registration relating to any such registration statement are not satisfied
(other than as a result of a default or breach thereunder by such Initiating
Holder), or (iii) as otherwise provided in Section 7(f) below.
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(c) If the Holders initiating a request for the registration of
Registrable Securities pursuant to this Section 7 intend to distribute the
Registrable Securities covered by their request by means of any
underwriting, they will so notify the Company as a part of their request
made pursuant to this Section 7(a), and the Company agrees to include such
information in its written notice referred to in Section 7(a). In such event
the right of any Holder to registration pursuant to this Section 7 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the
Initiating Holders initiating such request for registration and such Holder
with respect to such participation and inclusion) to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting agree to enter into (together with the Company) an underwriting
agreement with the underwriter or underwriters selected for such
underwriting, in the manner set forth above, provided that such underwriting
agreement is in customary form and is reasonably acceptable to the Company
and the Holders of a majority of the shares of Registrable Securities to be
included in such registration. The Holders of Registrable Securities to be
distributed by such underwriter may, at their option, require that any or
all of the representations and warranties by, and the agreements on the part
of, the Company to and for the benefit of such underwriters be made to and
for the benefit of such holders of Registrable Securities and that any or
all of the conditions precedent to the obligations of such underwriters
under such underwriting agreement shall also be conditions precedent to the
obligations of such holders of Registrable Securities. No underwriting
agreement (or other agreement in connection with such offering) shall
require any Holders of Registrable Securities, in their respective
capacities as stockholders and/or controlling persons, to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding
such Holder, the ownership of such Holder's Registrable Securities and such
Holder's intended method or methods of disposition and any other
representation required by law or to furnish any indemnity to any Person
which is broader than the indemnity furnished by such Holder pursuant to
Section 11(b).
(d) Whenever a registration requested pursuant to this Section 7 is for
an underwritten offering, the managing underwriter who will be selected to
administer the offering shall be selected jointly by the Questor Holders and
the Existing Investors in any registration in which both are participating
and otherwise by the Initiating Holder, and such underwriter shall be
reasonably satisfactory to the Company; PROVIDED, that at any time in which
either the Questor Holders or the Existing Investors own Registrable
Securities constituting less than 5% of the Common Stock of the Company on a
fully diluted basis, they will not have a right to participate in the
selection of the managing underwriter unless they are the Initiating Holder.
(e) Notwithstanding any other provision of this Section 7, if the
managing underwriter of an underwritten distribution advises the Company and
the Holders of Registrable Securities participating in such registration in
writing that in its good faith judgment the number of shares of Registrable
Securities requested to be included in such registration exceeds the number
of shares of Registrable Securities which can be sold in such offering, then
(i) the number of shares of Registrable Securities so requested to be
included in such registration shall be reduced to that number of shares
which in the good faith judgment of the managing underwriter can be sold in
such offering and (ii) this reduced number of shares shall be allocated
among all Holders thereof in proportion, as nearly as practicable, to the
respective number of shares of Registrable Securities held by such Holders
at the time of filing the registration statement.
(f) To the extent all shares of Registrable Securities of the
Initiating Holders are not included in the registration statement due to the
underwriter cutbacks described above, such registration shall not count as a
demand registration to which the Initiating Holders are entitled pursuant to
subparagraph (b) of this Section 7.
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(g) If the managing underwriter has not limited the number of
Registrable Securities to be underwritten, the Company may include
securities for its own account in such registration if the managing
underwriter so agrees and if the number of Registrable Securities which
would otherwise have been included in such registration and underwriting
will not thereby be limited.
(h) Notwithstanding any of the foregoing, if the Company shall at any
time furnish to each seller of Registrable Securities a certificate signed
by the President of the Company (a "DEFERRAL CERTIFICATE") stating that the
Company has pending or in process a material transaction (including a
financing transaction), the disclosure of which would, in the good faith
judgment of the Board, materially and adversely affect the Company, the
Company may defer the filing (but not the preparation) of a registration
statement to be filed pursuant to this Section 7 for up to 60 days (but the
Company shall use its best efforts to complete the transaction and file the
registration statement as soon as possible) PROVIDED that the Company shall
not be permitted to defer the filing of registration statements pursuant to
this clause (h) more than once in any 120-day period. If, after a
registration statement becomes effective, the Company advises the holders of
the registered shares that the Company considers it appropriate for the
registration statement to be amended, the holders of such shares shall
suspend any further sales of their registered shares until the Company
advises them that the registration statement has been amended, and the
Company will prepare and promptly file with the Commission any required
amendment.
(i) After receipt of notice of a requested registration pursuant to
this Section 7, the Company shall not initiate, without the consent of the
Initiating Holder, a registration of any of its securities for its own
account until 90 days after such registration has been effected or such
registration has been terminated. Further, the Company agrees not to effect
any public sale or distribution or any sale or distribution pursuant to
Rule 144A or Regulation S under the Securities Act of its equity securities
or securities convertible into or exchangeable or exercisable for any of
such securities within seven days prior to and 90 days (unless advised in
writing by the managing underwriter that a longer period, not to exceed 180
days, is required, or such shorter period as the managing underwriter for
any underwritten offering may agree) after the effective date of any
registration statement filed pursuant to Section 7 (except as part of such
registration or pursuant to a registration on Form S-4 or S-8 or any
successor form). In addition, the Company shall use its commercially
reasonable efforts to cause each holder of its equity securities or any
securities convertible into or exchangeable or exercisable for any of such
securities, issued by the Company at any time after the date of this
Agreement (other than any such securities issued to the public in a
registration or pursuant to Rule 144A under the Exchange Act), to agree not
to effect any such public sale or distribution of such securities during
such period, except as part of any such registration if permitted, and to
cause each such holder to enter into a similar agreement to such effect with
the Company, and each of the parties to this Agreement hereby so agrees.
8. INCIDENTAL REGISTRATION. (a) Each time the Company shall determine to
file a registration statement under the Securities Act (other than (i) pursuant
to Section 7 hereof, (ii) on Form S-8 or a registration statement on Form S-1
covering solely an employee benefit plan and (iii) on Form S-4) in connection
with the proposed offer and sale for money of any of its securities either for
its own account or on behalf of any other security holder, the Company agrees to
give promptly written notice of its determination to all Holders of Registrable
Securities. Upon the written request of a Holder of any shares of Registrable
Securities given within thirty (30) days after the receipt of such written
notice from the Company, the Company agrees to cause all such Registrable
Securities, the Holders of which have so requested registration thereof, to be
included in such registration statement and registered under the Securities Act,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Securities to be so registered.
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(b) If the registration of which the Company gives written notice
pursuant to Section 8(a) is for a public offering involving an underwriting,
the Company agrees to so advise the Holders as a part of its written notice.
In such event the right of any Holder to registration pursuant to this
Section 8 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting agree to
enter into (together with the Company and the other holders distributing
their securities through such underwriting) an underwriting agreement with
the underwriter or underwriters selected for such underwriting by the
Company, provided that such underwriting agreement is in customary form and
is reasonably acceptable to the Holders of a majority of the shares of
Registrable Securities requested to be included in such registration. The
Holders of Registrable Securities to be distributed by such underwriter may,
at their option, require that any or all of the representations and
warranties by, and the agreements on the part of, the Company to and for the
benefit of such underwriters be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to
the obligations of such underwriters under such underwriting agreement shall
also be conditions precedent to the obligations of such holders of
Registrable Securities. No underwriting agreement (or other agreement in
connection with such offering) shall require any Holders of Registrable
Securities, in their respective capacities as stockholders and/or
controlling persons, to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such Holder, the ownership of such
Holder's Registrable Securities and such Holder's intended method or methods
of disposition and any other representation required by law or to furnish
any indemnity to any Person which is broader than the indemnity furnished by
such Holder pursuant to Section 11(b).
(c) Notwithstanding any other provision of this Section 8, if the
managing underwriter of an underwritten distribution advises the Company and
the Holders of the Registrable Securities participating in such registration
in writing that in its good faith judgment the number of shares of
Registrable Securities exceeds the number of shares of Registrable
Securities which can be sold in such offering, then (i) the number of shares
of Registrable Securities so requested to be included in the offering shall
be reduced to that number of shares which in the good faith judgment of the
managing underwriter can be sold in such offering (except for shares to be
issued by the Company in an offering initiated by the Company, which shall
have priority over the shares of Registrable Securities), and (ii) such
reduced number of shares shall be allocated among all participating Holders
of Registrable Securities in proportion, as nearly as practicable, to the
respective number of shares of Registrable Securities held by such Holders
at the time of filing the registration statement.
9. REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions of Section 7 or 8 hereof to effect the registration of Registrable
Securities under the Securities Act, the Company, at its expense and as
expeditiously as possible, agrees to:
(a) In accordance with the Securities Act and all applicable rules and
regulations and the intended method or methods of distribution specified in
the Initiating Holders' registration request, prepare and, as soon as
practicable but in any event within 75 days thereafter, file with the
Commission a registration statement with respect to such securities, make
all required filings with the NASD, and use its best efforts to cause such
registration statement to become and remain effective until the securities
covered by such registration statement have been sold, and prepare and file
with the Commission such amendments and supplements to such registration
statement and the prospectus contained therein as may be necessary to keep
such registration statement effective and such registration statement and
prospectus accurate and complete until the securities covered by such
registration statement have been sold; PROVIDED that in no event shall the
Company be required to maintain the effectiveness of any registration
statement for more than 4 months (or such longer period of time as may be
requested by the managing underwriter in the case of an underwritten
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offering), except that the Company shall be required to maintain the
effectiveness of a Shelf Registration for a period of one year (which period
shall be extended for as long as sales of Registrable Securities have been
suspended pursuant to Section 9(l) if sales of Registrable Securities have
been suspended pursuant to Section 9(l));
(b) Furnish to the Holders of securities participating in such
registration and to the underwriters of the securities being registered
without charge such number of copies of the registration statement and each
amendment and supplement thereto (in each case including all exhibits and
documents filed therewith), preliminary prospectus, final prospectus and
such other documents as such underwriters and Holders may reasonably request
in order to facilitate the public offering of such securities;
(c) Use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws
of such jurisdictions as such participating Holders and underwriters may
reasonably request, except that the Company shall not for any purpose be
required to execute a general consent to service of process or to qualify to
do business as a foreign corporation in any jurisdiction where it is not so
qualified;
(d) Notify the Holders participating in such registration, promptly
after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(e) Notify such Holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information;
(f) Prepare and file with the Commission, promptly upon the request of
any such Holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such Holders,
is required under the Securities Act or the rules and regulations thereunder
in connection with the distribution of the Registrable Securities by such
Holders;
(g) Prepare and file promptly with the Commission, and promptly notify
such Holders of the existence of circumstances giving rise to the filing of,
such amendments or supplements to such registration statement or prospectus
as may be necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be delivered
under the Securities Act, any event has occurred as the result of which any
such prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(h) In case any of such Holders or any underwriter for any such Holders
is required to deliver a prospectus at a time when the prospectus then in
circulation is not in compliance with the Securities Act or the rules and
regulations of the Commission, prepare promptly upon request such amendments
or supplements to such registration statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of
the Securities Act and such rules and regulations;
(i) Advise such Holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(j) Furnish copies of all documents proposed to be filed with the
Commission in connection with such registration to (i) in the case of a
registration in which any Questor Holder but no Existing Investor is
participating, counsel selected by the Questor Holders, (ii) in the case of
a registration in which any Existing Investor but no Questor Holders are
participating, counsel selected by the Existing
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Investor, and (iii) in the case of a registration in which at least one
Questor Holder and at least one Existing Investor is participating, counsel
selected jointly by the participating Questor Holders and Existing
Investors, and such documents shall be subject to the review of such
counsel, the participating Questor Holders and the participating Existing
Investors, as the case may be, and the Company shall not file any
registration statement or prospectus or any amendment or supplement to such
registration statement or prospectus to which any such Person reasonably
objected on the grounds that such registration statement or prospectus or
amendment or supplement thereto does not comply in all material respects
with the requirements of the Securities Act or the rules and regulations
thereunder, after having been furnished with a copy thereof, together with
all other documents proposed to be filed in connection therewith, at least
five (5) business days prior to the filing thereof; provided, however, that
the failure of such Holders or their counsel to review or object to any
registration statement or prospectus or any amendment or supplement to such
registration statement or prospectus shall not affect the rights of such
Holders their respective officers, directors, partners, legal counsel,
accountants or controlling Persons or any underwriter or any controlling
Person of such underwriter under Section 9 hereof;
(k) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the Securities Act, the
Company will give the Holders of such Registrable Securities so to be
registered and their underwriters, if any, and their respective counsel and
accountants the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will make
available for inspection upon request by any such Person and by any
attorney, accountant or other agent retained by any such Holder or any such
underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause all of the Company's officers,
directors and employees to supply all information reasonably requested by
any such Holder, underwriter, attorney, accountant or agent in connection
with such registration statement;
(l) Provide in accordance with Section 22(c) hereof a Deferral
Certificate to each seller of any Registrable Securities covered by a Shelf
Registration at any time that the Company has a pending or in process
material transaction (including a financing transaction) or other material
development, the disclosure of which would, in the good faith judgment of
the Board, materially and adversely affect the Company, whereupon the
holders of Registrable Securities being sold pursuant to such Shelf
Registration shall suspend sales of such Registrable Securities beginning on
the date of receipt of such Deferral Certificate and expiring on the date
upon which such information is disclosed to the public or ceases to be
material, as evidenced by a notice from the Company to such holders to that
effect; PROVIDED, HOWEVER, that such deferral shall in no event be for a
period of more than 75 days (but the Company shall use its best efforts to
complete the transaction as soon as possible), and no more than one Deferral
Certificate relating to a Shelf Registration may be filed in any 180-day
period;
(m) At the request of any Holder of Registrable Securities covered by
such registration statement, furnish to such Holder on the effective date of
the registration statement or, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement,
(i) an opinion dated such date of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters, if any,
and to the Holder or Holders making such request, covering such matters with
respect to the registration statement, the prospectus and each amendment or
supplement thereto, proceedings under state and federal securities laws,
other matters relating to the Company, the securities being registered and
the offer and sale of such securities as are customarily the subject of
opinions of issuer's counsel provided to underwriters in underwritten public
offerings, and such opinion of counsel shall additionally cover such legal
matters with respect to the registration as such requesting Holder or
Holders may reasonably request, and (ii) letters dated each of such
effective date and such closing date, from the independent certified public
accountants of the
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Company, addressed to the underwriters, if any, and to the Holder or Holders
making such request, stating that they are independent certified public
accountants within the meaning of the Securities Act and dealing with such
matters as the underwriters may request, or if the offering is not
underwritten that in the opinion of such accountants the financial
statements and other financial data of the Company included in the
registration statement or the prospectus or any amendment or supplement
thereto comply in all material respects with the applicable accounting
requirements of the Securities Act, and additionally covering such other
accounting and financial matters, including information as to the period
ending not more than five (5) business days prior to the date of such letter
with respect to the registration statement and prospectus, as such
requesting Holder or Holders may reasonably request;
(n) Use its commercially reasonable efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies, authorities or self-regulatory
bodies as may be necessary by virtue of the business and operations of the
Company to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(o) Otherwise comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement of the Company (in form
complying with the provisions of Rule 158 under the Securities Act) covering
the period of at least 12 months, but not more than 18 months, beginning
with the first month after the effective date of such registration
statement;
(p) Use its commercially reasonable efforts (i) (A) to list such
Registrable Securities on any securities exchange on which the equity
securities of the Company are then listed or, if no such equity securities
are then listed, on an exchange selected by the Company, if such listing is
then permitted under the rules of such exchange, or (B) if such listing is
not practicable, to secure designation of such securities as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 under
the Exchange Act or, failing that, to secure NASDAQ authorization for such
Registrable Securities, and, without limiting the foregoing, to arrange for
at least two market makers to register as such with respect to such
Registrable Securities with the NASD, and (ii) to provide a transfer agent
and registrar for such Registrable Securities not later than the effective
date of such registration statement and to instruct such transfer agent
(A) to release any stop transfer order with respect to the certificates with
respect to the Registrable Securities being sold and (B) to furnish
certificates without restrictive legends representing ownership of the
shares being sold, in such denominations requested by the sellers of the
Registrable Securities or the lead underwriter;
(q) Enter into such agreements and take such other actions as the
sellers of Registrable Securities or the underwriters reasonably request in
order to expedite or facilitate the disposition of such Registrable
Securities, including, without limitation, preparing for, and participating
in, such number of "road shows" and all such other customary selling efforts
as the underwriters reasonably request in order to expedite or facilitate
such disposition; and
(r) Use its commercially reasonable efforts to take all other steps
necessary to effect the registration of such Registrable Securities
contemplated hereby.
10. EXPENSES. (a) With respect to each inclusion of shares of Registrable
Securities in a registration statement pursuant to Section 7 or 8 hereof, the
Company agrees to bear all fees, costs and expenses of and incidental to such
registration and the public offering in connection therewith; provided, however,
that security holders participating in any such registration agree to bear all
underwriting discounts and commissions and transfer taxes with respect to their
Registrable Securities included in such registration.
(b) The fees, costs and expenses of registration to be borne by the
Company, as provided in paragraph (a) above, shall include all expenses
incurred by the Company to comply with Sections 7
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and 8, including, without limitation, all registration, filing and NASD
fees, printing expenses, fees and disbursements of counsel and accountants
for the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the Company and/or selling security
holders are otherwise required to bear such fees and disbursements),
reasonable fees and disbursements not to exceed $50,000 of one counsel for
all of the selling Holders of Registrable Securities, all legal fees and
disbursements and other expenses of complying with state securities or blue
sky laws of any jurisdictions in which the securities to be offered are to
be registered or qualified, and the premiums and other costs of policies of
insurance against liability arising out of such public offering.
11. INDEMNIFICATION. (a) The Company hereby agrees to indemnify and hold
harmless each Holder of Registrable Securities which are included in a
registration statement pursuant to the provisions of this Agreement and each of
such Holder's officers, directors, partners, stockholders, members, legal
counsel and accountants, and each Person who controls such Holder within the
meaning of the Securities Act and any underwriter (as defined in the Securities
Act) for such Holder, and any Person who controls such underwriter within the
meaning of the Securities Act, from and against, and agrees to reimburse such
Holder, its officers, directors, partners, stockholders, members, legal counsel,
accountants and controlling Persons and each such underwriter and controlling
Person of such underwriter with respect to, any and all claims, actions (actual
or threatened), demands, losses, damages, liabilities, costs and expenses to
which such Holder, its officers, directors, partners, stockholders, legal
counsel, accountants or controlling Persons, or any such underwriter or
controlling Person of such underwriter may become subject under the Securities
Act or otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse each such indemnified party for any legal or any other expenses
reasonably incurred by them in connection with enforcing its rights hereunder or
under the underwriting agreement entered into in connection with such offering
or investigating, preparing, pursuing or defending any such loss, claim, damage,
liability, action or proceeding, except insofar as any such loss, claim, damage,
liability, action, proceeding or expense arises out of or is based upon an
untrue statement or omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such seller expressly for use in the preparation thereof. The
Company and the Holders of Registrable Securities hereby acknowledge and agree
that for all purposes of this Agreement the only information furnished or to be
furnished to the Company for use in any such registration statement, preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement are
statements specifically relating to (a) transactions between such Holder and its
Affiliates, on the one hand, and the Company, on the other hand, (b) the
beneficial ownership of shares of Common Stock by such Holder and its
Affiliates, (c) the name and address of such Holder, and (d) the intended method
of distribution of such Holder. Such indemnity shall remain in full force and
effect, regardless of any investigation made by such indemnified party and shall
survive the transfer of such Registrable Securities by such seller.
(b) Each Holder of shares of Registrable Securities which are included
in a registration statement pursuant to the provisions of this Agreement
hereby severally agrees to indemnify and hold harmless the Company, its
officers, directors, legal counsel and accountants and each Person who
controls the Company within the meaning of the Securities Act, from and
against, and agrees to reimburse the Company, its officers, directors, legal
counsel, accountants and controlling Persons with respect to, any and all
claims, actions, demands, losses, damages, liabilities, costs or expenses to
which the Company, its officers, directors, legal counsel, accountants or
such controlling Persons may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration statement, any
prospectus contained therein or any
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amendment or supplement thereto, or are caused by the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and
in strict conformity with written information furnished by such Holder
specifically for use in the preparation thereof. The Company and the holders
of Registrable Securities hereby acknowledge and agree that for all purposes
of this Agreement the only information furnished or to be furnished to the
Company for use in any such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement are statements
specifically relating to (a) transactions between such holder and its
Affiliates, on the one hand, and the Company, on the other hand, (b) the
beneficial ownership of shares of Common Stock by such Holder and its
Affiliates, (c) the name and address of such Holder, and (d) the intended
method of distribution of such Holder. The indemnity provided by each seller
of Registrable Securities under this Section 11(b) shall be limited in
amount to the net amount of proceeds actually received by such seller from
the sale of Registrable Securities pursuant to such registration statement.
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of subsection (a) or (b) of this Section 11 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim therefor is to
be made against the indemnifying party pursuant to the provisions of
subsection (a) or (b), notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to an indemnified party
otherwise than under this Section 11 and shall not relieve the indemnifying
party from liability under this Section 11 unless such indemnifying party is
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying parties similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel (in which case the indemnifying party shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties). Upon the permitted assumption by the indemnifying party
of the defense of such action, and approval by the indemnified party of
counsel, the indemnifying party shall not be liable to such indemnified
party under subsection (a) or (b) for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof (other than reasonable costs of investigation) unless
(i) the indemnified party shall have employed separate counsel in connection
with the assertion of legal defenses in accordance with the proviso to the
next preceding sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified
party within a reasonable time, (iii) the indemnifying party and its counsel
do not actively and vigorously pursue the defense of such action, or
(iv) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. No indemnifying
party shall be liable to an indemnified party for any settlement of any
action or claim without the consent of the indemnifying party and no
indemnifying party may unreasonably withhold its consent to any such
settlement. No indemnifying party will consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of
a release from all liability with respect to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b) of
this Section 11 is held by a court of competent jurisdiction to be
unavailable to a party to be indemnified with respect to any
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claims, actions, demands, losses, damages, liabilities, costs or expenses
referred to therein, then each indemnifying party under any such subsection,
in lieu of indemnifying such indemnified party thereunder, hereby agrees to
contribute to the amount paid or payable by such indemnified party as a
result of such claims, actions, demands, losses, damages, liabilities, costs
or expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified party
on the other in connection with the statements or omissions which resulted
in such claims, actions, demands, losses, damages, liabilities, costs or
expenses, as well as any other relevant equitable considerations. If,
however, the allocation provided by the immediately preceding sentence is
unavailable or is insufficient to hold harmless an indemnified party, other
than by reason of the exceptions provided therein, then the indemnifying
party shall contribute to the amount paid or payable by the indemnified
party as a result of such losses, claims, damages, liabilities, actions,
proceedings or expenses in such proportion as is appropriate to reflect the
relative benefits to the indemnifying party on the one hand and the
indemnifying party on the other in connection with the offering of
Registrable Securities (taking into account the portion of the proceeds of
the offering realized by such party). The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. Notwithstanding the foregoing, the amount any Holder of
Registrable Securities shall be obligated to contribute pursuant to this
subsection (d) shall be limited to an amount equal to the per share public
offering price (less any underwriting discount and commissions) multiplied
by the number of shares of Registrable Securities sold by such Holder
pursuant to the registration statement which gives rise to such obligation
to contribute (less the aggregate amount of any damages which such Holder
has otherwise been required to pay in respect of such claim, action, demand,
loss, damage, liability, cost or expense or any substantially similar claim,
action, demand, loss, damage, liability, cost or expense arising from the
sale of such Registrable Securities). No party shall be liable for
contribution under this Section 11d except to the extent as such party would
have been liable to indemnify under this Section 11d if such indemnification
were enforceable under applicable law.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
hereunder from any person who was not guilty of such fraudulent
misrepresentation.
12. REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT. The Company shall
timely file such information, documents and reports as the Commission may
require or prescribe under Section 13 of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 12 are (a) to enable the Holders of Registrable Securities to comply
with the current public information requirement contained in paragraph (c) of
Rule 144 should any such Holder ever wish to dispose of any of the Registrable
Securities without registration under the Securities Act in reliance upon Rule
144 (or any other similar exemptive provision) and (b) to qualify the Company
for the use of registration statements on Form S-3.
13. STOCKHOLDER INFORMATION. The Company may request each Holder of
Registrable Securities as to which any registration is to be effected pursuant
to this Agreement to furnish the Company with such information with respect to
such Holder and the distribution of such Registrable Securities as the Company
may from time to time reasonably request in writing and as shall be required by
law or by the Commission in connection therewith, and each Holder of Registrable
Securities as to which any registration is to be effected pursuant to this
Agreement agrees to furnish the Company with such information.
14. FINANCIAL INFORMATION. From and after the Closing for so long as the
Questor Investors beneficially own at least 5% of the fully diluted Common Stock
of the Company, including securities convertible into such Common Stock, the
Company will deliver to the Questor Holders annual audited and monthly unaudited
financial statements and an annual budget prior to the beginning of each fiscal
year as approved by the Board.
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15. STOCKHOLDER APPROVAL. (a) STOCKHOLDER MEETING. In order to consummate
the transactions contemplated hereby, the Company, acting through its Board,
shall, in accordance with applicable law, duly call, set a record date for, give
notice of, convene and hold a special meeting of its stockholders (the "SPECIAL
MEETING"), as soon as practicable, for the purpose of voting upon the adoption
and approval of this Agreement, the Amended and Restated Certificate of
Incorporation, the election of directors, and the other transactions
contemplated by this Agreement (the "Stockholder Approval"). The Company shall
include in the Proxy Statement (as hereinafter defined) the recommendation of
the Board that stockholders of the Company vote in favor of the adoption and
approval of this Agreement, the Amended and Restated Certificate of
Incorporation and the other transactions contemplated by this Agreement. The
Existing Investors agree to vote all shares of capital stock of the Company that
they own and that may vote on such matters in favor of the adoption and approval
of this Agreement, the Amended and Restated Certificate of Incorporation and the
other transactions contemplated by this Agreement.
(b) PROXY STATEMENT. In connection with the solicitation of the
Stockholder Approval, the Company shall as promptly as practicable prepare
and file with the Commission a preliminary proxy statement relating to this
Agreement, the Amended and Restated Certificate of Incorporation and the
other transactions contemplated by this Agreement and use all reasonable
efforts to obtain and furnish the information required to be included by the
Commission in the Proxy Statement (as hereinafter defined). The Company
shall consult with the Questor Investors and provide the Questor Investors
and their counsel a reasonable opportunity to review all filings with and
responses from the Commission. The Company shall respond as promptly as
reasonably practicable to any comments made by the Commission with respect
to the preliminary proxy statement and shall cause a definitive proxy
statement to be filed with the Commission and mailed to its stockholders at
the earliest reasonably practicable date (such proxy statement is referred
to herein as the "PROXY STATEMENT"). The Questor Investors shall furnish all
information concerning the Questor Investors and any new directors to be
nominated by Questor for election to the Board as may reasonably be
requested by the Company in connection with such filings. The Existing
Investors shall furnish all information concerning the Existing Investors
and any new directors to be nominated by Thayer for election the Board as
may reasonably be requested by the Company in connection with such filings.
The Company, after consultation with Questor, shall also take any action
required to be taken, and make any other filings required, under the
Securities Act, the Exchange Act and applicable state securities laws in
connection with the issuance of the Shares, including, without limitation,
any filing or statement or report to stockholders required by Rule 14f-1
under the Exchange Act, and the Questor Investors shall furnish all
information concerning the Questor Investors as may be reasonably requested
by the Company in connection with such actions and filings.
(c) NO FALSE OR MISLEADING STATEMENTS. The information provided and to
be provided by each of the Questor Investors and the Company specifically
for use in the Proxy Statement and any other filings with the Commission
shall not, with respect to the information supplied by such party, in the
case of the Proxy Statement, on the date the Proxy Statement is cleared by
the Commission, and, in the case of the Proxy Statement and any other
filings with the Commission, on the date upon which the Proxy Statement is
mailed to the stockholders of the Company or on the date upon which
Stockholder Approval is obtained, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the
Questor Investors and the Company agrees to correct as promptly as
reasonably practicable any such information provided by it that shall have
become false or misleading in any material respect. The Company shall as
promptly as practicable take all steps reasonably necessary to file with the
Commission and have cleared by the Commission any amendment or supplement to
the Proxy Statement so as to correct the same and to cause the Proxy
Statement as so corrected to be disseminated to the Company's stockholders
to the extent required by applicable law. The Proxy Statement shall comply
as to form
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and otherwise in all material respects with the provisions of the Exchange
Act, the rules and regulations thereunder and other applicable law.
(d) COMFORT LETTER. The Company shall use all reasonable efforts to
cause PricewaterhouseCoopers, LLP, the Company's independent accountants to
deliver to the Questor Investors and the Existing Investors a letter dated
as of the date of the Proxy Statement and addressed to the Questor Investors
and the Existing Investors, in form and substance reasonably satisfactory to
Questor, in connection with the procedures undertaken by them with respect
to the financial statements and other financial information of the Company
and its Subsidiaries contained in the Proxy Statement and the other matters
contemplated by AICPA Statement No. 72 and customarily included in comfort
letters relating to transactions similar to the transactions contemplated
hereby.
16. CONDUCT OF BUSINESS PENDING CLOSING. During the period commencing on
the date hereof and continuing through the Closing Date, the Company will, and
the Company will cause each of its Subsidiaries to, use commercially reasonable
efforts to conduct their businesses in, and only in, the ordinary course
consistent with past practice (including without limitation to preserve their
relationship with customers). By way of explication and without limiting the
foregoing, except as expressly contemplated by this Agreement or to the extent
that the other party shall otherwise expressly consent in writing:
(a) ORGANIC CHANGES. Neither the Company nor any of its Subsidiaries
will (a) amend its Certificate of Incorporation or Bylaws (or equivalent
documents), other than to increase the number of authorized shares of Common
Stock and to create the Shares in order to enable the Company to consummate
the transactions contemplated by this Agreement, (b) acquire by merging or
consolidating with, or agreeing to merge or consolidate with, or purchase
substantially all of the stock or assets of, or otherwise acquire any
business or any corporation, partnership, association or other business
organization or division thereof, (c) declare, set aside, make or pay any
dividend or other distribution in respect of its capital stock or purchase
or redeem, directly or indirectly, any shares of its capital stock, other
than regularly scheduled dividends on the Series B Preferred and
payment-in-kind dividends on the Series D and Series E Preferred, and except
for the planned redemption of the Series B, Series D or Series E Preferred
(in each case on terms reasonably satisfactory to the Questor Investors), or
(d) issue any shares of its capital stock other than upon exercise of
Options or conversion of Preferred Stock issued and outstanding on the date
hereof or as payment-in-kind dividends pursuant to the certificates of
designation of the Preferred Stock.
(b) INDEBTEDNESS. Other than in the ordinary course consistent with
past practice, the Company and each of its Subsidiaries will not incur any
Indebtedness, sell any debt securities, lend money to or guarantee the
Indebtedness of any Person or restructure or refinance their existing
Indebtedness.
(c) DISPOSITION OF ASSETS. The Company and each of its Subsidiaries
will not sell, transfer, license, lease or otherwise dispose of, or suffer
or cause the encumbrance by any Lien (other than Permitted Liens) upon any
of, their properties or assets, tangible or intangible, or any interest
therein, except in the ordinary course consistent with past practice.
(d) CAPITAL EXPENDITURES. Except for capital expenditures in an amount
of which shall not exceed $3 million in the aggregate for the Company and
its Subsidiaries, the Company and each of its Subsidiaries will not purchase
or enter into any contract to purchase any capital assets.
(e) OTHER ACTIONS. The Company shall not, and shall not permit any
Subsidiary, to (i) take, or agree or commit to take, any action that would
make any representation and warranty of the Company hereunder inaccurate in
any material respect at, or as of the Closing Date, (ii) omit, or agree or
commit to omit, to take any action necessary to prevent any such
representation or warranty from being inaccurate in any material respect at
any such time, or (iii) take, or agree or commit to take, any action that
would result in, or is reasonably likely to result in, any of the conditions
set forth in
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Section 17(a) not being satisfied, provided, however, that the Company shall
have the right to cure any noncompliance with subsections (i) or (ii) above
until the shorter of either (A) 30 days from the date of notice thereof or
(B) until the date of termination of this Agreement pursuant to Section 21
hereof.
17. CONDITIONS TO CLOSING. (a) CONDITIONS TO THE QUESTOR INVESTORS'
OBLIGATIONS AT THE CLOSING. The Questor Investors' obligations to purchase the
Shares at the Closing are subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
(i) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in
Section 4 and by the Existing Investors in Section 6 hereof shall be true
and correct in all material respects (or, for any representation or
warranty that is qualified as to materiality, true and correct in all
respects) as of the date hereof and as of the Closing Date with the same
force and effect as if they had been made as of the Closing Date, and the
Company and the Existing Investors shall have performed in all material
respects all obligations and conditions herein required to be performed
or observed by them on or prior to the Closing.
(ii) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement (except
for such as may and will be properly obtained subsequent to the Closing).
(iii) FILING OF CERTIFICATE. The Certificate shall have been filed
with the Secretary of State of the State of Delaware and shall continue
to be in full force and effect as of the Closing Date.
(iv) CORPORATE DOCUMENTS. The Company shall have delivered to the
Questor Investors or their counsel, copies of all corporate documents of
the Company as the Questor Investors shall reasonably request.
(v) RESERVATION OF CONVERSION SHARES. The Conversion Shares issuable
upon conversion of the Shares shall have been duly authorized and
reserved for issuance upon such conversion.
(vi) COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Questor Investors a Compliance Certificate, executed by the President of
the Company, dated the Closing Date, to the effect that the conditions
specified in subsection (i) of this Section 15 have been satisfied.
(vii) LEGAL OPINION. The Questor Investors shall have received from
legal counsel to the Company an opinion addressed to it, dated as of the
Closing Date, in form and substance reasonably satisfactory to the
Questor Investors.
(viii) DELIVERY OF SHARES. Certificates representing the Shares shall
have been delivered to the Questor Investors.
(ix) STOCKHOLDERS AGREEMENT. A Stockholders Agreement in the form
attached hereto as EXHIBIT B (the "STOCKHOLDERS AGREEMENT") shall have
been executed and delivered by the parties thereto and the Original
Stockholders Agreement shall have been terminated.
(x) LENDER AGREEMENTS. The Company shall have obtained the Bank
Approval, or the Company shall have consummated the refinancing of the
Credit Agreement (the "REFINANCING"), in each case on terms reasonably
satisfactory to the Questor Investors.
(xi) PROXY STATEMENT. The definitive Proxy Statement shall have been
filed with the Commission and mailed to the stockholders of the Company.
(xii) LEGAL PROCEEDINGS. No preliminary or permanent injunction or
other order, decree or ruling issued by any court of competent
jurisdiction nor any statute, rule, regulation or order entered,
promulgated or enacted by any governmental, regulatory or administrative
agency or
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authority, or national securities exchange shall be in effect that would
prevent the consummation of the transactions contemplated by this
Agreement.
(xiii) BY-LAW AMENDMENT. The By-Laws of the Company shall have been
amended and restated as set forth in EXHIBIT C.
(xiv) HSR. Any waiting period applicable to the consummation of the
transactions contemplated by this Agreement under the HSR Act shall have
expired or been terminated, and no action shall have been instituted by
the Department of Justice or Federal Trade Commission and still pending
which challenges or seeks to enjoin the consummation of such
transactions.
(xv) CERTIFICATE. The Certificate of Incorporation of the Company
shall have been amended (A) to increase the authorized shares of capital
stock of the Company from 100,000,000 shares of Common Stock and
1,000,000 shares of Preferred Stock to 200,000,000 shares of Common Stock
and 2,000,000 shares of Preferred Stock and (B) to delete Article Sixth
thereof to the extent that it provides for classification of the Board of
Directors into three separate classes.
(xvi) PREFERRED STOCK. Holders of all outstanding shares of Series D
and Series E Preferred Stock shall have consented to the repurchase at
the Closing by the Company of such shares and shall have tendered such
shares to the Company for repurchase at the Closing in each case on terms
reasonably satisfactory to the Questor Investors.
(xvii) RESIGNATIONS. The Company shall have received resignations from
all of the directors on the Board and six directors designated by the
Questor Investors and six directors designated by Thayer shall have been
elected or otherwise validly appointed by the stockholders of the
Company.
(xviii) REGISTRATION RIGHTS. The Registration Rights Agreement, dated
as of July 9, 1998, by and among the Company and the Existing Investors,
as amended, and the Registration Rights Agreement, dated May 4, 1998,
between ATC Communications Group, Inc. and Thayer shall have been
terminated without the imposition of any liability upon, or the granting
of any consideration by, the Company or its Subsidiaries.
(xix) RIGHTS PLAN. The Company shall have terminated the Rights Plan
without the imposition of any liability upon, or the granting of any
consideration by, the Company or its Subsidiaries.
(xx) WARRANTS. The Series Five Warrant to Purchase Up To Eight
Hundred Thousand (800,000) Shares of Common Stock, $.01 Par Value, dated
August 6, 1999, at the Common Stock's Fair Market Value per share, held
by Thayer Equity Investors III, L.P. shall have been terminated without
exercise or the imposition of any liability upon, or the granting of any
consideration by, the Company or its Subsidiaries.
(xxi) STOCKHOLDER APPROVAL. This Agreement, the Amended and Restated
Certificate of Incorporation and the transactions contemplated by this
Agreement shall have been adopted and approved by the requisite vote of
the stockholders of the Company in accordance with the applicable
provisions of the Delaware General Corporation Law.
(b) CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation
to issue and sell the Shares at each Closing is subject to the satisfaction,
on or prior to such Closing, of the following conditions:
(i) REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties in Section 5 made by the Questor Investors shall be true and
correct in all material respects (or, for any representation or warranty
that is qualified as to materiality, true and correct in all respects) as
of
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<PAGE>
the date hereof and as of the Closing Date, with the same force and
effect as if they had been made on and as of said date.
(ii) PERFORMANCE OF OBLIGATIONS. The Questor Investors shall have
performed and complied in all material respects with all agreements and
conditions herein required to be performed or complied with by the
Questor Investors on or before the Closing.
(iii) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement.
(iv) STOCKHOLDERS AGREEMENT. The Stockholders Agreement shall have
been executed and delivered by the parties thereto.
(v) LENDER AGREEMENTS. The Company shall have obtained the Bank
Approval or the Company shall have consummated the Refinancing, in each
case on terms reasonably satisfactory to the Company.
(vi) PAYMENT FOR SHARES. The Company shall have received a wire
transfer in the amount of the Purchase Price.
(vii) PROXY STATEMENT. The definitive Proxy Statement shall have been
filed with the Commission and mailed to the stockholders of the Company.
(viii) LEGAL PROCEEDINGS. No preliminary or permanent injunction or
other order, decree or ruling issued by any court of competent
jurisdiction nor any statute, rule, regulation or order entered,
promulgated or enacted by any governmental, regulatory or administrative
agency or authority, or national securities exchange shall be in effect
that would prevent the consummation of the transactions contemplated by
this Agreement.
(ix) HSR. Any waiting period applicable to the consummation of the
transactions contemplated by this Agreement under the HSR Act shall have
expired or been terminated, and no action shall have been instituted by
the Department of Justice or Federal Trade Commission and still pending
which challenges or seeks to enjoin the consummation of such
transactions.
(x) PREFERRED STOCK. Holders of all outstanding shares of Series B,
Series D and Series E Preferred Stock shall have consented to the
repurchase at the Closing by the Company of such shares and shall have
tendered such shares to the Company for repurchase at the Closing.
(xi) STOCKHOLDER APPROVAL. This Agreement, the Amended and Restated
Certificate of Incorporation and the transactions contemplated by this
Agreement shall have been adopted and approved by the requisite vote of
the stockholders of the Company in accordance with the applicable
provisions of the Delaware General Corporation Law.
18. SURVIVAL OF REPRESENTATIONS; INDEMNITY. (a) SURVIVAL OF
REPRESENTATIONS. Subject as set forth below, (i) all representations and
warranties (other than representations and warranties as to tax matters and as
to the matters set forth in the last three sentences of Section 4(b) and in
Section 4(c)) made by any party hereto in this Agreement or pursuant hereto
shall survive for the period commencing on the date hereof and ending on the
date thirty days after delivery to the Questor Investors of the Company's
audited consolidated financial statements for the fiscal year ended
December 31, 2000, (ii) the representations and warranties as to tax matters
made by any party hereto in this Agreement or pursuant thereto shall survive for
the applicable tax statute of limitation period, including any extensions
thereof, and (iii) the representations and warranties as to the matters set
forth in the last three sentences of Section 4(b) and in Section 4(c) shall
survive indefinitely.
(b) GENERAL INDEMNITY. (i) Subject to the terms and conditions of
this Section 18, the Company hereby agrees to indemnify, defend and hold the
Questor Investors harmless from and
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<PAGE>
against all demands, claims, actions or causes of action, assessments,
losses (including diminution in value of the Common Stock or the Shares),
damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and expenses
(collectively, "DAMAGES"), asserted against, arising out of, imposed upon or
incurred by the Questor Investors by reason of or resulting from (x) a
breach of any representation, warranty, agreement or covenant of the Company
contained in or made pursuant to this Agreement or (y) the matters set forth
on Schedule 18(b).
(ii) Subject to the terms and conditions of this Section 18, the
Questor Investors hereby agree to indemnify, defend and hold the Company
harmless from and against all Damages asserted against, arising out of,
imposed upon or incurred by the Company by reason of or resulting from a
breach of any representation, warranty, agreement or covenant of the
Questor Investors contained in or made pursuant to this Agreement.
(iii) Subject to the terms and conditions of this Section 18, the
Existing Investors severally hereby agree to indemnify, defend and hold
the Questor Investors harmless from and against all Damages asserted
against, resulting to, imposed upon or incurred by the Company by reason
of or resulting from a breach of any representation, warranty or covenant
of the Existing Investors contained in or made pursuant to this
Agreement.
(c) PROCEDURES FOR INDEMNIFICATION. The respective obligations and
liabilities of the Questor Investors, on the one hand, and the Company and
the Existing Investors, on the other hand (the "INDEMNIFYING PARTY"), to the
other (the "PARTY TO BE INDEMNIFIED") under Section 18(b) hereof with
respect to claims resulting from the assertion of liability by third parties
shall be subject to the following procedures:
(A) within 20 days after receipt of notice of commencement of any
action or the assertion in writing of any claim by a third party, the
party to be indemnified shall give the indemnifying party written
notice thereof together with a copy of such claim, process or other
legal pleading, and the indemnifying party shall have the right to
undertake the defense thereof by representatives of its own choosing;
provided that the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to an indemnified
party otherwise than under this Section 18(c) and shall not relieve
the indemnifying party from liability under this Section
18(c) unless such indemnifying party is prejudiced by such omission;
(B) in the event that the indemnifying party, by the 30th day
after receipt of notice of any such claim (or, if earlier, by the
tenth day preceding the day on which an answer or other pleading must
be served in order to prevent judgment by default in favor of the
person asserting such claim), does not elect to defend against such
claim, the party to be indemnified will (upon further notice to the
indemnifying party) have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for the
account and risk of the indemnifying party, subject to the right of
the indemnifying party to assume the defense of such claim at any
time prior to settlement, compromise or final determination thereof,
provided that the indemnifying party shall be given at least 15 days
prior written notice of the effectiveness of any such proposed
settlement or compromise;
(C) anything in this Section 18(c) to the contrary
notwithstanding (i) if there is a reasonable probability that a claim
may materially and adversely affect the indemnifying party other than
as a result of money damages or other money payments, the
indemnifying party shall have the right, at its own cost and expense,
to compromise or settle such claim, but (ii) the indemnifying party
shall not, without the prior written consent of the party to be
indemnified, settle or compromise any claim or consent to the entry
of any judgment which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to the party to
be indemnified a release from all liability in respect of such claim;
and
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<PAGE>
(D) in connection with any such indemnification, the indemnified
party will cooperate in all reasonable requests of the indemnifying
party.
(d) LIMITATION ON CERTAIN INDEMNITIES. Notwithstanding anything in
this Section 18 to the contrary:
(i) the Company shall not be obligated to indemnify, defend and hold
harmless the Questor Investors pursuant to Section 18(b) hereof unless
and to the extent that the aggregate amount of such Damages exceeds
$450,000; and
(ii) the Company's aggregate liability and obligation to indemnify,
defend and hold harmless the Questor Investors pursuant to said Section
18(b) shall in no event exceed $15,000,000.
PROVIDED that the limitations set forth in clauses (i) and (ii) above shall
not apply in respect of any breach of Sections 7 through 11.
(e) Following Closing, the indemnity provided for in this Section 18
shall be the sole and exclusive remedy of the Questor Investors or the
Company, as the case may be, for the breach of this Agreement PROVIDED that
nothing herein shall limit in any way any party's remedies in respect of any
intentional breach of this Agreement, any breach of any other agreement
among the parties hereto, any fraud or intentional misrepresentation or
omission, or any breach of Sections 7 through 11 hereof; PROVIDED, FURTHER
that no party shall be entitled to be compensated more than once for the
same Damages (including, without limitation, that the Questor Investors
shall not be entitled to indemnification under this Section 18 to the extent
that the Questor Investors have been compensated for damages that might
otherwise give rise to a right of indemnification under this Section 18 as a
result of any adjustment to the Series F Preferred Stock Conversion Price
made pursuant to Section 7(d) of the Certificate).
19. INQUIRIES AND NEGOTIATIONS. (a) Prior to the earlier of the
termination of this Agreement pursuant to Section 21 hereof or the Closing Date,
neither the Company nor any of its Subsidiaries, nor the Existing Investors, nor
any of their respective affiliates, directors, officers, employees,
representatives, advisors or agents, shall, directly or indirectly, solicit,
respond to or initiate any discussions, submissions of proposals or offers or
negotiations with, participate in any negotiations or discussions with, or
provide any information or data of any nature whatsoever to, or otherwise
cooperate in any other way with, or assist or participate in facilitate or
encourage any effort or attempt by, any person, other than the Questor Investors
and its affiliates, representatives and agents, concerning any transaction or
series of transactions with a third party of parties concerning any merger,
consolidation, sale of substantial assets, sale or exchange of shares of capital
stock or other equity securities or sale of debt securities (including without
limitation any of the foregoing effected by way of recapitalization, debt
restructuring or other similar transaction), involving the Company or any
Subsidiary, or any division of the Company or any of its Subsidiaries (such
transactions being hereinafter referred to as "ALTERNATIVE TRANSACTIONS"). Upon
execution of this Agreement, the Company and the Existing Investors shall
immediately cease any existing discussions or negotiations with any parties
relating to an Alternative Transaction. The Company or the Existing Investors,
as the case may be, shall immediately notify the Questor Investors if any bona
fide proposal, offer or other contact is received by, any material information
is requested from, or any discussions or negotiations are sought to be initiated
or continued with, the Company or the Existing Investors in respect of an
Alternative Transaction, and shall, in any such notice to the Questor Investors
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep the Questor Investors informed of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations. The
Company shall not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which the Company is a party.
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<PAGE>
20. USE OF PROCEEDS. The Company will use the proceeds from the sale of
the Shares exclusively for (a) the reduction of outstanding indebtedness,
provided that immediately following such reduction as of the Closing Date, there
shall remain at least $15,000,000 of immediately available funds under the
revolving credit facility under the Credit Agreement or any credit agreement
entered into in connection with the Refinancing after taking account of all
limitations on borrowing under the Credit Agreement or other credit agreement
entered into in connection with the Refinancing, including, without limitation,
the borrowing base, (b) the repurchase on the Closing Date of each share of the
Company's Preferred Stock issued and outstanding prior to Closing Date and
(c) the payment of fees and expenses in connection therewith and the
transactions contemplated by this Agreement.
21. TERMINATION. Notwithstanding anything contained herein to the
contrary, this Agreement may be terminated at any time prior to the Closing
Date:
(a) by the mutual written consent of the Questor Investors and the
Company; or
(b) by the Questor Investors or the Company if the Closing has not
occurred on or before December 31, 1999, and this Agreement has not
previously been terminated; PROVIDED, that the right to terminate the
Agreement under this Section 21(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Closing to occur on or before such
date.
(c) In the event that this Agreement shall be terminated pursuant to
this Section 21, all further obligations of the parties under this
Agreement, other than the obligations set forth in Sections 22(b), 22(d),
22(e), 22(f), 22(h), 22(l), 22(m), 22(n), 22(o), 22(p) and this Section
21(c), shall be terminated without further liability of any party to any
other party, provided that nothing herein shall relieve any party from
liability for its willful breach of this Agreement.
22. GENERAL PROVISIONS. (a) FORMS. All references in this Agreement to
particular forms of registration statements are intended to include, and shall
be deemed to include, references to all successor forms which are intended to
replace, or to apply to similar transactions as, the forms herein referenced.
All references in this Agreement to Sections of or Rules under the Securities
Act or the Exchange Act are intended to include, and shall be deemed to include,
references to all successor Sections and Rules which are intended to replace the
Sections and Rules herein referenced.
(b) INTEGRATION. This Agreement, including the Disclosure Schedules
and the exhibits and other attachments hereto and other documents referred
to herein, constitutes the entire agreement of the parties with respect to
the subject matter hereof, and supercedes all prior and contemporaneous
agreements and understandings, oral and written, between the parties with
respect to such subject matter; without limitation, this
Section 22(b) terminates Sections 1(iii), 2, 9 and 13 of the Letter
Agreement, dated May 10, 1999, between Questor Management Company and the
Company (the "CONFIDENTIALITY LETTER"), provided that the remainder of the
Confidentiality Letter shall survive until the Closing Date, at which time
the entire Confidentiality Letter shall be superceded by this Agreement.
(c) NOTICES. All notices and other communications which are required
or permitted to be given pursuant to the terms of this Agreement shall be in
writing and shall be personally delivered, mailed first class, postage
prepaid, registered or certified mail (return receipt requested), or
telecopied with confirmed receipt to the person for whom they are intended
at the address shown on the signature pages of this Agreement for such
party. Each notice or other communication shall for all purposes of this
Agreement be treated as being effective or having been given when delivered,
if delivered personally, or when confirmed if telecopied, or, if sent by
mail, at the earlier of actual receipt or five (5) days after the same has
been deposited in the United States mail, addressed and postage paid as
aforesaid. The addresses for the purposes of this Section 22(c) may be
changed by giving written notice to all parties of such change in the manner
provided herein for giving notice. Unless and until
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<PAGE>
such written notice is received, the addresses as provided herein shall be
deemed to continue in effect for all purposes hereunder. All notices
required to be given to Holders of Registrable Securities pursuant to
Sections 7, 8 and 9 hereof shall be deemed given to (i) the Questor Holders
if given to Questor or such other Person or Persons as may be designated
from time to time by Questor, (ii) the Existing Investors, any limited
partner of Thayer or any affiliate (as defined under the Securities Act) of
any Existing Investor or Thayer's general partner if given to Thayer or such
other Person or Persons as may be designated by Thayer.
(d) CHOICE OF LAW. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts of law)
of the State of Delaware.
(e) SEVERABILITY. The parties hereto agree that the terms and
provisions in this Agreement are reasonable and shall be binding and
enforceable in accordance with the terms hereof and, in any event, that the
terms and provisions of this Agreement shall be enforced to the fullest
extent permissible under law. In the event that any term or provision of
this Agreement shall for any reason by adjudged to be unenforceable or
invalid, then such unenforceable or invalid term or provision shall not
affect the enforceability or validity of the remaining terms and provisions
of this Agreement, and the parties hereto hereby agree to replace such
unenforceable or invalid term or provision with an enforceable and valid
arrangement which, in its economic effect, shall be as close as possible to
the unenforceable or invalid term or provision.
(f) PARTIES IN INTEREST. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective permitted successors and assigns of the
parties hereto, whether so expressed or not and, in particular, shall inure
to the benefit of and be enforceable by the Holder or Holders at the time of
any of the Registrable Securities. Subject to the immediately preceding
sentence, this Agreement shall not run to the benefit of or be enforceable
by any Person other than a party to this Agreement and its successors and
assigns.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties in separate counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(h) MODIFICATION, AMENDMENT AND WAIVER. This Agreement may be amended
only in writing with the written consent of a majority in interest of the
Questor Investors and a majority in interest of the Existing Stockholders
and the Company; PROVIDED that any amendment which adversely affects the
rights and obligations of any party hereunder may be amended only with the
written consent of such party. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally or by course
of dealing, but only by a statement in writing signed by the party against
which enforcement of the change, waiver, discharge or termination is sought,
except to the extent provided in this Section 22. Specifically, but without
limiting the generality of the foregoing, the failure of the Questor
Investors at any time or times to require performance of any provision
hereof by the Company shall in no manner affect its right at a later time to
enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, in any one or more instances, shall
be deemed to be, or construed as, a further or continuing waiver of any such
breach, or a waiver of the breach of any other term or covenant contained in
this Agreement.
(i) FURTHER ASSURANCES. The parties agree to execute such further
instruments and to take such further action, if any, as may reasonably be
necessary to carry out the intent of this Agreement, and the Company
specifically agrees to cooperate affirmatively with Thayer or Questor, to
the extent reasonably requested by Thayer or Questor, to enforce the rights
of Thayer or Questor and their assignees hereunder.
(j) HEADINGS. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
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<PAGE>
(k) GENDER AND NUMBER. As used in this Agreement, the masculine,
feminine or neuter gender, and the singular or plural, shall be deemed to
include the others whenever and wherever the context so requires.
Additionally, unless the context requires otherwise, "or" is not exclusive.
(l) ATTORNEYS' FEES. In the event that any suit or action is
instituted to enforce any provision in this Agreement, the prevailing party
in such dispute shall be entitled to recover from the losing party all fees,
costs and expenses of enforcing any right of such prevailing party under or
with respect to this Agreement, including without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall
include, without limitation, all fees, costs and expenses of appeals.
(m) BROKER'S FEES. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or
under the authority of such party hereto is or will be entitled to any
broker's or finder's fee or any other commission directly or indirectly in
connection with the transactions contemplated herein, except for fees owed
to Merrill Lynch & Co., Inc. and Questor Management Company pursuant to the
Fee Agreement dated August 25, 1999, in each case to be paid by the Company.
(n) CONFIDENTIALITY. Each party hereto agrees that, except with the
prior written consent of the other party, or to the extent required by law,
court order or the NASDAQ rules, it shall at all times keep confidential and
not disclose, divulge, furnish or make accessible to any other Person any
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties that is not currently in the public
domain, or does not come into the public domain other than by a breach by
any party hereto of this Agreement, and to which such party has been or
shall become privy by reason of this Agreement or any draft or final
documentation, letters of intent, term sheets, correspondence, discussions
or negotiations relating to this Agreement or the transactions contemplated
hereby, the performance of its obligations or the exercise of its rights
hereunder or the ownership of the Shares purchased hereunder.
(o) EXPENSES. The Company shall bear its own expenses, fees, charges
and disbursements incurred on its behalf with respect to this Agreement and
the transactions contemplated hereby and the expenses, fees, charges and
disbursements incurred by the Questor Investors in connection with this
Agreement and the transactions contemplated hereby up to a maximum of
$350,000, excluding all fees payable in accordance with Section 22(m)
herein.
(p) PUBLIC ANNOUNCEMENTS. The Company and the Existing Stockholders on
the one hand, and the Questor Investors, on the other hand, agree that they
will not issue any press release or otherwise make any public statement with
respect to this Agreement or the transactions contemplated hereby without
the prior approval of the other party (which approval will not be
unreasonably withheld or delayed), except as may be required by applicable
law.
(q) ADDITIONAL MATTERS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals and to effect all necessary registrations
and filings.
(r) ACCESS TO INFORMATION. The Company shall afford to the Questor
Investors and their authorized representatives access upon reasonable notice
and during normal business hours throughout the period prior to the Closing
to all of the books, records, properties, plants and personnel of the
Company and its Subsidiaries and, during such period, shall furnish as
promptly as practicable to the Questor Investors (a) a copy of each report,
schedule and other document filed or received by it pursuant to the
requirements of federal securities laws, and (b) all other information as
such other party reasonably may request.
(s) SERIES B PREFERRED STOCK. The Company shall use its best efforts
to repurchase and retire all outstanding shares of Series B Preferred Stock
at or prior to Closing on terms reasonably satisfactory to the Questor
Investors.
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<PAGE>
[SIGNATURE PAGE OF SERIES F CONVERTIBLE PREFERRED STOCK
PURCHASE AND REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, or
caused this Agreement to be duly executed on their behalf, as of the day and
year first above written.
COMPANY:
AEGIS COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
Address: ATC Communications
Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063
QUESTOR:
QUESTOR PARTNERS FUND II, L.P.
a Delaware limited partnership
By: Questor General Partner II, L.P.,
its General Partner
By: Questor Principals II, Inc.,
its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
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<PAGE>
QUESTOR SIDE-BY-SIDE
PARTNERS II, L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
QUESTOR SIDE-BY-SIDE
PARTNERS II 3(C)(1), L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
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<PAGE>
TC CO-INVESTORS, LLC
a Delaware limited liability company
By: TC Management Partners, LLC
a Delaware limited liability
company, its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
THAYER EQUITY INVESTORS III, L.P.
a Delaware limited partnership
By: TC Equity Partners, LLC
a Delaware limited liability
company, its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
ITC SERVICES COMPANY
a Delaware corporation
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
- --------------------------------------------------------------------------------
--------------------------------
--------------------------------
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<PAGE>
EDWARD BLANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
- --------------------------------------------------------------------------------
--------------------------------
--------------------------------
TRUSTS CREATED BY EDWARD BLANK AS BOTH
GRANTOR AND TRUSTEE UNDER ARTICLE
FOURTH OF THE EDWARD BLANK 1995
GRANTOR RETAINED ANNUITY TRUST
a New Jersey trust
By:
--------------------------------------
Name: Sharon Blank
Title: Trustee
Address:
- --------------------------------------------------------------------------------
--------------------------------
--------------------------------
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<PAGE>
APPENDIX B
August 26, 1999
The persons set forth on the signature
lines to this letter agreement
Ladies and Gentlemen:
We are each parties to that certain Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement dated as of
August 25, 1999 by and among Aegis Communications Group, Inc. (the "COMPANY"),
the Questor Investors (as defined below) and certain existing stockholders of
the Company identified therein (the "STOCK AGREEMENT"). Terms used in this
letter that are not otherwise defined will have the meanings given to them in
the Stock Agreement.
1. USE OF PROCEEDS The parties agree that notwithstanding the covenant of
the Company to use the proceeds from the sale of the Shares as set forth in
Section 20 of the Stock Agreement, the proceeds from such sale shall be used
exclusively for: (a) the reduction of outstanding indebtedness under the Credit
Agreement; (b) the repurchase on the Closing Date of the Company's Series D and
Series E Preferred Stock issued and outstanding prior to the Closing Date to the
extent (i) permitted by the Bank Approval or pursuant to the terms of the
Refinancing and (ii) approved by the Questor Investors in their sole discretion;
(c) the repurchase of each share of the Series B Preferred Stock tendered to the
Company on or prior to the Closing; and (d) the payment of fees and expenses in
connection therewith and the transactions contemplated by the Stock Agreement
(the "REVISED USE OF PROCEEDS"). In the event that any Series D or Series E
Preferred Stock is repurchased on or immediately following the Closing Date in
accordance with clause (b), the Series E Preferred Stock shall be repurchased in
full before any portion of the Series D Preferred Stock may be repurchased.
2. BANK APPROVAL; USE OF PROCEEDS. Section 17(a)(x) of the Stock Agreement
provides that the Questor Investors' obligations at Closing are subject to the
Company's having obtained the Bank Approval or consummated the Refinancing, on
terms reasonably satisfactory to the Questor Investors, and Section 17(a)(xvi)
provides that such obligations are conditioned on holders of all outstanding
shares of Series D and Series E Preferred Stock having tendered their Shares at
the Closing on terms reasonably satisfactory to the Questor Investors. Section
17(b)(v) of the Stock Agreement provides that the Company's obligations at
Closing are subject to the Company having obtained the Bank Approval or
consummated the Refinancing, on terms reasonably satisfactory to the Company.
Notwithstanding the foregoing:
(A) The Questor Investors hereby agree that if (i) as of the Closing,
all other conditions to their obligations under the Stock Agreement (as
modified by this letter agreement) have been satisfied (or otherwise waived
in writing by the Questor Investors in their sole discretion), (ii) the Bank
Approval has been obtained or a Refinancing has been consummated, and
(iii) upon the Closing of the transactions contemplated by the Stock
Agreement and immediately following the Revised Use of Proceeds, there will
be at least $15 million of immediately available funds under the revolving
credit facility under the Credit Agreement or under the credit agreement
entered into in connection with the Refinancing, after taking account of all
limitations on borrowing thereunder, including, without limitation, the
borrowing base, the Questor Investors agree that the conditions set forth in
Section17(a)(x) and 17(a)(xvi) will be deemed to be fulfilled, and
(B) The Company hereby agrees that if (i) as of the Closing, all other
conditions to the Company's obligations under the Stock Agreement (as
modified by this letter agreement) have been satisfied (or otherwise waived
in writing by the Company in its sole discretion), (ii) upon the Closing of
the transactions contemplated by the Stock Agreement, the Bank Approval has
been obtained, or a
B-1
<PAGE>
Refinancing has been consummated, and (iii) upon the Closing of the
transactions contemplated by the Stock Agreement and immediately following
the Revised Use of Proceeds there will be at least $15,000,000 of
immediately available funds under the revolving credit facility under the
Credit Agreement or under the credit agreement entered into in connection
with the Refinancing, after taking account of all limitations on borrowing
thereunder, including, without limitation, the borrowing base, the Company
agrees that the condition set forth in Section 17(b)(v) will be deemed to be
fulfilled.
The term "Bank Approval" as used in this letter agreement shall have the
same meaning as in the Stock Agreement, but all references in the definition
thereof in the Stock Agreement to "this Agreement" and to the "Use of Proceeds"
shall be deemed to be references to the Stock Agreement as modified by this
letter agreement and to the Revised Use of Proceeds, respectively.
3. CHANGES TO CERTIFICATE OF DESIGNATION. The Questor Investors, the
Company and Thayer Equity Investors III, L.P. ("THAYER") hereby agree that if
all shares of Series B, Series D and Series E Preferred Stock issued by the
Company prior to the Closing are not redeemed or repurchased at or prior to the
Closing, the Questor Investors, the Company and Thayer will work together in
good faith to revise the Certificate of Designations for the Series F Preferred
Stock (the "CERTIFICATE") to reflect that shares of Series B, Series D and/or
Series E Preferred Stock will remain outstanding, and to provide that the
Series F Preferred Stock will have priority and preference over the Series D and
Series E Preferred Stock, and will be subordinate to the Series B Preferred
Stock with respect to dividends and liquidation rights.
4. NEGOTIATIONS. The Company, Thayer and the Questor Investors each agree
to use their reasonable commercial efforts in obtaining the Bank Approval or in
consummating the Refinancing in accordance with the terms of the Stock Agreement
as modified by this letter agreement, including as to the Revised Use of
Proceeds. The Company and Thayer will (a) permit the Questor Investors to
participate in all negotiations relating to the Bank Approval (including the
negotiation of all amendments to the Credit Agreement) or the Refinancing,
including all meetings and pre-scheduled telephone conferences and, to the
extent reasonably practicable, telephone calls in connection therewith and will
promptly apprise the Questor Investors of all developments with respect to such
negotiations to the extent the Questor Investors have not so participated,
(b) will provide or make arrangements to provide the Questor Investors with
copies of all documents prepared or distributed in connection therewith at the
same time as they are received by the Company, Thayer or the lender banks, as
the case may be; (c) consult with the Questor Investors prior to entering into
any amendments to the Credit Agreement or any agreements in connection with the
Refinancing, and will take into account its advice and recommendations relating
to the terms of any such amendment or agreement.
5. REPURCHASE OF SERIES D AND SERIES E PREFERRED STOCK. To the extent any
or all of the Series D Preferred Stock or Series E Preferred Stock is not
repurchased by the Company on or prior to the Closing Date, the Certificate of
Designation of the Series D and Series E Preferred Stock will be amended
immediately following the Closing to provide that (a) the Redemption Price (as
defined therein) will be the greater of (i) the Redemption Price currently
provided in the Certificate of Designations, and (ii) the Common Stock Fair
Market Value (as therein defined) of the Series D and Series E Preferred Stock
on an as converted basis as of a date five days prior to the Redemption Date (as
therein defined), (b) to permit the Series D Preferred Stock and the Series E
Preferred Stock to be redeemed in whole or in part and separately or together,
subject only to the Company having sufficient and lawful funds to redeem the
Series D Preferred Stock and the Series E Preferred Stock called for redemption
and (c) to provide that the Series F Preferred Stock will have priority over the
Series D and Series E Preferred Stock with respect to dividends and liquidation
rights.
6. REPAYMENT OF NOTES. If the Company shall repay prior to the stated
maturity thereof, in whole or in part, that certain Promissory Note, dated as of
December 17, 1997, made by IQI, Inc. payable to the Blank Trust, in the
principal amount of $191, 400 and/or that certain Promissory Note, dated as of
B-2
<PAGE>
December 17, 1997, made by IQI, Inc. payable to Blank, in the principal amount
of $808,600, then the Company will immediately prior to such repayment, amend
that certain Stock Purchase Warrant, dated as of December 17, 1997, issued by
IQI, Inc. to the Blank Trust, and that certain Stock Purchase Warrant, dated as
of December 17, 1997, issued by IQI, Inc. to Blank, by deleting Section
2(i) from each such warrant.
7. EFFECT OF AGREEMENT. This Agreement modifies and amends the Stock
Agreement and, to the extent that there is any conflict between this letter
agreement and the Stock Agreement, this letter agreement shall govern.
8. CONFIDENTIALITY. This letter shall be subject to the confidentiality
restrictions set forth in Section 22(n) of the Stock Agreement, to the same
extent as if a part thereof.
9. CHOICE OF LAW. This letter agreement shall be governed by and construed
in accordance with the internal laws (and the conflicts of law) of the State of
Delaware.
Please execute this letter below to evidence your agreement to the
foregoing.
Very truly yours,
QUESTOR PARTNERS FUND II, L.P.
a Delaware limited partnership
By: Questor General Partner II, L.P.
its General Partner
By: Questor Principal II, Inc.
its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
B-3
<PAGE>
QUESTOR SIDE-BY-SIDE PARTNERS II, L.P.
a Delaware limited partnership
By: Questor Side-by-Side Partners II
3(c)(1), L.P.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
QUESTOR SIDE-BY-SIDE PARTNERS II
3(C)(1), L.P. a Delaware limited
partnership
By: Questor Principals II, Inc.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
B-4
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: ATC Communications
Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063
TC CO-INVESTORS, LLC
a Delaware limited liability company
By: TC Management Partners, LLC
a Delaware limited liability
company,
its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
THAYER EQUITY INVESTORS III, L.P.
a Delaware limited partnership
By: TC Equity Partners, LLC
a Delaware limited liability
company,
its General Partner
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
ITC SERVICES COMPANY
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
B-5
<PAGE>
EDWARD BLANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TRUSTS CREATED BY EDWARD BLANK AS BOTH
GRANTOR AND TRUSTEE UNDER ARTICLE
FOURTH OF THE EDWARD BLANK 1995
GRANTOR RETAINED ANNUITY TRUST
a New Jersey trust
By:
--------------------------------------
Name: Sharon Blank
Title: Trustee
Address:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
B-6
<PAGE>
APPENDIX C
AMENDMENT NO. 2
This Amendment No. 2, dated as of October 22, 1999, is to the Series F
Senior Voting Convertible Preferred Stock Purchase and Registration Rights
Agreement, dated August 25, 1999, by and among Aegis Communications
Group, Inc., a Delaware corporation, Questor Partners Fund II, L.P., a Delaware
limited partnership, Questor Side-by-Side Partners II, L.P., a Delaware limited
partnership, Questor Side-by-Side Partners II 3(c)(1), L.P., a Delaware limited
partnership, Thayer Equity Investors III, L.P., a Delaware limited partnership,
TC Co-Investors, LLC, a Delaware limited liability company, ITC Services
Company, Edward Blank, and trusts created by Edward Blank as both grantor and
trustee under Article Fourth of The Edward Blank 1995 Grantor Retained Annuity
Trust, dated December 29, 1995, a trust organized under the laws of New Jersey,
as amended by a Letter Agreement, dated August 26, 1999, among the Company, the
Questor Investors and the Existing Investors (such agreement, as amended, the
"PREFERRED STOCK AGREEMENT"). Any capitalized term used herein without
definition shall have the meaning assigned thereto in the Preferred Stock
Agreement.
1. AMENDMENT TO DEFINITIONS OF THE PREFERRED STOCK AGREEMENT. Section 1 of
the Preferred Stock Agreement is hereby amended by adding the following
definitions, each in alphabetical order:
"EBITDA" means the sum (without duplication), derived from the Company's
unaudited consolidated statement of operations included in the September
Financial Statements, of (A) Net Income; (B) the amount deducted, in
determining Net Income, representing amortization; (C) the amount deducted,
in determining Net Income, of all income taxes (whether paid or deferred);
(D) the amount deducted, in determining Net Income, representing Interest
Expense; and (E) the amount deducted, in determining Net Income,
representing depreciation of assets.
"INTEREST EXPENSE" means, for any period, the aggregate consolidated
interest expense of the Company for such period, determined in accordance
with generally accepted accounting principles consistently applied.
"NET INCOME" means the consolidated net income of the Company reflected on
the unaudited statement of operations included in the September Financial
Statements, but (i) excluding any extraordinary or nonrecurring gains and
(ii) including any negative prior period adjustments.
"NEW FINANCIAL STATEMENTS" means the Company's unaudited statements of
operations for each of the months ended July and August 1999.
"SEPTEMBER FINANCIAL STATEMENTS" means the Company's unaudited balance sheet
and statements of operations and cash flows for the month ended and the
three months ended September 30, 1999 prepared in accordance with GAAP
applied on a consistent basis."
2. AMENDMENT TO REPRESENTATIONS AND WARRANTIES OF THE PREFERRED STOCK
AGREEMENT. Section 4(h) of the Preferred Stock Agreement is hereby amended and
restated to read in its entirety as follows:
"(h) FINANCIAL STATEMENTS. The Company has furnished to the Questor
Investors a complete and correct copy of the following financial statements
(collectively, including all notes thereto, the "FINANCIAL STATEMENTS"):
(i) the Company's audited balance sheet, statements of operations, changes
in stockholders' equity and cash flows for the fiscal year ended
December 31, 1998 and for the twelve-month period then ended (including all
notes thereto, the "AUDITED FINANCIAL STATEMENTS"), and (ii) the Company's
unaudited balance sheet (the "BALANCE SHEET") as of August 31, 1999 (the
"BALANCE SHEET DATE") and statement of operations for the eight month period
ended as of the Balance Sheet Date (the "MOST RECENT FINANCIAL STATEMENTS").
The Audited Financial Statements have been prepared from the books and
records of the Company and present fairly the financial condition, results
of operations,
C-1
<PAGE>
changes in stockholders equity and cash flows of the Company, as of the
dates and for the periods indicated, and have been prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied.
The Most Recent Financial Statements have been prepared from the books and
records of the Company and present fairly the financial condition and
results of operations of the Company, as of the dates and for the periods
indicated, and have been prepared in accordance with GAAP consistently
applied, except that the Most Recent Financial Statements lack footnotes and
other presentation items and are subject to normal year-end audit
adjustments, which are not reasonably expected to be material in the
aggregate."
3. AMENDMENT TO REPRESENTATIONS AND WARRANTIES OF THE PREFERRED STOCK
AGREEMENT. Section 4(p) of the Preferred Stock Agreement is hereby amended and
restated to read in its entirety as follows:
"(p) ABSENCE OF CERTAIN CHANGES. Except as set forth in Section
(p)(i) and (ii) of the Disclosure Schedules, since the Balance Sheet Date,
neither the Company nor any of its Subsidiaries has made or suffered any
change in, or condition affecting, their respective condition (financial or
otherwise), properties, profitability or operations other than changes,
events or conditions in the ordinary course, none of which, individually or
in the aggregate, has had, or which the Company can reasonably foresee will
have, a Material Adverse Effect; PROVIDED, HOWEVER, that, subject to the
immediately succeeding proviso, any such change resulting from the loss of
(i) any customer or client or customer or client program since the Balance
Sheet Date will be viewed in the aggregate after taking into account any
customer or client or customer or client programs gained since the Balance
Sheet Date; PROVIDED FURTHER that the loss of (i) any customer or client set
forth on Section (p)(iii) of the Disclosure Schedules, or (ii) any program
of any such customer or client the loss of which program in itself could
reasonably be expected to have a Material Adverse Effect, will in each case
be deemed to constitute a Material Adverse Effect."
4. AMENDMENT REGARDING THE DATE OF THE REPRESENTATIONS AND WARRANTIES OF
THE PREFERRED STOCK AGREEMENT. The representations and warranties of the
Company, the Questor Investors and the Existing Investors contained in Sections
4 (except for subsections 4(s) and 4(t) thereof), 5 and 6 of the Preferred Stock
Agreement, respectively, shall be deemed to have been made as of the date
hereof.
5. AMENDMENT TO THE TERMINATION PROVISION OF THE PREFERRED STOCK
AGREEMENT. Section 21(b) of the Preferred Stock Agreement is hereby amended and
restated to read in its entirety as follows:
"(b)(i) by the Questor Investors or the Company if the Closing has not
occurred on or before January 31, 2000, and this Agreement has not
previously been terminated; PROVIDED, that the right to terminate the
Agreement under this Section 21(b)(i) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before
such date; or (ii) by the Questor Investors if the Company fails to deliver
the September Financial Statements within the time period specified in
Section 22(t) or to achieve the Minimum EBITDA (as hereinafter defined)."
6. AMENDMENT TO COVENANTS OF THE PREFERRED STOCK AGREEMENT. Section 22 of
the Preferred Stock Agreement is hereby amended by adding the following to the
end thereof:
"(t) ADDITIONAL FINANCIAL STATEMENTS AND MINIMUM EBITDA. The Company
(i) has delivered to the Questor Investors the New Financial Statements and
(ii) shall deliver as soon as practicable, but in any event no later than
the first to occur of November 15, 1999 and the date upon which the Company
files with the Commission its Form 10-Q for the quarter ended September 30,
1999, the September Financial Statements. The New Financial Statements have
been, and the September Financial Statements shall be, prepared from the
books and records of the Company. The New Financial Statements present, and
the September Financial Statements shall present, fairly the financial
condition, results of operations, changes in stockholders equity and cash
flows of the Company, as of the dates and for the periods indicated, and
have been, or shall be, respectively,
C-2
<PAGE>
prepared in accordance with GAAP consistently applied, except that (i) the
New Financial Statements lack, and the September Financial Statements shall
lack, footnotes and other presentation items and are, or shall be,
respectively, subject to normal year-end audit adjustments, which are not
reasonably expected to be material in the aggregate, and (ii) the New
Financial Statements include, and the September Financial Statements in any
event shall include, all negative prior period adjustments. The
September Financial Statements shall include a line item that correctly
calculates the Company's EBITDA for the three months ended September 30,
1999 (the "THIRD QUARTER EBITDA"). The Third Quarter EBITDA shall not be
less than negative $150,000 without regard to any materiality adjustments
otherwise permitted under GAAP consistently applied (the "MINIMUM EBITDA").
Without limiting Section 22(r) hereof, the Questor Investors may engage
PricewaterhouseCoopers, LLP ("PWC") to review the September Financial
Statements, including the calculation of the Third Quarter EBITDA, which
review shall be completed no later than 10 days following the date upon
which the September Financial Statements are first delivered to the Questor
Investors. In connection with any such review by PWC, the Questor Investors
or any other representative of the Questor Investors, the Company shall, and
shall cause its auditors to, give PWC full access to its management and to
its books and records and any documentation used or developed in connection
with the preparation of the September Financial Statements."
7. AMENDMENT TO ABSENCE OF CERTAIN CHANGES DISCLOSURE SCHEDULE. Section
(p) of the Disclosure Schedules to the Preferred Stock Agreement is amended by
adding the following thereto immediately prior to the section entitled "SELECTED
CLIENTS", which section shall be renumbered as appropriate:
"(i) CHANGE IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company previously delivered to the Questor Investors the report
entitled "Aegis Communications Group, Inc., August 1999 Financial
Package, Presented to Questor, September 29, 1999" regarding the results
of operations in July and August 1999 and projections for expected
results of operations. The financial statements and projections included
in such report reflect certain adverse changes in the financial
condition, profitability and operations of the Company.
(ii) NASDAQ DELISTING
On September 17, 1999, Nasdaq informed the Company that the Company no
longer met certain minimum requirements for continued listing on the
Nasdaq National Market System or The Nasdaq SmallCap Market, and
therefore, the Nasdaq had determined that continued listing was no longer
warranted. Accordingly, the Company' s common stock began trading
over-the-counter on the National Association of Securities Dealers'
Electronic Bulletin Board effective September 20, 1999. The Company is in
the process of appealing the Nasdaq decision."
8. AMENDMENT TO THE CERTIFICATE OF DESIGNATION. The definition of
"Interest Expense" in Section 1 of the Series F Preferred Stock Certificate of
Designation, Exhibit A to the Preferred Stock Agreement, is hereby amended and
restated to read in its entirety as follows:
"INTEREST EXPENSE means, for any period, the aggregate consolidated interest
expense of the Company for such period, determined in accordance with
generally accepted accounting principles consistently applied."
9. AMENDMENT TO THE CERTIFICATE OF DESIGNATION. Section 7(d) of the
Series F Preferred Stock Certificate of Designation, Exhibit A to the Preferred
Stock Agreement, is hereby amended and restated to read in its entirety as
follows:
"(d) EBITDA ADJUSTMENT. The Conversion Price shall be adjusted to
the extent that the Corporation's Adjusted EBITDA is less than or more than
$17,000,000. For each $500,000 (and/or
C-3
<PAGE>
fraction thereof) that the Corporation's Adjusted EBITDA is greater than
$17,000,000, the Conversion Price will be increased by $0.031. For each
$500,000 (and/or fraction thereof) that the Corporation's Adjusted EBITDA is
less than $17,000,000, the Conversion Price will be decreased by $0.031
(and/or fraction thereof). In no case, however, shall the resulting
Conversion Price be less than $1.00 or more than $1.661. For purposes of the
adjustment described in this clause (d), the Corporation and the Investors
shall engage PricewaterhouseCoopers, LLP ("PWC"), at the Corporation's
expense, to calculate the Adjusted EBITDA of the Corporation and to provide
a certificate (the "EBITDA CERTIFICATE") to the Corporation and each of the
Investors setting forth such calculation. Within 15 days after the issuance
of the Corporation's audited financial statements, PWC shall send a draft of
the EBITDA Certificate (the "DRAFT EBITDA CERTIFICATE") to the Investors and
the Corporation, each of whom shall have 30 days thereafter (the "OBJECTION
PERIOD") to make any objection thereto or suggest any changes in order to
conform the calculation therein to the terms of this Certificate of
Designation. Failure by any party to make any objection or suggest any such
changes within the Objection Period will be deemed to constitute acceptance
of the Draft EBITDA Certificate. The Corporation will use its best efforts
to cause PWC to issue the EBITDA Certificate (the "FINAL EBITDA
CERTIFICATE") as promptly as practicable, but in any event no later than 30
days following the expiration of the Objection Period, and the Final EBITDA
Certificate shall be binding on all parties, including without limitation
the Corporation and the Investors and their successors and assigns."
10. FULL FORCE AND EFFECT. Except as provided in this Amendment No. 1, the
Preferred Stock Agreement shall continue in full force and effect in accordance
with the provisions thereof.
11. GOVERNING LAW. This Amendment No. 2 shall be governed by, and construed
in accordance with, the laws of the State of Delaware without giving effect to
the conflicts of laws principles thereof.
12. MISCELLANEOUS. The section headings contained in this Amendment No. 2
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Amendment No. 2. This Amendment No. 2 may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
C-4
<PAGE>
[SIGNATURE PAGE OF AMENDMENT NO. 2 TO THE SERIES F
CONVERTIBLE PREFERRED STOCKPURCHASE AND REGISTRATION
RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, or
caused this Agreement to be duly executed on their behalf, as of the day and
year first above written.
COMPANY:
AEGIS COMMUNICATIONS GROUP, INC.,
a Delaware corporation
<TABLE>
<S> <C>
By:
----------------------------------------------------
Name:
Title:
</TABLE>
<TABLE>
<S> <C>
Address: Aegis Communications Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063
</TABLE>
QUESTOR:
QUESTOR PARTNERS FUND II, L.P.,
a Delaware limited partnership
<TABLE>
<S> <C>
By: Questor General Partner II, L.P.,
its General Partner
By: Questor Principals II, Inc.,
its General Partner
</TABLE>
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
<TABLE>
<S> <C>
Address: c/o Organization Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
</TABLE>
With a copy to:
Questor Management Company
<TABLE>
<S> <C>
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
</TABLE>
C-5
<PAGE>
QUESTOR SIDE-BY-SIDE
PARTNERS II, L.P.,
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
<TABLE>
<S> <C>
Address: c/o Organization Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
</TABLE>
With a copy to:
Questor Management Company
<TABLE>
<S> <C>
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
</TABLE>
QUESTOR SIDE-BY-SIDE
PARTNERS II 3(C)(1), L.P.,
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
<TABLE>
<S> <C>
Address: c/o Organization Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
</TABLE>
With a copy to:
Questor Management Company
<TABLE>
<S> <C>
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
</TABLE>
C-6
<PAGE>
TC CO-INVESTORS, LLC,
a Delaware limited liability company
By: TC Management Partners, LLC,
a Delaware limited liability company,
its General Partner
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
<TABLE>
<S> <C>
Address: 1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
</TABLE>
THAYER EQUITY INVESTORS III, L.P.,
a Delaware limited partnership
By: TC Equity Partners, LLC,
a Delaware limited liability company,
its General Partner
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
<TABLE>
<S> <C>
Address: 1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
</TABLE>
ITC SERVICES COMPANY,
a Delaware corporation
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
Address:
-------------------------------------------------------------------------------
----------------------------------------
----------------------------------------
C-7
<PAGE>
EDWARD BLANK
By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
Address:
-------------------------------------------------------------------------------
----------------------------------------
----------------------------------------
TRUSTS CREATED BY EDWARD BLANK AS BOTH GRANTOR
AND TRUSTEE UNDER ARTICLE FOURTH OF THE EDWARD
BLANK 1995 GRANTOR RETAINED ANNUITY TRUST, a New
Jersey trust
By:
------------------------------------------------
<TABLE>
<S> <C>
Name: Sharon Blank
Title: Trustee
</TABLE>
Address:
-------------------------------------------------------------------------------
----------------------------------------
----------------------------------------
C-8
<PAGE>
APPENDIX D
SERIES F PREFERRED STOCK
CERTIFICATE OF DESIGNATION
OF
------------------------
AEGIS COMMUNICATIONS GROUP, INC.
(A DELAWARE CORPORATION)
------------------------
(PURSUANT TO SECTION 151(G) OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE)
Aegis Communications Group, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "CORPORATION"), DOES HEREBY CERTIFY THAT:
WHEREAS, pursuant to authority conferred upon the Board of Directors of the
Corporation (the "BOARD") by the Amended and Restated Certificate of
Incorporation of the Corporation (the "CERTIFICATE") and Section 151 of the
General Corporation Law of the State of Delaware (the "DGCL"), the following
resolutions were duly adopted by unanimous written consent of the Board dated
August , 1999, which resolutions are still in full force and effect and are
not in conflict with any provisions of the Certificate or Bylaws of the
Corporation or any certificate of designation filed by the Corporation pursuant
to Section 151 of the DGCL;
NOW, THEREFORE, BE IT RESOLVED, that pursuant to authority vested in the
Board by the Certificate and Section 151 of the DGCL a series of Preferred Stock
of the Corporation to be known as "SERIES F PREFERRED STOCK" is hereby
established and provided for and the Board of Directors hereby fixes, states and
expresses the powers, designation, preferences and relative, participating,
optional and other special rights of such series and the qualifications,
limitations or restrictions of such series, as follows:
I. DESIGNATION. The Board does hereby provide for the issuance of a new
series of Preferred Stock of the Corporation, to be designated and known as
Series F Preferred Stock.
II. NUMBER OF SHARES. The number of shares constituting the Series F
Preferred Stock shall be and the same is hereby fixed at 46,750.
III. CAPITAL. For the purpose of Section 154 of the DGCL the amount to be
represented as capital for each share of Series F Preferred Stock is and shall
at all times be $1,000.00.
Section 1. DEFINITIONS. (a) For purposes of this Certificate of
Designation, the following definitions shall apply:
"ADJUSTED EBITDA" means, for the year ended December 31, 1999, the sum
(without duplication), derived from the Corporation's audited consolidated
statement of operations for such period, of (a) Net Income; (b) the amount
deducted, in determining Net Income, representing amortization, provided
that in no event shall such amount include more than $1,469,000 in respect
of the period beginning January 1, 1999 and ended June 30, 1999 (the "STUB
PERIOD"); (c) the amount deducted, in determining Net Income, of all income
taxes (whether paid or deferred), provided that in no event shall such
amount include more than ($3,982,000) in respect of the Stub Period;
(d) the amount deducted, in determining Net Income, representing Interest
Expense, provided that in no event shall more than $3,580,000 be included as
Interest Expense in respect of the Stub Period; (e) the amount deducted, in
determining Net Income, representing depreciation of assets, provided that
in no event shall such amount include more than $6,206,000 in respect of the
Stub Period; (f) the amount deducted, in determining Net Income,
representing the goodwill writeoff in the amount of $20,399,000
D-1
<PAGE>
recorded in the Stub Period; (g) the amount deducted, in determining Net
Income, representing the restructuring charge in the amount of $541,000
recorded in the Stub Period; and (h) fees and expenses relating to the
issuance of the Series F Preferred Stock and related transactions deducted
in determining Net Income consisting of (i) the transaction fees and
expenses of Merrill Lynch & Co. and Questor Management Company, (ii) the
transaction legal and accounting fees and expenses of the Corporation,
(iii) extraordinary bank fees incurred during the period beginning July 1,
1999 and ending December 31, 1999 (the "SECOND STUB PERIOD"), (iv) the
transaction expenses of TC Management Partners, LLC, and (v) consulting
fees, executive severance costs (including in respect of non-cash charges in
connection with the acceleration of employee stock options), executive
search and relocation costs, any increases in the salary of the Chairman of
the Corporation, and other non-recurring charges incurred during the Second
Stub Period, net of related savings, in each case with respect to this
clause (v) as mutually agreed by a Majority of the Series F Preferred Stock
and the Corporation.
"AFFILIATES" shall mean any person that directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Person specified. No Person shall be deemed to be an
Affiliate of another Person solely as a consequence of the Purchase
Agreement or the Stockholders Agreement or the transactions contemplated
thereby.
"BOARD" means the board of directors of the Corporation.
"BUSINESS DAY" shall mean a day which is not a Saturday, Sunday or legal
holiday on which banking institutions in New York are authorized to close.
"CHANGE IN CONTROL TRANSACTION" means any of the following:
(a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than
the Corporation, or any of its Subsidiaries or any Investor or Excluded
Group (an "ACQUIRING PERSON"), of beneficial ownership (within the
meaning of Rule 13d-5 promulgated under the Exchange Act) of 35% or more
of the combined voting power or economic interests of the then
outstanding voting securities of the Corporation entitled to vote
generally in the election of directors; provided, however, that any
transfer from any Investor or Excluded Group will not result in a Change
in Control if such transfer was part of one or a series of related
transactions the effect of which, absent the transfer to such Acquiring
Person by the Investor or Excluded Group, would not have resulted in the
acquisition by such Acquiring Person of 35% or more of the combined
voting power or economic interests of the then outstanding voting
securities; or
(b) the individuals who at the beginning of any 12 consecutive month
period following the Original Issue Date that constituted a majority of
the directors of the Corporation (the "INCUMBENT MAJORITY") cease for any
reason to constitute at least a majority of such directors; provided that
(i) any individual becoming a director whose election, or nomination for
election by the Corporation's stockholders was approved by a vote of the
stockholders having the right to designate such director in accordance
with the Stockholders Agreement, and (ii) any director whose election to
the Board or whose nomination for election by the stockholders of the
Corporation was approved by the Incumbent Majority, shall, in each such
case, be considered as though such individual were a member of the
Incumbent Majority, but excluding, as a member of the Incumbent Majority,
any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of
the directors of the Corporation (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) and further
excluding any person who is an affiliate or associate of an Acquiring
Person having or proposing to acquire beneficial ownership of 25% or more
of the combined voting power of the then outstanding voting securities of
the Corporation entitled to vote generally in the election of directors;
or
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(c) the approval by the stockholders of the Corporation of a
reorganization, merger or consolidation, in each case, with respect to
which all or substantially all of the individuals and entities who were
the respective beneficial owners of the voting securities of the
Corporation immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than 51% of
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors of the
Corporation resulting from such reorganization, merger or consolidation;
or
(d) the sale or other disposition of assets representing 50% or more
of the assets of the Corporation and its Subsidiaries in one transaction
or a series of related transactions.
"COMMON STOCK" shall mean the common stock, par value $.01 per share, of
the Corporation.
"COMMON STOCK'S FAIR MARKET VALUE" shall mean, as of any date, the fair
market value of a share of Common Stock on such date. Such fair market value
on a date shall mean (i) if shares of the Common Stock are listed on a
national securities exchange, the average of the closing prices as reported
for composite transactions during the 30 consecutive trading days preceding
the trading day immediately prior to such date or, if no sale occurred on a
trading day, then the mean between the closing bid and asked prices on such
exchange on such trading day; (ii) if shares of the Common Stock are traded
on the Nasdaq National Market ("NMM"), the average of the closing prices as
reported on the NMM during the 30 consecutive trading days preceding the
trading day immediately prior to such date or, if no sale occurred on a
trading day, then the mean between the highest bid and lowest asked prices
as of the close of business on such trading day, as reported on the NMM;
(iii) if the shares of the Common Stock are not traded on a national
securities exchange or the NMM but are otherwise traded over-the-counter,
the arithmetic average (for consecutive trading days) of the mean between
the highest bid and lowest asked prices as of the close of business during
the 30 consecutive trading days preceding the trading day immediately prior
to such date as quoted on the National Association of Securities Dealers
Automated Quotation system or an equivalent generally accepted reporting
service; or (iv) if there is no active market for the Common Stock, the fair
market value thereof as mutually determined by the Corporation and the
holders of a Majority of the Series F Preferred Stock.
"DEFAULT RATE" means 15% per annum.
"DIVIDEND RATE" means 9.626% per annum.
"EQUITY SECURITY" means any stock or similar security of the Corporation
or any security (including indebtedness for borrowed money) convertible or
exchangeable, with or without consideration, into or for any such stock or
similar security, or any security (including indebtedness for borrowed
money) carrying any warrant or right to subscribe to or purchase any such
stock or similar security, or any such warrant or right.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED GROUP" means a "GROUP" (as such term is used in Rule 13d-5 of
the Exchange Act) that includes one or more of the Investors, including,
without limitation, for purposes of this definition only, any party to the
Stockholders Agreement.
"INTEREST EXPENSE" means, for any period, the aggregate consolidated
cash interest expense of the Corporation for such period, determined in
accordance with generally accepted accounting principles consistently
applied.
"INVESTMENT VALUE" of any share of Series F Preferred Stock, means, as
of any date, the sum of (i) the Per Share Amount for such Series F Preferred
Stock, plus (ii) the amount of any unpaid dividends on such share added to
the Investment Value of such share on any Dividend Reference Date
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pursuant to Section 2(a); and in the event of any liquidation, dissolution
or winding up of the Corporation, within the meaning of Section 3, or a
Change in Control Transaction, or the redemption or conversion of such
share, unpaid dividends on such share, whether or not earned or declared,
will be added to the Investment Value of such share on the payment or
distribution date under Section 3 or 4, as the case may be, or on the
Optional Redemption Date (as defined in Section 5), or on the Conversion
Date (as defined in Section 7), as the case may be, calculated cumulatively
on a daily basis to the close of business on such payment date, distribution
date, or Conversion Date or Optional Redemption Date, as the case may be.
"INVESTORS" means Questor, Questor Side-by-Side Partners II, L.P.,
Questor Side-by-Side Partners II (3)(c)(1), L.P., Thayer, TC Co-Investors,
LLC and their respective Affiliates (including for this purpose any of their
limited or general partners).
"JUNIOR STOCK" shall mean the Common Stock and all other shares of
capital stock of the Corporation, whether presently outstanding or hereafter
issued other than the Series F Preferred Stock.
"MAJORITY OF THE SERIES F PREFERRED STOCK" shall mean more than 50% of
the outstanding shares of Series F Preferred Stock.
"NET INCOME" means, for the year ended December 31, 1999, the
consolidated net income of the Corporation for such period, determined in
accordance with generally accepted accounting principles consistently
applied, provided that for purposes of determining the Corporation's
Adjusted EBITDA, in no event shall the Net Income of the Corporation for the
Second Stub Period used in such determination exceed ($28,278,000) and
further provided that for purposes of determining the Corporation's Adjusted
EBITDA, in no event shall the Net Income of the Corporation for the Second
Stub Period include extraordinary or nonrecurring gains except to the extent
included in the Revised 1999 Operating Plan--Summary with Regional Detail,
dated July 13, 1999, and specifically disclosed to Questor prior to
August , 1999.
"ORIGINAL ISSUE DATE" shall mean the first date on which shares of
Series F Preferred Stock are issued.
"OUTSTANDING OPTIONS" shall mean options granted under the Corporation's
1992 Stock Option Plan, rights granted under the 1996 Stock Exchange Rights
Plan, options granted under the Corporation's 1996 Stock Option and
Restricted Stock Plan and options granted under the Corporation's 1998 Stock
Option Plan.
"OUTSTANDING WARRANTS" shall mean: (i) Warrant to Purchase One Million
One Hundred Thousand (1,100,000) Shares of Common Stock, $.01 Par Value,
dated April 7, 1998, at the price of $1.96 per share, held by Thayer Equity
Investors III, L.P.; (ii) Warrants to purchase 350,000 shares of Common
Stock issued pursuant to a commitment letter from Thayer to the Company at
an exercise price of $2.375; (iii) Series Four Warrant to Purchase Nine
Hundred Seven Thousand Nine Hundred Eighty-Four (907,984) Shares of Common
Stock, $.01 Par Value, dated June 30, 1999, at the price of $.90625 per
share, held by Thayer Equity Investors III, L.P.; (iv) Series Four Warrant
to Purchase Forty-Two Thousand Ninety-One (42,091) Shares of Common Stock,
$.01 Par Value, dated June 30, 1999, at the price of $.90625 per share, held
by Edward Blank; (v) Series Four Warrant to Purchase Nine Thousand Nine
Hundred Seventy-Eight (9,978) Shares of Common Stock, $.01 Par Value, dated
June 30, 1999, at the price of $.90625 per share, held by Edward Blank 1995
Grantor Retained Annuity Trust; (vi) Series Four Warrant to Purchase
Thirty-Nine Thousand Nine Hundred Forty-Seven (39,947) Shares of Common
Stock, $.01 Par Value, dated June 30, 1999, at the price of $.90625 per
share, held by ITC Service Company; or (vii) Stock Purchase Warrant, dated
as of December 17, 1997, from IQI, Inc. to Edward Blank, to purchase 25,403
shares for $808,600 and the Stock Purchase Warrant, dated as of
December 17, 1997, from IQI, Inc., to purchase 6,013 shares for $191,400
(such
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two Stock Purchase Warrants to purchase IQI, Inc. shares having been
converted into warrants to purchase 306,347 shares, in aggregate, of Common
Stock at an exercise price of $3.26 per share).
"PER SHARE AMOUNT" means $1,000.00 (appropriately adjusted for
subdivisions or combinations of the Series F Preferred Stock).
"PERSON" means an individual, corporation, partnership, association,
trust, limited liability company or any other entity or organization,
including a government or political subdivision or an agency, unit or
instrumentality thereof.
"PREFERRED STOCK" means Preferred Stock, $.01 par value per share, of
the Corporation.
"PURCHASE AGREEMENT" means the Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement, dated as of
August 25, 1999, by and among the Corporation, Questor Partners Fund II,
L.P., Questor Side-by-Side Partners II, L.P., Questor Side-by-Side
Partners II 3(c)(1), L.P., Thayer, TC Co-Investors LLC, ITC Services
Company, Edward Blank and trusts created by Edward Blank as both grantor and
trustee under Article Fourth of The Edward Blank 1995 Grantor Retained
Annuity Trust.
"QUESTOR" means Questor Partners Fund II, L.P.
"SERIES F CERTIFICATE OF DESIGNATION" means this Certificate of
Designation of the Series F Preferred Stock filed with the Delaware
Secretary of State on [ , 1999].
"SERIES F PREFERRED STOCK" shall mean the Series F Preferred Stock, par
value $.01 per share, of the Corporation.
"SPECIAL CONVERSION PRICE" shall mean $1.661.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
, 1999 among the Corporation, Questor Partners Fund II, L.P., Questor
Side-by-Side Partners II, L.P., Questor Side-by-Side Partners II 3(c)(1),
L.P., Thayer and TC Co-Investors III, L.P.
"SUBSIDIARY" shall mean, with respect to the Corporation, any Person of
which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by the
Corporation or a Subsidiary of the Corporation.
"THAYER" shall mean Thayer Equity Investors III, L.P., a Delaware
limited partnership.
"VOTING STOCK" shall mean any shares having general voting power in
electing the Board (irrespective of whether or not at the time stock of any
other class or classes has or might have voting power by reason or the
happening of any contingency). The Common Stock is Voting Stock.
Section 1. DEFINITIONS. (a) For purposes of this Certificate
Section 2. DIVIDENDS. (a) RIGHT TO DIVIDENDS. (i) Each of the holders of
record of the Series F Preferred Stock shall be entitled to receive, when and as
declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the rate and in the manner provided herein in preference
to the payment of dividends on any Junior Stock. Dividends on each share of the
Series F Preferred Stock shall accumulate and accrue on each such share from the
date of its original issue and shall accumulate and accrue from day to day
thereafter, whether or not earned or declared. Dividends shall accumulate and
accrue on each share of Series F Preferred Stock from the Original Issue Date
and shall not be affected by the transfer of shares of Series F Preferred Stock
thereafter or the cancellation and issuance or reissuance of certificates
evidencing such shares.
(ii) Dividends will be calculated cumulatively on a daily basis on each
share of Series F Preferred Stock at the Dividend Rate (or, pursuant to
Section 4(c)(ii) at the Default Rate) per annum on the
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Investment Value thereof. To the extent not paid on any March 31, June 30,
September 30 or December 31 of any year (each a "DIVIDEND REFERENCE DATE"),
commencing , 1999, all dividends which have been calculated on each
share of Series F Preferred Stock then outstanding during the three-month
period (or other period in the case of the first Dividend Reference Date)
ending on such Dividend Reference Date, whether or not earned or declared,
will be added to the Investment Value of such share on such Dividend
Reference Date and will remain a part thereof until such share of Preferred
Stock is converted, redeemed, repurchased or otherwise retired in accordance
with the terms hereof. If any Dividend Reference Date is not a Business Day,
the dividend otherwise due on such date shall be paid on the next following
Business Day (and this extension shall be included in the determination of
such dividend payment).
(b) ADDITIONAL DIVIDENDS. After cumulative dividends on the Series F
Preferred Stock for all past dividend periods and the then current dividend
period shall have been declared and paid or set apart, or added to the
Investment Value of each share of Series F Preferred Stock as provided in
Section 2(a)(ii) hereof, if the Board shall elect to declare additional
dividends, such additional dividends shall be declared in equal amounts per
share on all shares of Series F Preferred Stock and Common Stock, but with
each share of Series F Preferred Stock being entitled to dividends based
upon the number of shares of Common Stock into which such share of Series F
Preferred Stock could be converted, in accordance with provisions of this
Series F Certificate of Designation, at the record date for the
determination of stockholders entitled to receive such dividend or, if no
such record date is established, on the date such dividend is declared.
Section 3. LIQUIDATION RIGHTS OF SERIES F PREFERRED STOCK.
(a) SERIES F PREFERRED STOCK PREFERENCE. Upon any liquidation,
dissolution or winding up of the Corporation, the holders of the Series F
Preferred Stock shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether such
assets are capital, surplus, or earnings, before any payment or declaration
and setting apart for payment of any amount shall be made in respect of any
Junior Stock, an amount equal to the Investment Value per share with respect
to the Series F Preferred Stock on the date of payment. If upon any
liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary, the assets to be distributed to the holders of the Series F
Preferred Stock under this Section 3(b) shall be insufficient to permit the
payment to such stockholders of the full preferential amounts therein, then
all of the assets of the Corporation to be distributed shall be distributed
ratably to the holders of the Series F Preferred Stock on the basis of the
number of shares of Series F Preferred Stock held.
(b) REMAINING ASSETS. After the payment or distribution to the holders
of the Series F Preferred Stock of the full preferential amounts aforesaid,
the holders of the Common Stock and the holders of the Preferred Stock shall
be entitled to receive ratably all remaining assets of the Corporation to be
distributed, but with all holders of shares of Preferred Stock, treated (for
this purpose only) as if they had converted their shares of the Preferred
Stock into Common Stock in accordance with the conversion provisions of the
certificate of designation or other instrument governing such Preferred
Stock.
Section 4. CHANGE IN CONTROL TRANSACTION. (a) In the event there occurs a
Change in Control Transaction, the Company will offer to purchase from each
holder of the Series F Preferred Stock, in cash or in securities (including,
without limitation, debt securities) received from the acquiring corporation, if
any, or a combination thereof, at the closing of any such transaction, each
share of Series F Preferred Stock held by such holder, for an amount equal to
the Investment Value per share thereof, as of the date of full payment therefor
(the "CHANGE IN CONTROL REDEMPTION PRICE") by delivery of a notice of such offer
(a "CHANGE IN CONTROL REDEMPTION NOTICE"), and each holder of Series F Preferred
Stock shall have the right (but not the obligation) to require the Corporation
to purchase any or all of the Series F Preferred Stock held by such holder for
the Change in Control Redemption Price. Each holder of Series F Preferred Stock
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shall also be permitted, until the fifteenth business day following delivery of
the Change in Control Notice, to convert any or all of the shares of Series F
Preferred Stock held by such holder pursuant to Section 7 below, and any shares
of Common Stock issuable upon conversion of any Series F Preferred Stock
converted pursuant to this sentence after a Change in Control Transaction has
occurred shall be entitled to receive the same amount of cash, securities and
other property in connection with such Change in Control Transaction as the
Common Stock outstanding prior to the Change in Control Transaction.
(b) Any securities or other property to be delivered to the holders of
the Series F Preferred Stock or Junior Stock pursuant to Section
4(a) hereof shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
(A) If traded on a securities exchange, the value shall be deemed
to be the average of the closing prices of the securities on such
exchange over the 10-day period ending three (3) days prior to the
closing of any Change in Control Transaction;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 10-day
period ending three (3) days prior to the closing of any Change in
Control Transaction; and
(C) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the Corporation
and the holders of a Majority of the Series F Preferred Stock.
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make
appropriate discount from the market value determined as above in
paragraph (i)(A), (B) or (C) to reflect the approximate fair market value
thereof, as mutually determined by the Corporation and the holders of a
Majority of the Series F Preferred Stock.
(iii) All other securities or other property shall be valued at the
fair market value thereof, as mutually determined by the Corporation and
the holders of a Majority of the Series F Preferred Stock.
(iv) If the holders of a Majority of the Series F Preferred Stock and
the Corporation are unable to reach agreement on any valuation matter,
such valuation shall be submitted to and determined by a nationally
recognized independent investment banking firm selected by the Board and
the holders of a Majority of the Series F Preferred Stock (or, if such
selection cannot be made, by a nationally recognized independent
investment banking firm selected by the American Arbitration Association
in accordance with its rules).
(c) In the event the requirements of Section 4(a) hereof are not
complied with, or provision has not been made therefor by the setting apart
of cash and securities sufficient to permit the Corporation to comply with
such requirements:
(i) with respect to any Change in Control Transaction as to which the
Corporation is a party,
(A) the Corporation will cause the closing of such Change in
Control Transaction to be postponed until such time as the
requirements of this Section 4 have been complied with or adequate
provision therefor has been made; or
(B) the Corporation will cancel such transaction, in which event
the rights, preferences and privileges of the holders of the
Series F Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in Section 4(d) hereof; and
(ii) with respect to any Change in Control Transaction as to which
the Company is not a party, Dividends will be calculated at the Default
Rate until such time as the requirements of Section 4(a) are complied
with or adequate provision therefor has been made.
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(d) The Corporation shall give each holder of record of Series F
Preferred Stock written notice of an impending Change in Control
Transaction, if known to the Corporation, not later than the earlier of
(i) thirty (30) days prior to the stockholders' meeting called to approve
such transaction, and (ii) thirty (30) days prior to the closing of such
transaction. Such notice shall describe the material terms and conditions of
the impending transaction and the provisions of this Section 4. No later
than five business days following the occurrence of a Change in Control
Transaction, the Corporation shall deliver a Change in Control Redemption
Notice to each holder of Series F Preferred Stock, which notice shall set
forth (A) each holder's right to require the Corporation to redeem all or
any portion of the shares of Series F Preferred Stock held by it at the
Change in Control Redemption Price, (B) a date upon which such redemption is
offered to take place (which date shall be no more than 30 business days
following the date of such Change in Control Redemption Notice), and
(C) the procedures to be followed by such holder in exercising its right to
cause such redemption. In the event a holder of shares of Series F Preferred
Stock shall elect to require the Corporation to redeem any or all such
shares of Series F Preferred Stock pursuant to Section 4(a), such holder
shall deliver within 15 business days of delivery of the Corporation's
Change in Control Notice, a written notice to the Corporation so stating,
specifying the number of shares to be redeemed pursuant to Section 4(a). The
Corporation shall, in accordance with the terms hereof, redeem the number of
shares so specified on the date fixed for redemption. Failure of the
Corporation to give any notice shall not prejudice the rights of any holders
of such of Series F Preferred Stock to cause the Corporation to redeem all
such shares held by them.
(e) The provisions of this Section 4 are in addition to the protective
provisions of Section 8 hereof.
Section 5. REDEMPTION. (a) RESTRICTION ON REDEMPTION AND
PURCHASE. Except as expressly provided in this Section 5, the Corporation shall
not have the right to purchase, call, redeem or otherwise acquire for value any
or all of the Series F Preferred Stock.
(b) OPTIONAL REDEMPTION. At any time after the fifth but before the
eighth anniversary of the Original Issue Date, the Corporation may, at its
option, redeem not less than 60% of all of the then issued and outstanding
Series F Preferred Stock (the "OPTIONAL REDEMPTION"), at the Redemption
Price hereinafter specified; PROVIDED, HOWEVER, that the Corporation shall
not be entitled to redeem the Series F Preferred Stock or give notice of any
redemption unless the Corporation has sufficient and lawful funds to redeem
all of the then outstanding Series F Preferred Stock. The date on which the
Series F Preferred Stock is to be redeemed pursuant to this
Section 5(b) is herein called the "OPTIONAL REDEMPTION DATE."
(c) REDEMPTION PRICE. The Redemption Price per share of the Series F
Preferred Stock (the "REDEMPTION PRICE"), shall be the Investment Value per
share thereof as of the Optional Redemption Date. In connection with an
Optional Redemption, the Corporation shall pay the Redemption Price for the
Series F Preferred Stock to be redeemed in cash.
(d) REDEMPTION NOTICE. The Corporation shall, not less than thirty
(30) days nor more than sixty (60) days prior to the Optional Redemption
Date give written notice ("REDEMPTION NOTICE") to each holder of record of
Series F Preferred Stock to be redeemed. The Redemption Notice shall state:
(i) That not less than 60% of the outstanding shares of Preferred
Stock are to be redeemed and the total number of shares being redeemed;
(ii) The number of shares of Series F Preferred Stock held by the
holder which the Corporation will redeem (which will be determined PRO
RATA based on the number of shares of Series F Preferred Stock held by
each holder);
(iii) The Optional Redemption Date and the aggregate Redemption Price
for the shares of Series F Preferred Stock held by such holder;
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(iv) That the holder's right to convert the Series F Preferred Stock
will terminate on the Optional Redemption Date; and
(v) The time, place and manner in which the holder is to surrender to
the Corporation the certificate or certificates representing the shares
of Series F Preferred Stock to be redeemed.
(e) PAYMENT OF REDEMPTION PRICE AND SURRENDER OF STOCK. On the
Optional Redemption Date, the Redemption Price of the Series F Preferred
Stock scheduled to be redeemed or called for redemption shall be payable to
the holders of the Series F Preferred Stock. On or before the Optional
Redemption Date, each holder of Series F Preferred Stock to be redeemed,
unless the holder has exercised its right to convert the shares as provided
in Section 7, shall surrender the certificate or certificates representing
such shares to the Corporation, in the manner and at the place designated in
the Redemption Notice, and thereupon the Redemption Price for such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired.
(f) TERMINATION OF RIGHTS. If the Redemption Notice is duly given, and
if at least ten (10) days prior to the Optional Redemption Date the
Redemption Price per share of Series F Preferred Stock to be redeemed is
either paid or made available for payment, then notwithstanding that the
certificates evidencing any of the shares of Series F Preferred Stock so
called or scheduled for redemption have not been surrendered, all rights
with respect to such shares shall forthwith after the Optional Redemption
Date cease and terminate, except only (i) the right of the holders to
receive the Redemption Price per share of such Series F Preferred Stock
without interest upon surrender of their certificates therefor or (ii) the
right to receive Common Stock plus dividends upon exercise of the conversion
rights provided in Section 7 on or before the Optional Redemption Date.
Section 6. VOTING RIGHTS. In addition to any voting rights provided by
law, the holders of shares of Series F Preferred Stock shall have the following
voting rights:
(a) So long as any shares of the Series F Preferred Stock are
outstanding, each share of Series F Preferred Stock shall entitle the holder
thereof to vote, in person or by proxy or written consent, at a special or
annual meeting of stockholders or in any written consent of stockholders, on
all matters voted on by holders of Common Stock voting together as a single
class with other shares entitled to vote thereon. With respect to any such
vote, each share of Series F Preferred Stock shall entitle the holder
thereof to cast that number of votes per share as is equal to the number of
votes that such holder would be entitled to cast had such holder converted
his number of Series F Preferred Stock into Common Stock pursuant to
Section 7 on the record date for determining the stockholders of the
Corporation eligible to vote on any such matters.
(b) For so long as these are shares of Series F Preferred Stock issued
and outstanding with an aggregate Investment Value of at least $15 million,
if at any time or from time to time holders of a Majority of the Series F
Preferred Stock shall so request, then the number of directors constituting
the Board of Directors shall, without further action, be increased by two,
and the holders of a Majority of the Series F Preferred Stock shall have, in
addition to the other voting rights set forth herein, the exclusive right,
voting together as a single class without regard to series, to elect the two
directors (the "ADDITIONAL DIRECTORS") of the Corporation to fill such
newly-created directorships. Notwithstanding the foregoing, no member of the
Excluded Group shall be permitted to elect, pursuant to the preceding
sentence, more than the number of directors that such member of the Excluded
Group has a right to designate for nomination and election to the Board of
Directors pursuant to the Stockholders Agreement.
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Section 7. CONVERSION. The holders of Series F Preferred Stock shall have
the following conversion rights:
(a) RIGHT TO CONVERT. Each share of Series F Preferred Stock shall be
convertible, at any time prior to the eighth anniversary of the Original
Issue Date at the option of the holder thereof, into fully paid and
nonassessable shares of Common Stock and shall convert without any further
action on the part of the holder thereof, on the eighth anniversary of the
Original Issue Date.
(b) CONVERSION PRICE. The Series F Preferred Stock shall be
convertible into the number of shares of Common Stock which results from
dividing the Conversion Price (as hereinafter defined) in effect at the time
of conversion, or if the holders of Series F Preferred Stock convert prior
to the issuance of the Final EBITDA Certificate (as hereinafter defined),
the Special Conversion Price, into the Investment Value of each share of
Series F Preferred Stock being converted as of the Conversion Date (as
hereinafter defined). The Conversion Price shall be $1.506, subject to
adjustment from time to time as provided below (the "CONVERSION PRICE").
(c) MECHANICS OF CONVERSION. Each holder of Series F Preferred Stock
who desires to convert the same into shares of Common Stock shall surrender
the certificate or certificates therefor, duly endorsed, at the office of
the Corporation or of any transfer agent for the Series F Preferred Stock or
Common Stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state therein
the number of shares of Series F Preferred Stock being converted. Thereupon
the Corporation shall promptly issue and deliver to such holder a
certificate or certificates for the number of shares of Common Stock to
which such holder is entitled. Such conversion shall be deemed to have been
made (i) immediately prior to the close of business on the date of such
surrender of the certificate representing the shares of Series F Preferred
Stock to be converted, or (ii) on the eighth anniversary of the Original
Issue Date in the case of mandatory conversion (such date referred to in
clauses (i) and (ii), the "CONVERSION DATE"), and the Person entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder of such shares of Common Stock
on such date. Any holder of Series F Preferred Stock mandatorily converted
on the eighth anniversary of the Original Issue Date shall be entitled, upon
surrender of the certificate or certificates therefor, duly endorsed at the
office of the Corporation or of any transfer agent for the Series F
Preferred Stock or Common Stock, to promptly receive from the Corporation
certificates representing the shares of Common Stock to which such holder is
entitled.
(d) EBITDA ADJUSTMENT. The Conversion Price shall be adjusted to the
extent that the Corporation's Adjusted EBITDA is less than or more than
$17,000,000. For each $500,000 (and/or fraction thereof) that the
Corporation's Adjusted EBITDA is greater than $17,000,000, the Conversion
Price will be increased by $0.031. For each $500,000 (and/or fraction
thereof) that the Corporation's Adjusted EBITDA is less than $17,000,000,
the Conversion Price will be decreased by $0.031 (and/or fraction thereof).
In no case, however, shall the resulting Conversion Price be less than
$1.351 or more than $1.661. For purposes of the adjustment described in this
clause (d), the Corporation and the Investors shall engage
PricewaterhouseCoopers, LLP ("PWC"), at the Corporation's expense, to
calculate the Adjusted EBITDA of the Corporation and to provide a
certificate (the "EBITDA CERTIFICATE") to the Corporation and each of the
Investors setting forth such calculation. Within 15 days after the issuance
of the Corporation's audited financial statements, PWC shall send a draft of
the EBITDA Certificate (the "DRAFT EBITDA CERTIFICATE") to the Investors and
the Corporation, each of whom shall have 30 days thereafter (the "OBJECTION
PERIOD") to make any objection thereto or suggest any changes in order to
conform the calculation therein to the terms of this Certificate of
Designation. Failure by any party to make any objection or suggest any such
changes within the Objection Period will be deemed to constitute acceptance
of the Draft EBITDA Certificate. The Corporation will use its best efforts
to cause PWC to issue the EBITDA Certificate (the "FINAL EBITDA
CERTIFICATE") as promptly as practicable, but in any event no later than 30
days following the
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expiration of the Objection Period, and the Final EBITDA Certificate shall
be binding on all parties, including without limitation the Corporation and
the Investors and their successors and assigns.
(e) STOCK DIVIDENDS. In case the Corporation after the date hereof
shall pay a dividend or make a distribution to all holders of shares of
Common Stock in shares of Common Stock, then in any such case the Conversion
Price in effect at the opening of business on the day following the record
date for the determination of stockholders entitled to receive such dividend
or distribution shall be reduced to a price obtained by multiplying such
Conversion Price by a fraction of which (x) the numerator shall be the
number of shares of Common Stock outstanding at the close of business on
such record date and (y) the denominator shall be the sum of such number of
shares of Common Stock outstanding and the total number of shares of Common
Stock constituting such dividend or distribution, such reduction to become
effective immediately after the opening of business on the day following
such record date. For purposes of this subsection (e), the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Corporation but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock.
The Corporation will not pay any dividend or make any distribution on shares
of Common Stock held in the treasury of the Corporation.
(f) STOCK SPLITS AND REVERSE SPLITS. In case after the date hereof
outstanding shares of Common Stock shall be subdivided into a greater number
of shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately reduced, and, conversely, in case after
the date hereof outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(g) OPTIONS, RIGHTS, AND WARRANTS. In case the Corporation after the
date hereof shall issue options, rights or warrants to holders of shares of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Common Stock's Fair Market Value on
the record date for the determination of stockholders entitled to receive
such options, rights or warrants, the Conversion Price in effect at the
opening of business on the day following such record date shall be adjusted
to a price obtained by multiplying such Conversion Price by a fraction of
which (x) the numerator shall be the number of shares of Common Stock
outstanding at the close of business on such record date plus the number of
shares of Common Stock that the aggregate offering price of the total number
of shares so to be offered would purchase at the Common Stock's Fair Market
Value and (y) the denominator shall be the number of shares of Common Stock
outstanding at the close of business on such record date plus the number of
additional shares of Common Stock so to be offered for subscription or
purchase, such adjustment to become effective immediately after the opening
of business on the day following such record date. For purposes of this
subsection (g), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation but shall
include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. Options, rights or warrants issued by
the Corporation to all holders of Common Stock entitling the holders thereof
to subscribe for or purchase Equity Securities, which options rights or
warrants (i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, including shares of Common Stock issued upon
exercise of the Series F Preferred Stock, in each case in clauses
(i) through (iii) until the occurrence of a specified event or events (a
"TRIGGER EVENT"), shall for purposes of this subsection (g) not be deemed
issued until the occurrence of the earliest Trigger Event.
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(h) SPECIAL DIVIDENDS. In case the Corporation after the date hereof
shall distribute to all holders of shares of Common Stock evidences of its
indebtedness or assets (excluding any regular periodic cash dividend),
Equity Securities (other than Common Stock) or rights to subscribe
(excluding those referred to in subsection (g) above) for Equity Securities
other than Common Stock, in each such case the Conversion Price in effect
immediately prior to the close of business on the record date for the
determination of stockholders entitled to receive such distribution shall be
adjusted to a price obtained by multiplying such Conversion Price by a
fraction of which (x) the numerator shall be the Common Stock's Fair Market
Value on such record date, less the then-current fair market value as of
such record date (as determined in accordance with Section 4(b)) of the
portion of assets or evidences of indebtedness or Equity Securities or
subscription rights so distributed applicable to one share of Common Stock,
and (y) the denominator shall be the Common Stock's Fair Market Value, such
adjustment to become effective immediately prior to the opening of business
on the day following such record date; PROVIDED, HOWEVER, that no adjustment
shall be made if the Corporation issues or distributes to each holder of
Series F Preferred Stock the subscription rights referred to above that each
holder of Series F Preferred Stock would have been entitled to receive had
the Series F Preferred Stock held by such holder been converted prior to
such record date. The Corporation shall provide any holder of Series F
Preferred Stock, upon receipt of a written request therefor, with any
indenture or other instrument defining the rights of the holders of any
indebtedness, assets, subscription rights or Equity Securities referred to
in this subsection (h). Rights, options or warrants issued by the
Corporation to all holders of Common Stock entitling the holders thereof to
subscribe for or purchase Equity Securities, which rights, options or
warrants (i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, including shares of Common Stock issued upon
exercise of the Series F Preferred Stock, in each case in clauses
(i) through (iii) until the occurrence of a Trigger Event, shall for
purposes of this subsection (h) not be deemed issued until the occurrence of
the earliest Trigger Event.
(i) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In the
event that at any time or from time to time the Common Stock issuable upon
the conversion of the Series F Preferred Stock is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section 7),
then and in any such event each holder of Series F Preferred Stock shall
have the right thereafter to convert such stock into the kind and amount of
stock and other securities and property receivable upon such
recapitalization, reclassification or other change, by holders of the
maximum number of shares of Common Stock into which such shares of Series F
Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further
adjustment as provided herein.
(j) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at
any time or from time to time there is a capital reorganization of the
Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this
Section 7) or a merger or consolidation of the Corporation with or into
another corporation, or the sale of all or substantially all of the
Corporation and its subsidiaries' properties and assets to any other Person,
then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Series F Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series F
Preferred Stock the number of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock
deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 7 with respect to the rights of the holders of the Series F
Preferred Stock after the reorganization, merger, consolidation or sale to
the end that the provisions of this Section 7 (including adjustment of the
appropriate
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Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series F Preferred Stock) shall be applicable after that
event and be as nearly equivalent as may be practicable.
(k) If any event occurs as to which Sections 7(e), 7(f), 7(g), 7(h),
7(i) and 7(j) are not strictly applicable or, if strictly applicable, would
not fairly and adequately protect the conversion rights of the Series F
Preferred Stock in accordance with the essential intent and principles of
such provisions, then there shall be made such adjustments in the
application of such provisions, in accordance with such essential intent and
principles, as shall be reasonably necessary to protect such conversion
rights as aforesaid.
(l) FURTHER ADJUSTMENT. The Conversion Price shall be reduced by $.005
on each of the first eight anniversaries of the Original Issue Date, which
adjustment shall be prorated on a daily basis during each twelve month
period between such anniversaries.
(m) WHEN ADJUSTMENT NOT REQUIRED. If the Corporation shall take a
record of the holders of its Common Stock for purposes of taking any action
that requires an adjustment of the Conversion Price under this Section 7,
and shall, thereafter and before the effective date of such action, legally
abandon its plan to take such action, then thereafter no adjustment shall be
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
(n) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. Except as provided in
Section 7(d), in each case of an adjustment or readjustment of the
Conversion Price or the number of shares of Common Stock or other securities
issuable upon conversion of the Series F Preferred Stock, the Corporation,
at its expense, shall cause independent public accountants of recognized
standing selected by the Corporation (who may be the independent public
accountants then auditing the books of the Corporation) to compute such
adjustment or readjustment in accordance with the provisions hereof and
prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by first class mail, postage prepaid, to each
registered holder of the Series F Preferred Stock at the holder's address as
shown in the Corporation's books; PROVIDED that the Corporation shall be
required to deliver such a certificate to holders of Series F Preferred
Stock in connection with the adjustments required pursuant to Section 7(l)
only (i) once each year, within 45 days following the anniversary of the
Original Issue Date, which will reflect all adjustments made through such
anniversary, and (ii) no later than five days following the setting of any
record date to determine the stockholders of the Corporation entitled to
vote at any meeting of stockholders, which will reflect all adjustments made
through such record date. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based.
(o) NOTICES OF RECORD DATE. In the event of (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock
of the Corporation, any merger or consolidation of the Corporation with or
into any other corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other person or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of Series F Preferred Stock at least
thirty (30) days prior to the record date specified therein, a notice
specifying (1) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend
or distribution, (2) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation
or winding up is expected to become effective, and (3) the date, if any,
that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock
(or other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
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(p) FRACTIONAL SHARES. Fractional shares of Common Stock otherwise
issuable upon conversion of shares of Series F Preferred Stock held by a
single holder shall be aggregated into whole shares and issued to such
holder. Otherwise, no fractional shares of Common Stock shall be issued upon
conversion of the Series F Preferred Stock. Except as provided above, in
lieu of any fractional share to which the holder would otherwise be
entitled, the Corporation shall pay cash equal to the product of such
fraction multiplied by the Common Stock's Fair Market Value on the date of
conversion.
(q) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series F Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series F Preferred Stock;
and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series F Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
(r) NOTICES. Any notice required or permitted by this Section 7 or any
other provision of this Certificate of Designation to be given to a holder
of Series F Preferred Stock or to the Corporation shall be in writing and be
deemed given upon the earlier of actual receipt or three (3) days after the
same has been deposited in the United States mail, by certified or
registered mail, return receipt requested, postage prepaid, and addressed
(i) to each holder of record at the address of such holder appearing on the
books of the Corporation, or (ii) to the Corporation at 7880 Bent Branch
Drive, Suite 150, Irving, Texas 75063, or (iii) to the Corporation or any
holder, at any other address specified in a written notice given to the
other for the giving of notice.
(s) PAYMENT OF TAXES. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series F Preferred Stock, including without
limitation any tax or other charge imposed in connection with any transfer
involved in the issue and delivery of shares of Common Stock in a name other
than that in which the shares of Series F Preferred Stock, so converted were
registered.
(t) NO DILUTION OR IMPAIRMENT. The Corporation shall not amend its
certificate of incorporation or participate in any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action for the purpose of avoiding or seeking to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of the holders of the
Series F Preferred Stock against dilution or other impairment.
Section 8. RESTRICTIONS AND LIMITATIONS. So long as any shares of
Series F Preferred Stock remain outstanding, the Corporation shall not, and
shall not permit any Subsidiary to, without the prior vote or written consent by
the holders of a Majority of the Series F Preferred Stock:
(a) Authorize, create or issue any new class or series of capital stock
or any other securities convertible into equity securities of the
Corporation (other than Common Stock) having a preference over, or being on
parity with, the Series F Preferred Stock with respect to voting, dividends,
redemption, liquidation or dissolution of the Corporation;
(b) Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Series F Preferred Stock;
(c) Increase or decrease the par value of the Series F Preferred Stock;
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(d) Alter or change the powers, preferences or special rights of the
Series F Preferred Stock so as to affect them adversely;
(e) Engage in any transaction described in clauses (c) and (d) of the
definition of Change in Control, provided that, notwithstanding anything to
the contrary herein, the rights of the holders of Series F Preferred Stock
pursuant to this Section 8(e) shall terminate at such time as the aggregate
Investment Value of all the Series F Preferred Stock outstanding is less
than $5 million; or
(f) Declare or pay any dividend (whether in cash or in shares of Common
Stock or any other capital stock of the Corporation) on or declare or make
any other distribution, direct or indirect, on account of the Junior Stock
or set apart any sum for any such purpose.
Section 9. NO REISSUANCE OF SERIES F PREFERRED STOCK. No share or shares
of Series F Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and, upon such event, all
such shares shall resume the status of authorized but unissued shares of
Preferred Stock.
Section 10. MISCELLANEOUS. Dollar amounts herein that appear within
parentheses represent negative numbers. All references in this Agreement to
Sections of or Rules under the Securities Act or the Exchange Act are intended
to include, and shall be deemed to include, references to all successor Sections
and Rules which are intended to replace the Sections and Rules herein
referenced.
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[SIGNATURE PAGE OF CERTIFICATE OF DESIGNATION]
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under penalty of perjury this
day of , 1999.
AEGIS COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By: __________________________________
Name:
Title:
Attest:
By:
- ------------------------------------
Name:
Title:
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APPENDIX E
AMENDED AND RESTATED BYLAWS OF
AEGIS COMMUNICATIONS GROUP, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE. The registered office of the corporation in the
State of Delaware shall be 1209 Orange Street, Wilmington, Delaware 19801.
1.2 PRINCIPAL OFFICE. The principal office of the corporation shall be in
the City of Dallas, County of Dallas, Texas.
1.3 OTHER OFFICES. The corporation may also have offices at such other
places, both within and without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
2.1 TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of meeting or in a duly executed waiver thereof.
2.2 ANNUAL MEETING--ELECTION OF DIRECTORS. An annual meeting of the
stockholders shall be held each year at a time on the third Thursday during the
month of April to be selected by the board of directors, or at such other date
and time as may be selected by the board of directors. If such day is a legal
holiday, then the meeting shall be held on the next secular day following. At
the meeting, the stockholders shall elect directors and transact such other
business as may properly be brought before the meeting.
2.3 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, described by the Act or by the articles of incorporation,
or by these bylaws, may be called by the chairman of the board, if any, the
president or secretary, and shall be called by the chairman of the board, the
president or secretary at the request in writing of a majority of the board of
directors or the holders of twenty-five percent (25%) or more of the shares
entitled to vote at such meeting. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice of the
meeting.
2.4 NOTICES. Written or printed notice of the annual or any special
meeting stating the place, day, and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered to each stockholder of record entitled to vote not less than ten
nor more than fifty days before the date of the meeting, either personally or by
mail, by or at the direction of the chairman of the board, the president, the
secretary or the officer or person calling the meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the stockholder at the address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
2.5 VOTING LIST. The officer or agent who has charge of the stock transfer
books of the corporation shall make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at said
meeting or any adjournment thereof, arranged in alphabetical order, with address
of
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and the number of voting shares held by each. Such list shall be kept on file at
the principal office of the corporation for a period of ten days prior to such
meeting and shall be subject to inspection by any stockholder at any time during
usual business hours. Such list shall also be produced and kept open at the time
and place of the meeting and shall be subject to the inspection of any
stockholder during the whole time of the meeting. The original stock transfer
books shall be prima facie evidence as to who are stockholders entitled to
examine such list or transfer books and to vote at any meeting of stockholders.
2.6 QUORUM. The holders of a majority of the issued and outstanding stock
entitled to vote thereat, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at all meetings of the stockholders for
the transaction of business except as otherwise provided by statute, by the
certificate of incorporation, or by these bylaws. If a quorum is not present or
represented at a meeting of the stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At such adjourned meeting at
which a quorum is present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
2.7 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at any
meeting, the vote of the holders of a majority of the shares having voting
power, present in person or represented by proxy, shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of the statutes or of the certificate of incorporation or of these
bylaws, a different vote is required in which case such express provision shall
govern and control the decision of such question. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
2.8 VOTING. (a) Each outstanding share entitled to vote thereon,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of stockholders, except to the extent that the voting rights
of the shares of any class or series are otherwise specified in the certificate
of incorporation. At any meeting of the stockholders, every stockholder having
the right to vote may vote either in person, or by proxy executed in writing by
the stockholder or by his duly authorized attorney in fact. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy or by written agreement. Each proxy shall be revocable
unless expressly provided therein or by written agreement to be irrevocable and
unless otherwise made irrevocable by law. Each proxy shall be filed with the
secretary of the corporation prior to or at the time of the meeting.
(b) Treasury shares, shares of stock owned by another corporation the
majority of the voting stock of which is owned or controlled by this
corporation, and shares of stock held by this corporation in its fiduciary
capacity shall not be voted, directly or indirectly, at any meeting and
shall not be counted in determining the total number of outstanding shares
at any given time.
(c) Directors shall be elected by plurality vote.
(d) Shares standing in the name of another corporation, domestic or
foreign, may be voted on by such officer, agent, or proxy as the bylaws of
such corporation may authorize or, in the absence of such authorization, as
the board of directors of such corporation may determine.
(e) Shares held by an administrator, guardian or conservator may be
voted by him so long as such shares forming part of an estate are in the
possession and forming a part of the estate being served by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee maybe voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name as trustee.
(f) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted
by such receiver without the transfer thereof into his
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name if authority so to be contained in an appropriate order of the court by
which such receiver was appointed.
(g) A stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the
pledges, and thereafter the pledges shall be entitled to vote the shares so
transferred.
(h) Voting on any question or in any election at a meeting may be by
voice vote or show of hands unless the presiding officer shall order, or the
holders of at least ten percent of the shares entitled to vote shall demand,
that voting be by written ballot.
2.9 RECORD DATE; CLOSING TRANSFER BOOKS. The board of directors may fix in
advance a record date for the purpose of determining stockholders entitled to
notice of or to vote at a meeting of the stockholders, the record date to be not
less than ten (10) no more than sixty (60) days prior to the meeting. In the
absence of action by the board of directors, the date upon which the notice of
the meeting is mailed shall be the record date.
2.10 ACTION WITHOUT MEETING. Any action which may be taken at any annual
or special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
ARTICLE III
DIRECTORS
3.1 MANAGEMENT. The business and affairs of the corporation shall be
managed by the board of directors who may exercise all such powers of the
corporation and do all such lawful acts and things as are not (by statute or by
the articles of incorporation or by these bylaws) directed or required to be
exercised or done by the stockholders.
3.2 NUMBER; QUALIFICATION: ELECTION; TERM. The board of directors shall
consist of not fewer than two nor more than twelve directors as shall be fixed
from time to time by resolution of the board of directors or by vote of the
stockholders. The first board after the adoption of these amended and restated
bylaws shall consist of twelve directors. At the next annual meeting of
stockholders following the occurrence of the First Break Point (as defined in
the Stockholders' Agreement), the number of directors on the board of directors
shall be reduced from twelve members to nine members. Directors need not be
residents of the State of Delaware or stockholders of the corporation. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Bylaws 3.3, 3.4 and 3.6. Each director shall hold office until his
successor shall be elected and shall qualify.
3.3 MAJOR DECISIONS. (a) Any Major Decision (as defined below) shall be
approved by the affirmative vote of not less than three fourths (or in the event
that the number of directors constituting the entire board is reduced to nine,
by the affirmative vote of not less than two thirds) of the directors then
serving on the board.
(b) The term "MAJOR DECISION" means any decision by the board with
respect to any of the following matters (but, for the avoidance of doubt,
shall exclude any Board action in connection with either (w) an optional
redemption pursuant to Section 5(b) of the Series F Preferred Stock
Certificate of Designation of the Company, (x) the repayment of the
Promissory Note by and among IQI, Inc. Edward Blank, and The Edward Blank
1995 Grantor Retained Annuity Trust dated April 16, 1998 in the original
aggregate principal amount of $1.0 million, (y) the repayment of the
Promissory Note by and between IQI, Inc. and Thayer Equity Investors III,
L.P. dated
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April 16, 1998 in the original principal amount of $2.0 million, or (z) the
redemption or repurchase of any or all of the Series D Preferred Stock or
the Series E Preferred Stock):
(i) issuing any shares or any security, including any indebtedness,
convertible into shares, or any other form of equity in the corporation
or any subsidiary of the corporation, other than (i) granting options to
directors or employees of the corporation pursuant to any incentive or
other benefit plan adopted by the board, (ii) issuing shares of common
stock pursuant to the exercise of such options, and (iii) issuing shares
of common stock or any security, including any indebtedness, convertible
into shares of common stock, or any other form of equity in the
corporation, in one or more offerings (excluding any issuances referred
to in (i) or (ii) above) where the aggregate purchase price for all such
issuances does not exceed $500,000, provided that any such issuance shall
be sold at Market Value (as hereinafter defined);
(ii) adoption of any stock-based employee benefit plan;
(iii) incurring indebtedness or entering into guarantees for borrowed
money (excluding trade payables incurred in the ordinary course of
business) in excess of $2,500,000 in any twelve consecutive month period;
(iv) selling, leasing, pledging or granting a security interest or
encumbrance in all or substantially all of the corporation's or any
subsidiary of the corporation's assets, except in connection with the
incurrence of indebtedness for borrowed money that does not involve a
Major Decision under the preceding paragraph;
(v) acquiring (whether through an asset purchase, merger, equity
purchase or otherwise) any assets (excluding acquisitions of raw
materials and supplies in the ordinary course of business) having a
value, individually or in the aggregate for any series of related
transactions, in excess of $2,000,000;
(vi) selling or otherwise disposing of any assets (excluding sales or
other dispositions of inventory in the ordinary course of business)
having a value, individually or in the aggregate for any series of
related transactions, in excess of $2,000,000;
(vii) amending these bylaws or the articles of incorporation of the
corporation;
(viii) any Change in Control Transaction (as hereinafter defined);
(ix) executing or delivering any assignment for the benefit of
creditors of the corporation;
(x) filing any voluntary petition in bankruptcy or receivership with
respect to the corporation; or
(xi) taking any action while there is a vacancy on the board of
directors, including without limitation the filling of such vacancy.
3.4 CHANGE IN NUMBER. Subject to Bylaw 3.3(xi), the number of directors
may be increased or decreased from time to time by resolution of the board of
directors at any meeting, but no decrease shall have the effect of shortening
the term of any incumbent director.
3.5 REMOVAL. Any director may be removed with or without cause at any
special or annual meeting of stockholders, by the affirmative vote of a majority
in number of shares of the stockholders present in person or by proxy at such
meeting and entitled to vote for the election of such director if notice of
intention to act upon such matter shall have been given in the notice calling
such meeting.
3.6 VACANCIES. Any vacancy occurring in the board of directors (by death,
resignation, removal or otherwise) may be filled by affirmative vote of the
directors then in office pursuant to Bylaw 3.3(xi). A director elected to fill
such a vacancy shall be elected for the unexpired term of his predecessor in
office.
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3.7 COMPENSATION. By resolution of the board of directors, the directors
may be paid their expenses, if any, of attendance at each meeting of the board
of directors and may be paid a fixed sum of attendance at each meeting of the
board of directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may,
by resolution of the board of directors, be allowed like compensation for
attending committee meetings.
3.8 MEETINGS OF THE BOARD OF DIRECTORS.
(a) PLACE. Meetings of the board of directors of the corporation,
regular or special, may be held either within or without the State of
Delaware.
(b) REGULAR MEETINGS. Regular meetings of the board of directors may
be held without notice at such time and at such place as shall from time to
time be determined by the board by resolution.
(c) SPECIAL MEETINGS. Special meetings of the board of directors may
be called by or at the request of the chairman of the board, the president
or the secretary and shall be called by the secretary on the written request
of two of the incumbent directors. The person or persons authorized to call
special meetings of the board of directors may fix the place for holding any
special meeting of the board of directors called by them. Notice of any
special meeting shall be given at least twenty-four (24) hours previous
thereto if given either personally (including written notice delivered
personally or notice by telephone) or by fax or telegram, and at least
seventy-two (72) hours previous thereto if given by written notice mailed to
each director at the address of his business and residence. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the board of directors need be specified in the notice or waiver
of notice of such meeting. If mailed, the notice shall be deemed to be
delivered when deposited in the United States mail addressed, in the
above-specified manner, with postage thereon prepaid. If notice be given by
fax or telegram, such notice shall be deemed to be delivered when the fax or
telegram is delivered to the telegraph company. Any director may waive
notice of any meeting, as provided in By-law 4.2.
(d) QUORUM: MAJORITY VOTE. At all meetings of the board of directors a
majority of the number of directors fixed by these bylaws shall constitute a
quorum for the transaction of business. The act of a majority of the
directors present at any meeting at which a quorum is present shall be the
act of the board of directors, except as otherwise specifically provided by
statute or by the certificate of incorporation or by these bylaws.
(e) PROCEDURE. The board of directors shall keep regular minutes of
its proceedings. The minutes shall be placed in the minute book of the
corporation.
3.9 ACTION WITHOUT MEETING. Any action required or permitted to be taken
at a meeting of the board of directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all the
members of the board of directors. Such consent shall have the same force and
effect as a unanimous vote at a meeting. The signed consent, or a signed copy,
shall be placed in the minute book.
3.10 TELEPHONE AND COMMUNICATION EQUIPMENT MEETINGS. Stockholders, members
of the board of directors, and members of any committee of the board of
directors may participate in meetings by means of conference telephone or other
communications equipment to the full extent permissible by Section 141(i) of the
General Corporation Law of the State of Delaware.
ARTICLE IV
NOTICES
4.1 METHOD. Whenever by statute or the certificate of incorporation or
these bylaws, notice is required to be given to director or stockholder, and no
provision is made as to how the notice shall be given, it shall not be construed
to mean personal notice, but any such notice may be given (a) in writing, by
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mail, postage prepaid, addressed to the director or stockholder at the address
appearing on the books of the corporation, or (b) in any other method permitted
by law. Any notice required or permitted to be given by mail shall be deemed
given at the time when the same is thus deposited in the United States mails.
4.2 WAIVER. Whenever, by statute or the articles of incorporation or these
bylaws, notice is required to be given to a stockholder or director, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated in such notice, shall be equivalent to
the giving of such notice. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE V
COMMITTEES OF THE BOARD OF DIRECTORS
5.1 DESIGNATION. The board of directors may by resolution of a majority of
the whole board, designate an executive committee, and one or more other
committees including an audit committee, a compensation committee, and any such
other special committees as the board shall deem advisable.
5.2 NUMBER, QUALIFICATION; TERM. Each committee shall consist of one or
more directors who will serve at the pleasure of the board of directors. Each
committee of the board shall be constituted so that the number of Questor
Designees (as such term is defined in the Stockholders' Agreement) and Existing
Stockholder Designees (as such term is defined in the Stockholders' Agreement)
on any such committee is as nearly as possible in the same proportion as the
number of Questor Designees and Existing Stockholder Designees on the entire
board. The compensation committee, if any, may include the chief accounting and
financial officer of the corporation provided a majority of the committee are
not officers or full-time employees of the corporation.
5.3 AUTHORITY OF COMMITTEES.
(a) THE EXECUTIVE COMMITTEE. The executive committee, to the extent
provided in such resolution, shall have and may exercise all of the
authority of the board of directors in the management of the business and
affairs of the corporation, except where action of the full board of
directors is required by statute, the certificate of incorporation or these
bylaws, and shall have power to authorize the seal of the corporation to be
affixed to all papers which may require it. Without limiting the general
authority of the executive committee, it shall have the power subject to
Bylaw 3.3:
(1) to appoint officers and agents of the corporation and determine
their salaries (subject to recommendations of the compensation committee,
if any).
(2) to borrow money, and issue bonds, notes or other obligations and
evidences of indebtedness therefor.
(3) to authorize the corporate seal to be affixed to documents of
the corporation.
(4) to determine questions of general policy with regard to the
business of the corporation.
(5) to make recommendations as to declaration of dividends.
(b) AUDIT COMMITTEE. The audit committee, if any, shall nominate the
independent public accountants to report on the financial statements of the
corporation, and shall have such other powers, duties and authority as shall
be set forth in the resolutions of the board of directors appointing the
committee.
(c) COMPENSATION COMMITTEE. The compensation committee, if any, shall
have the responsibility of reviewing the remuneration-of the officers and
key employees of the corporation including stock
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option and stock purchase rights and such other powers, duties and authority
as shall be set forth in the resolutions of the board of directors
appointing the committee.
(d) OTHER COMMITTEES. Any other committee or committees appointed by
the directors shall have and may exercise such powers of the board of
directors in the management of the business and affairs of the corporation
as shall be provided in the resolution(s) creating the committee. Such
committee or committees shall have such name or names as may be determined
from time to time by resolution of the board of directors.
5.4 CHANGE IN NUMBER. Subject to Bylaw 5.2, the number of members of any
committee may be increased or decreased from time to time by resolution adopted
by a majority of the whole board of directors.
5.5 REMOVAL. Subject to Bylaw 5.2, any member of a committee may be
removed by the board of directors by the affirmative vote of a majority of the
whole board, whenever in its judgment the best interests of the corporation will
be served thereby.
5.6 VACANCIES. A vacancy occurring in any committee (by death,
resignation, removal or otherwise) may be filled by the board of directors in
the manner provided for original designation in Bylaw 5.2.
5.7 MEETINGS. Time, place and notice (if any) of executive committee
meetings shall be determined by the committee.
5.8 QUORUM; MAJORITY VOTE. At meetings of each committee, all members
designated by the board of directors shall constitute a quorum for the
transaction of business. The act of a majority of the members present at any
meeting at which a quorum is present shall be the act of the committee, except
as otherwise specifically provided by statute or by the articles of
incorporation or by these bylaws. If a quorum is not present at a meeting of the
committee, the members present thereat may adjourn the meeting from time to
time, without notice other than an announcement at the meeting, until a quorum
is present.
5.9 COMPENSATION. See Bylaw 3.7.
5.10 PROCEDURE. Each committee shall keep regular minutes of its
proceedings and report the same to the board of directors when required. The
minutes of the proceedings of each committee shall be placed in the minute book
of the corporation.
5.11 ACTION WITHOUT MEETING. Any action required or permitted to be taken
at a meeting of any committee may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all the members of the
committee. Such consent shall have the same force and effect as a unanimous vote
at a meeting. The signed consent, or a signed copy, shall be placed in the
minute book.
5.12 TELEPHONE AND COMMUNICATION. Meetings of committees may be held by
telephone as provided by Bylaw 3.10.
5.13 RESPONSIBILITY. The designation of a committee and the delegation of
authority to it shall not operate to relieve the board of directors, or any
member thereof, of any responsibility imposed upon it or him by law.
ARTICLE VI
OFFICERS AND AGENTS
6.1 NUMBER: QUALIFICATION; ELECTION: TERM.
(a) The corporation shall have:
(1) A president, a vice president, a secretary and a treasurer, and
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(2) Such other officers (including a chairman of the board, an
executive vice president and additional vice presidents) and assistant
officers and agents as the board of directors may deem necessary.
(b) Officers named in Bylaw 6.1(a)(1) shall be elected by the board of
directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Bylaw 6. l(a)(2) may be elected by the
board at any meeting.
(c) Unless otherwise specified by the board at the time of election or
appointment, or in an employment contract approved by the board, each
officer's and agent's term shall end at the first meeting of directors after
the next annual meeting of stockholders. He shall serve until the end of his
term or, if earlier, his death, resignation, or removal.
(d) Any two or more offices may be held by the same person.
6.2 REMOVAL. Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
6.3 VACANCIES. Any vacancy occurring in any office of the corporation (by
death, resignation, removal or otherwise) may be filed by the board of
directors.
6.4 AUTHORITY. Officers and agents shall have such authority and perform
such duties in the management of the corporation as are provided in these bylaws
or as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
6.5 COMPENSATION. The compensation of officers and agents shall be fixed
from time to time by the board of directors.
6.6 CHAIRMAN OF THE BOARD. If there be a chairman of the board of
directors, he shall be chosen from among the directors. He shall have the power
to call special meetings of the stockholders and of the directors for any
purpose or purposes, and he shall preside at all meetings of the stockholders
and of the board of directors, unless he shall be absent or unless he shall, at
his option, designate the president to preside in his stead at some particular
meeting. The chairman of the board shall have all of the powers granted by the
bylaws to the president including the power to make and sign contracts and
agreements in the name and on behalf of the corporation. He shall, in general,
have supervisory power over the president, the other officers and the business
activities of the corporation, subject to the approval or review of the board of
directors.
6.7 PRESIDENT. If there be a chairman of the board of directors, the
powers and duties of the president shall be subject to the powers and duties of
the chairman of the board of directors. If there be no chairman of the board,
the president shall have all the powers and duties provided for in Bylaw 6.6 as
well as those provided in this Bylaw 6.7. The president, who need not be chosen
from among the directors, shall, subject to the powers conferred upon the
chairman of the board under Bylaw 6.6 of this Article, be the chief executive
officer of the corporation; preside at all meetings of the stockholders and the
board of directors, shall have general and active management of the business and
affairs of the corporation, and shall see that all orders and resolutions of the
board are carried into effect. He shall perform such other duties and have such
other authority and powers as the board of directors may from time to time
prescribe.
6.8 EXECUTIVE VICE PRESIDENT. If there be an executive vice president, he
shall be the ranking vice president and shall be the chief operating officer of
the corporation unless the board of directors shall designate another officer as
chief operating officer. In the absence or disability of the president, the
executive vice president shall perform all the duties, exercise the powers and
assume all responsibilities of the president. He shall also generally assist the
president and exercise any other powers and perform such other duties as are
delegated to him by the president and as the board of directors shall prescribe.
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6.9 VICE PRESIDENTS. The vice presidents in the order of their seniority,
unless otherwise determined by the board of directors, shall, in the absence or
disability of the president, perform the duties and have the authority and
powers as the board of directors may from time to time prescribe or as the
president may from time to time delegate.
6.10 SECRETARY.
(a) The secretary shall attend all meetings of the board of directors
and all meetings of the stockholders and record all votes and the minutes of
all proceedings in a book to be kept for that purpose and shall perform like
duties for the executive committee when required.
(b) He shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the board of directors.
(c) He shall keep in safe custody the seal of the corporation and, when
authorized by the board of directors or the executive committee, affix the
same to any instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the treasurer or an
assistant secretary, which may be facsimile.
(d) He shall be under the supervision of the president. He shall perform
such other duties and have such other authority and powers as the board of
directors may from time to time prescribe or as the president may from time
to time delegate.
6.11 ASSISTANT SECRETARIES. The assistant secretaries in the order of
their seniority, unless otherwise determined by the board of directors, shall,
in the absence or disability of the secretary, perform the duties and have the
authority and exercise the powers of the secretary. They shall perform such
other duties and have such other powers as the board of directors may from time
to time prescribe or as the president may from time to time delegate.
6.12 TREASURER.
(a) The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other
valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the board of directors.
(b) He shall disburse the funds of the corporation as may be ordered by
the board of directors, taking proper vouchers for such disbursements, and
shall render to the president and directors, at the regular meetings of the
board, or whenever they may require it, an account of all his transactions
as treasurer and of the financial condition of the corporation.
(c) He shall perform such other duties and have such other authority
and powers as the board of directors may from time to time prescribe or as
the president may from time to time delegate.
6.13 ASSISTANT TREASURERS. The assistant treasurers in the order of their
seniority, unless otherwise determined by the board of directors, shall, in the
absence or disability of the treasurer, perform the duties and have the
authority and exercise the powers of the treasurer. They shall perform such
other -duties and have such other powers as the board of directors may from time
to time prescribe or the president may from time to time delegate.
6.14 BONDING OF OFFICERS. If required by the board of directors, all or
certain officers shall give the corporation a bond in such form, in such sum,
and with such surety or sureties as shall be satisfactory to the board for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
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ARTICLE VII
CERTIFICATES AND STOCKHOLDERS
7.1 CERTIFICATES. The corporation shall deliver certificates representing
all shares to which stockholders are entitled. Certificates shall be
consecutively numbered and shall be entered in the books of the corporation as
they are issued. Each certificate shall state on the face thereof the holder's
name, the number and class of shares, the par value of shares or a statement
that such shares are without par value, and such other matters as may be
required by law. They shall be signed by the president or a vice president and
such other officer or officers as the board of directors shall designate, and
may be sealed with the seal of the corporation or a facsimile thereof. The
signature of any such officer may be facsimile. In case any officer who has
signed, or whose facsimile signature has been used on such certificate, shall
cease to be such officer of the corporation before such certificate has been
delivered by the corporation or its agents, such certificate may nevertheless be
issued and delivered with the same effect as if he were still such officer at
the date of issue.
7.2 PAYMENT FOR SHARES.
(1) KIND. The consideration for the issuance of shares shall consist
of money paid, labor done (including services actually performed for the
corporation), or property (tangible or intangible) actually received.
Neither promissory notes nor the promise of future services shall constitute
payment for shares.
(2) VALUATION. In the absence of fraud in the transaction, the
judgment of the board of directors as to the value of consideration received
shall be conclusive.
(3) EFFECT. When consideration, as fixed by law, has been paid, the
shares shall be deemed to have been issued and shall be considered fully
paid and non-assessable.
(4) ALLOCATION OF CONSIDERATION. The consideration received for shares
shall be allocated by the board of directors, in accordance with law,
between stated capital and capital surplus accounts.
7.3 SUBSCRIPTIONS. Unless otherwise provided in the subscription
agreement, subscription of shares, whether made before or after organization of
the corporation, shall be paid in full at such time or in such installments and
at such times as shall be determined by the board of directors. Any call made by
the board of directors for payment on subscriptions shall be uniform as to all
shares of the same series, as the case may be. In case of default in the payment
on any installment or call when payment is due, the corporation may proceed to
collect the amount due in the same manner as any debt due to the corporation.
7.4 LIEN. For any indebtedness of a stockholder to the corporation, the
corporation shall have a first and prior lien on all shares of its stock owned
by him and on all dividends or other distributions declared thereon.
7.5 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation shall issue a
new certificate in place of any certificate for shares previously issued if the
registered owner of the certificate:
(a) CLAIM. Makes proof in affidavit form that it has been lost or
wrongfully taken or destroyed; and
(b) TIMELY REQUEST. Requests the issuance of a new certificate before
the corporation has notice that the certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
and
(c) BOND. Gives a bond in such form, and with such surety or sureties,
with fixed or open penalty, as the corporation may direct, to indemnify the
corporation (and its transfer agent and registrar, if any) against any claim
that may be made on account of the alleged loss, destruction, or theft of
the certificate; and
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(d) OTHER REQUIREMENT. Satisfies any other reasonable requirements
imposed by the corporation. When a certificate has been lost, apparently
destroyed or wrongfully taken, and the holder of record fails to notify the
corporation within a reasonable time after he has notice of it, and the
corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the corporation for the transfer or
for a new certificate.
7.6 REGISTRATION OF TRANSFER. The corporation shall register the transfer
of a certificate for shares presented to it for transfer if:
(a) ENDORSEMENT. The certificate is properly endorsed by the
registered owner or by his duly authorized attorney; and
(b) GUARANTY AND EFFECTIVENESS OF SIGNATURE. The signature of such
person has been guaranteed by a national banking association or member of
the New York Stock Exchange, and reasonable assurance is given that such
endorsements are effective; and
(c) ADVERSE CLAIMS. The corporation has no notice of an adverse claim
or has discharged any duty to inquire into such a claim; and
(d) COLLECTION OF TAXES. Any applicable law relating to the collection
of taxes has been complied with; and
(e) STOP TRANSFER ORDERS AND LEGENDS. The corporation has not issued a
stop-transfer order or placed a legend on such certificate restricting
transfer; or, if legended, the registered owner has complied with the
conditions for transfer provided for in the legend.
7.7 REGISTERED OWNER. Prior to due presentment for registration of
transfer of a certificate for shares, the corporation may treat the registered
owner as the person exclusively entitled to vote, to receive notices and
otherwise to exercise all the rights and powers of a stockholder.
ARTICLE VIII
INDEMNIFICATION; INSURANCE
8.1 PERSONS. The corporation shall indemnify, to the extent provided in
Bylaws 8.1, 8.2 and 8.4:
(a) Any person who is or was director, officer, agent or employee of
the corporation, and
(b) Any person who serves or served at the corporation's request as a
director, officer, agent, employee, partner or trustee of another
corporation or of a partnership, joint venture, trust or other enterprise.
8.2 EXTENT. Derivative Suits. In case of a suit by or in the right of the
corporation named in Bylaw 8.1 by reason of his holding a position named in
Bylaw 8.1, the corporation shall indemnify him if he satisfies the standard in
Bylaw 8.3 for expenses (including attorney's fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the suit.
8.3 STANDARD--DERIVATIVE SUITS. In case of a suit by or in the right of
the corporation, a person named in Bylaw 8.1 shall be indemnified only if:
(a) He is successful on the merits of otherwise; or
(b) He acted in good faith in the transaction which is the subject of
the suit, and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has been
adjudged liable for negligence or misconduct in the performance of his duty
to the corporation unless, and only
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to the extent that, the court in which the suit was brought shall determine
upon application that, despite the adjudication but in view of all the
circumstances, such person is fairly and reasonably entitled to indemnity
for such expenses as the court shall deem proper.
8.4 EXTENT--NONDERIVATIVE SUITS. In case of a suit, action or proceeding
(whether civil, criminal, administrative or investigative)--other than a suit by
or in the right of the corporation--together thereafter referred to as a
nonderivative suit, against a person named in Bylaw 8.1 by reason of his holding
a position named in Bylaw 8.1, the corporation shall indemnify him if he
satisfies the standard in Bylaw 8.5 for amounts actually and reasonably incurred
by him in connection with the defense or settlement of the nonderivative suit
as:
(a) Expenses (including attorney's fees);
(b) Amount paid in settlement;
(c) Judgment; and
(d) Fines.
8.5 STANDARD--NONDERIVATIVE SUITS. In case of non-derivative suit, a
person named in Bylaw 8.1 shall be indemnified only if:
(a) He is successful on the merits or otherwise; or
(b) He acted in good faith in the transaction which is the subject of
the nonderivative suit, and in a manner reasonably believed to be in, or not
opposed to, the best interest of the corporation and, with respect to any
criminal action or proceeding, he has no reason to believe his conduct was
unlawful The termination of nonderivative suit by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent
shall not, of itself, create a presumption that the person failed to satisfy
the standard of this Bylaw 8.5(b).
8.6 DETERMINATION THAT STANDARD HAS BEEN MET. A determination that the
standard of Bylaws 8.3 or 8.5(b) (second sentence), the determination may be
made by:
(1) A majority of the directors of the corporation (whether or not a
quorum) who were not parties to the action, suit or proceeding, or;
(2) Independent legal counsel in a written opinion; or
(3) The stockholders of the corporation.
8.7 PRORATION. Anyone making a determination under Bylaw 8.6 may determine
that a person has met the standard as to some matters but not as to others, and
may reasonably prorate amounts to be indemnified.
8.8 ADVANCE PAYMENT. The corporation may pay in advance any expenses
(including attorney's fees) which may become subject to indemnification under
Bylaws 8.1-8.8 if (a)The board of directors authorizes the specific payment; and
(b) The person receiving the payment undertakes in writing to repay unless it is
ultimately determined that he is entitled to indemnification by the corporation
under Bylaws 8.1-8.8.
8.9 NONEXCLUSIVE. The indemnification provided by Bylaws 8.1-8.8 shall not
be exclusive of any other rights to which a person may be entitled by law,
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
8.10 CONTINUATION. The indemnification and advance payment provided by
Bylaws 8.1-8.8 shall continue as to a person who has ceased to hold a position
named in Bylaw 8.1 and shall inure to his heirs, executors and administrators.
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8.11 INSURANCE. The corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in Bylaw 8.1,
against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the corporation would have power to indemnify
him against such liability under Bylaws 8.1-8.8.
8.12 REPORTS. Indemnification payments, advance payments and insurance
payments made under Bylaws 8.1-.11 shall be reported in writing to the
stockholders of the corporation with the next notice of annual meeting.
ARTICLE IX
GENERAL PROVISIONS
9.1 DIVIDENDS AND RESERVES.
(a) DECLARATION AND PAYMENT. Subject to statute and the certificate of
incorporation, dividends may be declared by the board of directors at any
regular or special meeting and may be paid in cash, in property, or in
shares of the corporation. Subject to Bylaw 3.3, the declaration and payment
shall be at the discretion of the board of directors.
(b) RECORD DATE. The board of directors may fix in advance a record
date for the purpose of determining stockholders entitled to receive payment
of any dividend, the record date to be not more than fifty days prior to the
payment date of such dividend, or the board of directors may close the stock
transfer books for such purpose for a period of not more than fifty days
prior to the payment date of such dividend. In the absence of any action by
the board of directors, the date upon which the board of directors adopts
the resolution declaring the dividend shall be the record date.
(c) RESERVES. By resolution the board of directors may create such
reserve or reserves out of the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide
for contingencies, or to equalize dividends, or to repair or maintain any
property of the corporation, or for any other purpose they think beneficial
to the corporation. The directors may modify or abolish any such reserve in
the manner in which it was created.
9.2 BOOKS AND RECORDS. The corporation shall keep correct and complete
books and records of account and shall keep minutes of the, proceedings of its
stockholders and board of directors, and shall keep at its registered office or
principal place of business, or at the office of its transfer agent, agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
9.3 ANNUAL STATEMENT. The board of directors shall mail to each
stockholder of record, at least ten days before each annual meeting a full and
clear statement of the business and condition of the corporation, including a
reasonably detailed balance sheet, income statement, and surplus statement, all
prepared in conformity with generally accepted accounting principles applied on
a consistent basis.
9.4 CHECKS AND NOTES. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
9.5 FISCAL YEAR. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
9.6 SEAL. The corporation seal (of which there may be one or more
exemplars) shall contain the name of the corporation and the name of the state
of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it, or otherwise.
9.7 RESIGNATION. Any director, officer or agent may resign by giving
written notice to the president or the secretary. The resignation shall take
effect at the time specified therein, or immediately if no time is
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specified therein. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
9.8 AMENDMENT OF BYLAWS. These Bylaws may be altered, amended, or repealed
at any meeting of the board of directors at which a quorum is present, in
accordance with Bylaw 3.3, provided notice of the proposed alteration,
amendment, or repeal is contained in the notice of such meeting.
9.9 CONSTRUCTION. Whenever the context so requires, the masculine shall
include the feminine and neuter, and the singular shall include the plural and
conversely.
If any portion of these bylaws shall be invalid or inoperative, then, so far
as is reasonable and possible:
(a) The remainder of these Bylaws shall be considered valid and
operative.
(b) Effect shall be given to the intent manifested by the portion held
invalid or inoperative.
9.10 TABLE OF CONTENTS; HEADINGS. The table of contents and headings are
for organization, convenience and clarity. In interpreting these Bylaws, they
shall be subordinated in importance to the other written material.
9.11 CERTAIN DEFINITIONS.
CHANGE IN CONTROL TRANSACTION: any of the following:
(a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the
Corporation, or any of its Subsidiaries or any Investor or Excluded Group
(an "ACQUIRING PERSON") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the
combined voting power or economic interests of the then outstanding voting
securities of the corporation entitled to vote generally in the election of
directors; provided, however, that any transfer from any Investor or
Excluded Group will not result in a Change in Control if such transfer was
part of one or a series of related transactions the effect of which, absent
the transfer to such Acquiring Person by the Investor or Excluded Group,
would not have resulted in the acquisition by such Acquiring Person of 35%
or more of the combined voting power or economic interests of the then
outstanding voting securities; or
(b) the individuals who at the beginning of any 12 consecutive month
period following the Closing constituted a majority of the directors of the
corporation (the "INCUMBENT MAJORITY") cease for any reason to constitute at
least a majority of such directors; provided that (i) any individual
becoming a director whose election, or nomination for election by the
corporation's stockholders pursuant to the Stockholders Agreement, was
approved by a vote of the stockholders having the right to designate such
director pursuant to the Stockholders Agreement and (ii) any director whose
election to the Board or whose nomination for election by the stockholders
of the corporation was approved by the Incumbent Majority, shall, in each
such case, be considered as though such individual were a member of the
Incumbent Majority, but excluding, as a member of the Incumbent Majority,
any such individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of the
directors of the corporation (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) and further excluding any
person who is an affiliate or associate of an Acquiring Person having or
proposing to acquire beneficial ownership of 25% or more of the combined
voting power of the then outstanding voting securities of the corporation
entitled to vote generally in the election of directors; or
(c) the approval by the stockholders of the corporation of a
reorganization, merger or consolidation, in each case, with respect to which
all or substantially all of the individuals and entities who were the
respective beneficial owners of the voting securities of the corporation
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly or indirectly, more than 51% of the combined voting power of
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the then outstanding voting securities entitled to vote generally in the
election of directors of the corporation resulting from such reorganization,
merger or consolidation; or
(d) the sale or other disposition of assets representing 50% or more of
the assets of the corporation and its subsidiaries in one transaction or
series of related transactions.
EXCLUDED GROUP: a "group" (as such term is used in Rule 13d-5 of the
Exchange Act) that includes one or more of the Investors, including, without
limitation, for the purpose of this definition only, any party to the
Stockholder' Agreement.
INVESTOR: Questor or Thayer or their respective Affiliates.
MARKET VALUE: shall mean, as of any date: (i) if any equity securities are
listed on a national securities exchange, the average of the closing prices as
reported for composite transactions during the 30 consecutive trading days
preceding the trading day immediately prior to such date or, if no sale occurred
on a trading day, then the mean between the closing bid and asked prices on such
exchange on such trading day; (ii) if any equity securities are traded on the
Nasdaq National Market ("NMM"), the average of the closing prices as reported on
the NMM during the 30 consecutive trading days preceding the trading day
immediately prior to such date or, if no sale occurred on a trading day, then
the mean between the highest bid and lowest asked prices as of the close of
business on such trading day, as reported on the NMM; (iii) if any equity
securities are not traded on a national securities exchange or the NMM but are
otherwise traded over-the-counter, the arithmetic average (for consecutive
trading days) of the mean between the highest bid and lowest asked prices as of
the close of business during the 30 consecutive trading days preceding the
trading day immediately prior to such date as quoted on the National Association
of Securities Dealers Automated Quotation system or an equivalent generally
accepted reporting service; or (iv) if there is no active market for any equity
securities, the market value thereof as mutually agreed by the corporation and a
majority in interest of the stockholders.
STOCKHOLDERS AGREEMENT: the Stockholders Agreement, dated as of [ ], 1999,
among the corporation, Questor Partners Fund II, L.P. ("FUND II"), Questor
Side-by-Side Partners II, L.P. (the "SIDE-BY-SIDE FUND"), Questor Side-by-Side
Partners II 3(c)(1), L.P. (the "3(C)(1) FUND" and together with Fund II and the
Side-by-Side Fund, "QUESTOR"), and Thayer Equity Investors III, L.P. ("THAYER
EQUITY") and TC Co-Investors, LLC ("TC CO-INVESTORS" and, together with Thayer
Equity, "THAYER").
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APPENDIX G
STOCKHOLDERS AGREEMENT
AEGIS COMMUNICATIONS GROUP, INC.
DATED AS OF [ ], 1999
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Sales to Third Parties.......................................................................................... G-1
1.1 Sales to Third Parties........................................................................ G-1
1.2 Right of First Offer.......................................................................... G-1
1.3 Involuntary Transfers......................................................................... G-2
2. Tag-Along Rights................................................................................................ G-2
3. Election of Directors........................................................................................... G-3
3.1 Board Make-up................................................................................. G-3
3.2 Irrevocable Proxy............................................................................. G-3
3.3 Major Decisions............................................................................... G-3
4. Stock Certificate Legend........................................................................................ G-5
5. Covenants; Representations and Warranties....................................................................... G-5
5.1 No Other Arrangements or Agreements........................................................... G-5
5.2 Additional Representations and Warranties..................................................... G-6
6. Amendment and Modification...................................................................................... G-6
7. Parties......................................................................................................... G-6
7.1 Assignment by the Company..................................................................... G-6
7.2 Assignment Generally.......................................................................... G-6
7.3 Termination................................................................................... G-7
7.4 Agreements to Be Bound........................................................................ G-7
8. Recapitalizations, Exchanges, etc. ............................................................................. G-7
9. Further Assurances.............................................................................................. G-7
10. Governing Law.................................................................................................. G-7
11. Invalidity of Provision........................................................................................ G-7
12. Waiver......................................................................................................... G-7
13. Notices........................................................................................................ G-8
14. Headings; Execution in Counterpart............................................................................. G-9
15. Counterparts................................................................................................... G-9
16. Entire Agreement............................................................................................... G-9
17. Injunctive Relief.............................................................................................. G-9
18. Miscellaneous.................................................................................................. G-9
19. Defined Terms.................................................................................................. G-9
</TABLE>
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STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of [ ], 1999, among Aegis
Communications Group, Inc., a Delaware corporation (the "COMPANY"), Questor
Partners Fund II, L.P., a Delaware limited partnership ("FUND II"), Questor
Side-by-Side Partners II, L.P., a Delaware limited partnership (the "SIDE-
BY-SIDE FUND"), Questor Side-by-Side Partners II 3(c)(1), L.P., a Delaware
limited partnership (the "3(C)(1) FUND" and together with Fund II and the
Side-by-Side Fund, "QUESTOR"), and Thayer Equity Investors III, L.P., a Delaware
limited partnership ("THAYER EQUITY") and TC Co-Investors, LLC, a Delaware
limited liability company ("TC CO-INVESTORS" and, together with Thayer Equity,
"THAYER" or "EXISTING STOCKHOLDERS"). The Existing Stockholders and Questor are
herein referred to collectively as the "STOCKHOLDERS." Capitalized terms used
herein without definition are defined in Section 18.
The parties hereto agree as follows:
1. SALES TO THIRD PARTIES.
1.1 SALES TO THIRD PARTIES. Any Stockholder may Transfer all or a portion
of its Equity Securities to a third party, provided that such Transfer is made
in compliance with the provisions of Section 1.2 (Right of First Offer), Section
2 (Tag-Along Rights) and Section 7.4 (Agreements to Be Bound). Any Stockholder
may Transfer all or a portion of its Equity Securities to an Affiliate, provided
that such Transfer is made in compliance with Section 7.4 (Agreements to Be
Bound). For the purposes of Sections 1.2 and 2, a Transfer to a "third party"
shall not include a Transfer to any Existing Stockholder Assignee or Questor
Assignee or a Transfer in a Public Sale.
1.2 RIGHT OF FIRST OFFER. (a) PROCEDURE. If any Stockholder (the "SELLING
STOCKHOLDER") desires to Transfer any Equity Securities (other than any
Transfers referred to in the final sentence of Section 1.1), then prior to
Transferring such Equity Securities to any third party or parties, the Selling
Stockholder shall deliver to each of the other Stockholders a letter (the "SALE
NOTICE") signed by it setting forth:
(i) the number of Equity Securities such Selling Stockholder wishes
to Transfer;
(ii) the material terms and conditions on which such Selling
Stockholder wishes to Transfer such shares, including, without
limitation, the purchase price per security of Equity Securities; and
(iii) such Selling Stockholder's offer (irrevocable by its terms for
15 days following receipt) to Transfer to the other Stockholders all (but
not less than all) of such Equity Securities, for a purchase price and on
the other terms and conditions set forth in subparagraph (ii) of this
section 1.2(a).
Within 15 days of receipt of the Sale Notice, each of the other Stockholders
may agree to purchase in the aggregate, all of the Equity Securities covered by
the Sale Notice, and (i) individually, that portion of such Equity Securities
offered by the Selling Stockholder equal to their PRO RATA interest in the
Company relative to each other (based on the percentage of outstanding Common
Stock Equivalents owned by each of them on the date of the Sale Notice),
(ii) such other portion of such Equity Securities as the other Stockholders may
agree upon or (iii) in the event any of the other Stockholders does not exercise
such right, all of the Equity Securities offered to such declining Stockholders
by the Selling Stockholder in amounts determined pursuant to subclause (i) or
(ii) above without regard to such declining Stockholders, by delivering written
notice to such effect to the Selling Stockholder setting forth closing
arrangements and a closing date not less than 30 nor more than 90 days following
the delivery of such notice (or such later date as is necessary to obtain all
requisite governmental and regulatory approvals and consents).
(b) EFFECTING SALES. If, upon the expiration of 15 days following
receipt by the other Stockholders of the Sale Notice, none of the other
Stockholders shall have agreed to purchase the Equity Securities covered by
the Sale Notice, the Selling Stockholder may sell to a third party or
parties all, but not less than all, of the Equity Securities covered by the
Sale Notice for at least 95% of the price
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and upon the same other terms and conditions as contained in the Sale
Notice, PROVIDED that the Selling Stockholder and the third party execute a
binding purchase agreement (subject to customary closing conditions) within
90 days after the expiration of such 15 day period and consummate the
closing thereunder within 120 days (or such later date as is necessary to
obtain all requisite governmental and regulatory approvals and consents)
from the execution of the binding purchase agreement. If the other
Stockholders shall have agreed to purchase the Equity Securities covered by
the Sale Notice, then the sale of such Equity Securities shall be
consummated as soon as practicable after the delivery of a notice of
acceptance by the Selling Stockholder, but in any event within 90 days of
the delivery of the Sale Notice (or such later date as is necessary to
obtain all requisite governmental and regulatory approvals and consents).
Questor and the Existing Stockholders shall have the right to assign to one
or more Questor Assignees or Existing Stockholder Assignees, as the case may
be, all or any of their rights to purchase Equity Securities pursuant to
this Section 1.2.
(c) Notwithstanding anything to the contrary herein, the rights granted
to and obligations imposed on Questor and the Questor Assignees, on the one
hand, and the Existing Stockholders and the Existing Stockholder Assignees,
on the other hand, pursuant to this Section 1.2 shall terminate if the
Second Break Point occurs.
1.3 INVOLUNTARY TRANSFERS. Any transfer of title or beneficial ownership
of Equity Securities upon default, foreclosure, forfeit, divorce, court order or
otherwise than by a voluntary decision on the part of a Stockholder (each, an
"INVOLUNTARY TRANSFER") shall be void unless the Stockholder complies with this
Section 1.3 and enables the Company to exercise in full its rights hereunder.
Upon any Involuntary Transfer, the Company shall have the right to purchase such
Equity Securities pursuant to this Section 1.3 and the person or entity to whom
such Equity Securities have been Transferred (the "INVOLUNTARY TRANSFEREE")
shall have the obligation to sell such Equity Securities in accordance with this
Section 1.3. Upon the Involuntary Transfer of any Equity Securities, such
Stockholder shall promptly (but in no event later than two days after such
Involuntary Transfer) furnish written notice (the "NOTICE") to the Company
indicating that the Involuntary Transfer has occurred, specifying the name of
the Involuntary Transferee, giving a detailed description of the circumstances
giving rise to, and stating the legal basis for, the Involuntary Transfer. Upon
the receipt of the Notice, and for 60 days thereafter, the Company shall have
the right to purchase, and upon exercise of such right the Involuntary
Transferee shall have the obligation to sell, all (but not less than all) of the
Equity Securities acquired by the Involuntary Transferee for a purchase price
equal to the Market Value of such Equity Securities.
2. TAG-ALONG RIGHTS. (a) If a Stockholder proposes to make a Transfer of
Common Stock that requires such Stockholder first to offer such Common Stock
pursuant to Section 1.2, the other Stockholders fail to agree to purchase the
Common Stock offered by the Selling Stockholder pursuant to Section 1.2 and the
Selling Stockholder shall have agreed to sell any Common Stock covered by the
Sale Notice to a third party, then such Selling Stockholder shall, in accordance
with the procedures set forth in Section 2(b), offer each of the other
Stockholders a right (a "TAG-ALONG RIGHT") to participate (each a "PARTICIPATING
PARTY") PRO RATA (based on the number of shares of Common Stock Equivalents
owned by each Participating Party and the Selling Stockholder) in such sale for
a purchase price for such Common Stock and on other terms and conditions no less
favorable to such Participating Party than those applicable to such Selling
Stockholder.
(b) Within three days after the Selling Stockholder has entered into an
agreement to sell the Common Stock covered by the Sale Notice to a third
party, the Selling Stockholder shall give each Participating Party, as the
case may be, written notice of its Tag-Along Right (the "TAG-ALONG NOTICE").
No later than 15 days after the receipt of the Tag-Along Notice (such date,
the "TAG-ALONG DETERMINATION DATE"), each Participating Party shall notify
the Selling Stockholder in writing whether it elects to participate in such
sale. The failure of any Participating Party to respond within such 15 day
period shall be deemed to be a rejection of the Selling Stockholder's offer
to participate in such sale and the Selling Stockholder shall be entitled to
consummate such sale on the terms set forth in such notice
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within the time period specified in Section 1.2(b). If such sale is not
consummated within such period, the Selling Stockholder may not effect such
sale unless it again shall have complied with this Section 2.
(c) Notwithstanding anything to the contrary herein, the rights granted
to Questor and the Questor Assignees, on the one hand, and to the Existing
Stockholders and the Existing Stockholder Assignees, on the other hand,
pursuant to this Section 2 shall terminate if the Second Break Point occurs.
3. ELECTION OF DIRECTORS.
3.1 BOARD MAKE-UP. (a) Subject to Section 3.1(b), each Stockholder agrees
that from and after the Closing such Stockholder will use his, hers or its best
efforts to nominate and elect and will vote all of the Equity Securities owned
or held of record by him, her or it that have voting rights to elect and,
thereafter for such period, to continue in office a Board consisting of twelve
members, six of whom shall be designated by Questor (the "QUESTOR DESIGNEES")
and six of whom shall be designated by Thayer (the "EXISTING STOCKHOLDER
DESIGNEES"). The persons designated pursuant to this Section 3.1 by Questor and
by Thayer may be changed from time to time by Questor and by Thayer,
respectively. If the directors are to be elected in staggered terms, the number
of nominees designated by Questor and by Thayer for each such term shall equal
the total number of Questor Designees or Existing Stockholder Designees,
respectively, divided by the number of such terms.
(b) The number of directors constituting the entire Board and the
number of Questor Designees and Existing Stockholder Designees will be
subject to reduction as provided in this Section 3.1(b). At the next annual
meeting of stockholders following the occurrence of the First Break Point,
the Board shall be reduced from twelve members to nine members. If, upon
occurrence of the First Break Point, (i) the Questor Parties own,
beneficially or of record, a smaller number of Common Stock Equivalents than
the Existing Stockholder Parties, then Thayer shall be entitled to designate
six directors and Questor shall be entitled to designate three directors
otherwise in accordance with Section 3.1(a), or (ii) the Existing
Stockholder Parties own a smaller number of Common Stock Equivalents than
the Questor Parties, then Thayer will be entitled to designate three
directors and Questor will be entitled to designate six directors otherwise
in accordance with Section 3.1(a). If, upon the occurrence of the Second
Break Point, (i) the Questor Parties own a smaller number of Common Stock
Equivalents than the Existing Stockholder Parties, then Questor will no
longer be entitled to designate any directors, and Thayer will be entitled
to designate six directors, or (ii) the Existing Stockholder Parties own a
smaller number of Common Stock Equivalents than the Questor Parties, then
Thayer no longer will be entitled to designate any directors, and Questor
will be entitled to designate six directors otherwise in accordance with
Section 3.1(a). For the avoidance of doubt, except as explicitly indicated
in this Section 3.1(b), Section 3.1(a) shall remain in full force, including
the obligations of each party to vote for the directors that such other
party is entitled to designate.
3.2 IRREVOCABLE PROXY. In order to effectuate Section 3.1 and, in addition
to and not in lieu of Section 3.1, each Stockholder hereby grants to the
Secretary of the Company then in office an irrevocable proxy solely for the
purpose of voting all of the Equity Securities that have voting rights and owned
by the grantor of the proxy for the election of directors nominated only in
accordance with Section 3.1.
3.3 MAJOR DECISIONS. (a) Each Stockholder agrees that from and after the
Closing such Stockholder will use his, hers or its best efforts, and, where
applicable, will vote all of the Equity Securities owned or held of record by
him, her or it that have voting rights, to cause the By-laws of the Company to
require that (i) any Major Decision (as defined below) be approved by the
affirmative vote of not less than three fourths (or in the event that the number
of directors constituting the entire Board is reduced to nine pursuant to
Section 3.1(b), by the affirmative vote of not less than two thirds) of the
directors then serving on the Board, and (ii) any committee of the Board be
constituted so that the number of Questor Designees and Existing Stockholder
Designees on any such committee be as nearly as possible in the same proportion
as the number of Questor Designees and Existing Stockholder Designees on the
entire Board.
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(b) The term "MAJOR DECISION" means any decision by the Board with
respect to any of the following matters (but, for the avoidance of doubt,
shall exclude any Board decision made pursuant to Section 3.3(c) hereof):
(i) issuing any shares or any security, including any indebtedness,
convertible into shares, or any other form of equity in the Company or
any subsidiary of the Company, other than (i) granting options to
directors or employees of the Company pursuant to any incentive or other
benefit plan adopted by the Board, (ii) issuing shares of Common Stock
pursuant to the exercise of such options, and (iii) issuing shares of
Common Stock or any security, including any indebtedness, convertible
into shares of Common Stock, or any other form of equity in the Company,
in one or more offerings (excluding any issuances referred to in (i) or
(ii) above) where the aggregate purchase price for all such issuances
does not exceed $500,000, provided that any such issuance shall be sold
at Market Value;
(ii) adoption of any stock-based employee benefit plan;
(iii) incurring indebtedness or entering into guarantees for borrowed
money (excluding trade payables incurred in the ordinary course of
business) in excess of $2,500,000 in any twelve consecutive month period,
provided, however, that the Board may approve pursuant to this Section
3.3(b)(iii) a revolving credit or similar borrowing facility together
with subsequent draw-downs under such facility without obtaining separate
Board approval for each such draw-down;
(iv) selling, leasing, pledging or granting a security interest or
encumbrance in all or substantially all of the Company's or any
subsidiary of the Company's assets, except in connection with the
incurrence of indebtedness for borrowed money that does not involve a
Major Decision under the preceding paragraph;
(v) acquiring (whether through an asset purchase, merger, equity
purchase or otherwise) any assets (excluding acquisitions of raw
materials and supplies in the ordinary course of business) having a
value, individually or in the aggregate for any series of related
transactions, in excess of $2,000,000;
(vi) selling or otherwise disposing of any assets (excluding sales or
other dispositions of inventory in the ordinary course of business)
having a value, individually or in the aggregate for any series of
related transactions, in excess of $2,000,000;
(vii) amending the By-laws or the Certificate of Incorporation of the
Company;
(viii) any Change of Control Transaction;
(ix) executing or delivering any assignment for the benefit of
creditors of the Company;
(x) filing any voluntary petition in bankruptcy or receivership with
respect to the Company; or
(xi) taking any action while there is a vacancy on the Board,
including without limitation the filling of such vacancy.
(c) The Questor Parties agree that from and after the Closing they will
use their best efforts to cause the Questor Designees to abstain from voting
on any Board action in connection with an optional redemption pursuant to
Section 5(b) of the Series F Preferred Stock Certificate of Designation of
the Company. The Existing Stockholder Parties agree that from and after the
Closing they will use their best efforts to cause the Existing Stockholder
Designees to abstain from voting on any Board action in connection with the
repayment of the Promissory Note by and among IQI, Inc. Edward Blank, and
The Edward Blank 1995 Grantor Retained Annuity Trust dated April 16, 1998 in
the original aggregate principal amount of $1.0 million and the Promissory
Note by and between IQI, Inc. and Thayer Equity Investors III, L.P. dated
April 16, 1998 in the original principal amount of $2.0
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million or the redemption or repurchase of any or all of either the
Series D Preferred Stock or the Series E Preferred Stock.
4. STOCK CERTIFICATE LEGEND. A copy of this Agreement shall be filed with
the Secretary of the Company and kept with the records of the Company. Each
certificate representing shares of Common Stock owned by the Stockholders shall
bear upon its face the following legends, as appropriate:
(i) "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL
REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
UNLESS, IN THE OPINION OF COUNSEL TO THE STOCKHOLDER, WHICH COUNSEL MUST
BE, AND THE FORM AND SUBSTANCE OF WHICH OPINION ARE, SATISFACTORY TO THE
ISSUER, SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, TRANSFER OR
OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN
COMPLIANCE WITH THE ACT AND SUCH LAWS.".
(ii) "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON TRANSFER AND OTHER CONDITIONS, AS SPECIFIED IN THE
STOCKHOLDERS' AGREEMENT OF THE ISSUER DATED AS OF , 1999 (THE
"STOCKHOLDERS' AGREEMENT"), COPIES OF WHICH ARE ON FILE AT THE OFFICE OF
THE ISSUER AND WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF SUCH
SHARES UPON WRITTEN REQUEST AND MAY NOT BE OFFERED, SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS, IN
THE OPINION OF COUNSEL TO THE STOCKHOLDER, WHICH COUNSEL MUST BE, AND THE
FORM AND SUBSTANCE OF SUCH OPINION ARE, SATISFACTORY TO THE ISSUER, SUCH
OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER
DISPOSITION IS IN COMPLIANCE WITH THE STOCKHOLDERS' AGREEMENT. "
(iii) "THE ISSUER WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO
SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OR SERIES
OF SHARES AUTHORIZED TO BE ISSUED AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS."
In addition, certificates representing shares of Common Stock owned by residents
of certain states shall bear any legends required by the laws of such states.
All Stockholders shall be bound by the requirements of such legends.
5. COVENANTS; REPRESENTATIONS AND WARRANTIES.
5.1 NO OTHER ARRANGEMENTS OR AGREEMENTS. Each Stockholder hereby
represents and warrants to the Company and to each other Stockholder that he or
she has not entered into or agreed to be bound by any other arrangements or
agreements of any kind that conflict with this Agreement. Each Stockholder
agrees that, except as expressly permitted under this Agreement, he will not
enter into any such other arrangements or agreements as he has represented and
warranted to above with any other party as long as any of the terms of this
Agreement remain in effect.
5.2 ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Stockholder represents
and warrants to the Company and each other Stockholder that:
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(i) such Stockholder has the power, authority and capacity (or, in
the case of any Stockholder that is a corporation, trust or limited
partnership, all corporate, trust or limited partnership power and
authority, as the case may be) to execute, deliver and perform this
Agreement;
(ii) in the case of a Stockholder that is a corporation, trust or
limited partnership, the execution, delivery and performance of this
Agreement by such Stockholder has been duly and validly authorized and
approved by all necessary corporate, trust or limited partnership action,
as the case may be;
(iii) this Agreement has been duly and validly executed and delivered
by such Stockholder and constitutes a valid and legally binding
obligation of such Stockholder, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to creditors' rights generally and
general principles of equity; and
(iv) the execution, delivery and performance of this Agreement by
such Stockholder does not and will not violate the terms of or result in
the acceleration of any obligation under (A) any material contract,
commitment or other material instrument to which such Stockholder is a
party or by which such Stockholder is bound or (B) in the case of a
Stockholder that is a corporation, trust or limited partnership, the
certificate of incorporation, certificate of limited partnership, by-
laws, limited partnership agreement or other organizational documents, as
the case may be.
6. AMENDMENT AND MODIFICATION. This Agreement may not be amended, modified
or supplemented except by a written instrument signed by the Company, Questor,
Thayer and, in the case of an amendment, modification or supplement that would
materially and adversely effect any other Stockholder, any such other
Stockholder. The Company shall notify all Stockholders promptly after any such
amendment, modification or supplement shall have taken effect.
7. PARTIES.
7.1 ASSIGNMENT BY THE COMPANY. The Company shall have the right to assign
to Questor or the Existing Stockholders and/or the right to cause Questor or the
Existing Stockholders to assume, all or any portion of its rights and
obligations under Section 1.3, PROVIDED that any such assignment or assumption
is accepted by the proposed assignee or assignees. If the Company has not
exercised its right to purchase Equity Securities pursuant to such Section 1.3
within 15 days of receipt by the Company of the Notice giving rise to such
right, then Questor, in the case of an Involuntary Transfer by any Existing
Stockholder or Existing Stockholder Party and the Existing Stockholders, in the
case of an Involuntary Transfer by Questor or any Questor Party, shall have the
right to require the Company to assign to Questor or the Existing Stockholders,
respectively, such right to purchase those Equity Securities not being purchased
by the Company. Questor and the Existing Stockholders shall have the right to
assign to one or more of the Questor Parties or the Existing Stockholder
Parties, as the case may be, all or any of their rights to purchase Equity
Securities pursuant to this Section 7.1.
7.2 ASSIGNMENT GENERALLY. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, legal representatives, successors and assigns, PROVIDED that the Company
may not assign any of its rights or obligations hereunder without the consent of
Questor and the Existing Stockholders and PROVIDED, FURTHER, that no Stockholder
may assign any of its rights or obligations hereunder without the prior written
consent of Questor and the Existing Stockholders, unless such assignment is in
connection with a Transfer explicitly permitted by this Agreement and, prior to
such assignment, such assignee complies with the requirements of Section 7.4.
7.3 TERMINATION. Any party to, or person who is subject to, this Agreement
which ceases to own Equity Securities or any interest therein, shall cease to be
a party to, or person who is subject to, this Agreement and thereafter shall
have no rights or obligations hereunder, PROVIDED, HOWEVER, that a Transfer of
Equity Securities not explicitly permitted under this Agreement shall not
relieve a Stockholder of any of his or her obligations hereunder.
Notwithstanding the foregoing, in connection with a Transfer to an
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Affiliate explicitly permitted by this Agreement, prior to any such Person
ceasing to be an Affiliate of the Stockholder from whom such Person acquired its
Equity Securities, such Person shall be obligated to transfer such Equity
Securities back to such original Stockholder and such original Stockholder shall
thereupon again be subject to this Agreement. Notwithstanding any other
provision in this Agreement, this Agreement shall terminate and be of no further
force or effect at such time as either the Questor Parties or the Existing
Stockholder Parties beneficially own less than 5% of the outstanding Equity
Securities.
7.4 AGREEMENTS TO BE BOUND. Notwithstanding anything to the contrary
contained in this Agreement, any Transfer of Equity Securities by a Stockholder
(other than pursuant to a Public Sale) shall be permitted under the terms of
this Agreement only if the transferee of such Stockholder shall agree in writing
to be bound by the terms and conditions of this Agreement pursuant to an
instrument of assumption reasonably satisfactory in substance and form to the
Company, and, in the case of a transferee who is an individual and who resides
in a state with a community property system, such transferee causes his or her
spouse, if any, to execute a Spousal Waiver in the form of Exhibit A attached
hereto. Upon the execution of the instrument of assumption by such transferee
and, if applicable, the Spousal Waiver by the spouse of such transferee, such
transferee shall have the rights and be subject to all of the restrictions and
obligations of his or her transferor hereunder, PROVIDED, HOWEVER, that Section
1.1 (Right of First Offer) and Section 2 (Tag-Along Rights) shall not apply to
any Involuntary Transferee.
8. RECAPITALIZATIONS, EXCHANGES, ETC. Except as otherwise provided herein,
the provisions of this Agreement shall apply to the full extent set forth herein
with respect to (a) the Equity Securities and (b) any and all shares of capital
stock of the Company or any successor or assign of the Company (whether by
merger, consolidation, sale of assets or otherwise) which may be issued in
respect of, in exchange for, or in substitution for the Equity Securities by
reason of any stock dividend, split, reverse split, combination,
recapitalization, reclassification, merger, consolidation or otherwise. All
share numbers and percentages shall be proportionately adjusted to reflect any
stock split, stock dividend or other subdivision or combination effected after
the date hereof. Except as otherwise provided herein, this Agreement is not
intended to confer upon any person, except for the parties hereto, any rights or
remedies hereunder.
9. FURTHER ASSURANCES. Each party hereto shall do and perform or cause to
be done and performed all such further acts and things and shall execute and
deliver all such other agreements, certificates, instruments and documents as
any other party hereto or person subject hereto may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
10. GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder and the persons subject hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of Delaware,
without giving effect to the choice of law principles thereof.
11. INVALIDITY OF PROVISION. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of this Agreement, including that provision, in any
other jurisdiction.
12. WAIVER. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement shall not operate as a waiver
of any other breach or default, whether similar to or different from the breach
or default waived. No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties hereto or from any failure by
either party to assert its or his or her rights hereunder on any occasion or
series of occasions.
13. NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed, certified or registered mail with postage prepaid,
(c) sent by next-day or overnight mail or delivery or (d) sent by fax, as
follows (or to such other address as the party entitled to notice shall
hereafter designate in accordance with the terms hereof):
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(i) If to the Company, to it at:
Aegis Communications Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063
Fax: (972) 868-0396
Attention:
with a copy to Questor and Thayer at their addresses set forth below.
(ii) If to Thayer, to it at:
Thayer Capital Management Partners
1455 Pennsylvania Avenue, N.W.
Suite 350
Washington, D.C.
Fax: (202) 371-0391
Attention:
(iii) If to Questor, to it at:
c/o Organization Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Fax: (302) 478-3667
Attention: Gilbert Warren
With a copy to:
Questor Management Company
4000 Town Center
Suite 530
Southfield, Michigan 48075
Fax: (248) 213-2200
Attention: President
All such notices, requests, demands, waivers and other communications shall be
deemed to have been received (A) if by personal delivery on the day after such
delivery, (B) if by certified or registered mail, on the fifth business day
after the mailing thereof, (C) if by next-day or overnight mail or delivery, on
the day delivered, or (D) if by fax, on the next day following the day on which
such fax was sent, provided that a copy is also sent by certified or registered
mail.
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14. HEADINGS; EXECUTION IN COUNTERPART. The headings to sections in this
Agreement are for the convenience of the parties only and shall not control or
affect the meaning or construction of any provision hereof.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
16. ENTIRE AGREEMENT. This Agreement, the Purchase and Registration Rights
Agreement and the Series F Certificate of Designation, constitute the entire
agreement and understanding of the parties hereto with respect to the matters
referred to herein. This Agreement and the agreements referred to in the
preceding sentence supersede all prior agreements and understandings among the
parties with respect to such matters.
17. INJUNCTIVE RELIEF. The parties hereto agree that the Company and the
Stockholders will be irreparably damaged in the event this Agreement is not
specifically enforced. Each of the parties therefore agrees that in the event of
a breach of any provision of this Agreement, the aggrieved party may elect to
institute and prosecute proceedings in any court of competent jurisdiction to
enforce specific performance or to enjoin the continuing breach of this
Agreement. Such remedies shall, however, be cumulative and not exclusive, and
shall be in addition to any other remedy which the Company or any Stockholder
may have. Each Stockholder hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts in New York for the purposes of any
suit, action or other proceeding arising out of or based upon this Agreement or
the subject matter hereof. Each Stockholder hereby consents to service of
process made in accordance with Section 13.
18. MISCELLANEOUS. Prior to such time as the Existing Stockholder Parties
are no longer entitled to designate any directors pursuant to Section 3 hereof,
the Questor Parties agree that they will not exercise their right to request the
election of two directors pursuant to the terms of the Series F Preferred Stock.
All references in this Agreement to Sections of or Rules under the Securities
Act or the Exchange Act are intended to include, and shall be deemed to include,
references to all successor Sections and Rules which are intended to replace the
Sections and Rules herein referenced.
19. DEFINED TERMS. As used in this Agreement, the following terms shall
have the meanings ascribed to them below:
AFFILIATE: person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified, and with regard to Questor or Thayer, any partner or
member of Questor or Thayer, respectively; provided that no Person shall be
deemed to be an Affiliate of another Person solely as a result of this
Agreement, the Purchase and Registration Rights Agreement or the other
agreements contemplated thereby, or solely as a result of the ownership of
Common Stock Equivalents.
"BENEFICIALLY OWN": the meaning given in Rule 13d-3 under the Exchange Act.
BOARD: the board of directors of the Company.
CHANGE IN CONTROL TRANSACTION: any of the following:
(a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the
Company, or any of its Subsidiaries or any Investor or Excluded Group (an
"ACQUIRING PERSON") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 35% or more of the combined
voting power or economic interests of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors;
provided, however, that any transfer from any Investor or Excluded Group
will not result in a Change in Control if such transfer was part of one or a
series of related transactions the effect of which, absent the transfer to
such Acquiring Person by the Investor or Excluded Group,
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would not have resulted in the acquisition by such Acquiring Person of 35%
or more of the combined voting power or economic interests of the then
outstanding voting securities; or
(b) the individuals who at the beginning of any 12 consecutive month
period following the Closing constituted a majority of the directors of the
Company (the "INCUMBENT MAJORITY") cease for any reason to constitute at
least a majority of such directors; provided that (i) any individual
becoming a director whose election, or nomination for election by the
Company's stockholders pursuant to this Agreement, was approved by a vote of
the stockholders having the right to designate such director pursuant to
this Agreement and (ii) any director whose election to the Board or whose
nomination for election by the stockholders of the Company was approved by
the Incumbent Majority, shall, in each such case, be considered as though
such individual were a member of the Incumbent Majority, but excluding, as a
member of the Incumbent Majority, any such individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the directors of the Company (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) and further excluding any person who is an affiliate or
associate of an Acquiring Person having or proposing to acquire beneficial
ownership of 25% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors; or
(c) the approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, with respect to which
all or substantially all of the individuals and entities who were the
respective beneficial owners of the voting securities of the Company or its
parent immediately prior to such reorganization, merger or consolidation do
not, following such reorganization, merger or consolidation, beneficially
own, directly or indirectly, more than 51% of the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors of the Company or its parent resulting from such
reorganization, merger or consolidation; or
(d) the sale or other disposition of assets representing 50% or more of
the assets of the Company and its subsidiaries in one transaction or series
of related transactions.
CLOSING: the "CLOSING" shall mean the date hereof.
COMMON STOCK: the common stock of the Company, par value $.01 per share.
COMMON STOCK EQUIVALENTS: the number of shares of Common Stock owned
beneficially or of record by Questor or the Existing Stockholders, as the case
may be, as of the date of this Agreement as adjusted (in the case of Questor)
pursuant to Sections 7(d) of the Series F Preferred Stock Certificate of
Designation, which at any date of determination are owned beneficially or of
record by a Questor Party or Existing Stockholder Party. In the event that any
Questor Party or Existing Stockholder Party acquires beneficial or record
ownership of any Equity Securities after the date of this Agreement which are
not Common Stock Equivalents pursuant to the immediately preceding sentence, any
Equity Securities thereafter Transferred by such Person shall be deemed to be
such after acquired Equity Securities until the number of such after acquired
Equity Securities owned beneficially or of record by such Person has been
reduced to 0.
EQUITY SECURITY: any stock or similar security of the Company or any
security (including indebtedness for borrowed money) convertible or
exchangeable, with or without consideration, into or for any such stock or
similar security, or any security (including indebtedness for borrowed money)
carrying any warrant or right to subscribe to or purchase any such stock or
similar security, or any such warrant or right.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
EXCLUDED GROUP: a "group" (as such term is used in Rule 13d-5 of the
Exchange Act) that includes one or more of the Investors, including, without
limitation, for the purpose of this definition only, any party to the
Stockholders' Agreement.
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EXISTING STOCKHOLDER ASSIGNEE: the Existing Stockholders and any Affiliate
of the Existing Stockholders, and, in the case of any individual, such
individual's spouse, parents, immediate family or lineal descendants.
EXISTING STOCKHOLDER PARTIES: the Existing Stockholders, the Existing
Stockholder Assignees and any third party other than an Involuntary Transferee
or Questor Party who receives Equity Securities from any Existing Stockholder or
any Existing Stockholder Assignee pursuant to Section 1 or Section 2 of this
Agreement.
FIRST BREAK POINT: the time at which the Total Ownership Ratio for either
the Questor Parties or the Existing Stockholder Parties falls below 25%.
INVESTOR: Questor or Thayer or their respective Affiliates.
MARKET VALUE: shall mean, as of any date: (i) if any Equity Securities are
listed on a national securities exchange, the average of the closing prices as
reported for composite transactions during the 30 consecutive trading days
preceding the trading day immediately prior to such date or, if no sale occurred
on a trading day, then the mean between the closing bid and asked prices on such
exchange on such trading day; (ii) if any Equity Securities are traded on the
Nasdaq National Market ("NMM"), the average of the closing prices as reported on
the NMM during the 30 consecutive trading days preceding the trading day
immediately prior to such date or, if no sale occurred on a trading day, then
the mean between the highest bid and lowest asked prices as of the close of
business on such trading day, as reported on the NMM; (iii) if any Equity
Securities are not traded on a national securities exchange or the NMM but are
otherwise traded over-the-counter, the arithmetic average (for consecutive
trading days) of the mean between the highest bid and lowest asked prices as of
the close of business during the 30 consecutive trading days preceding the
trading day immediately prior to such date as quoted on the National Association
of Securities Dealers Automated Quotation system or an equivalent generally
accepted reporting service; or (iv) if there is no active market for any Equity
Securities, the market value thereof as mutually agreed by the Corporation and a
majority in interest (based on Common Stock Equivalents then owned) of the
Stockholders.
INVOLUNTARY TRANSFER: the meaning set forth in Section 2.3.
PERSON: an individual, corporation, partnership, limited liability company,
joint venture, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
PUBLIC SALE: Transfers (i) to the general public pursuant to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of such
registration statement, (ii) to or through a broker or dealer or underwriter in
a public distribution or a public securities transaction, or (iii) (other than
to a partner or affiliate (as defined under the Securities Act) of the Questor
Investors) in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions and restrictive legends with respect to such Common Stock
are removed upon the consummation of such Transfer and the transferor and
transferee of such Common Stock receive an opinion of counsel for the Company,
which shall be in form and content reasonably satisfactory to the transferor and
transferee and their respective counsel, to the effect that such Common Stock in
the hands of the transferee is freely transferable without restriction or
registration under the Securities Act in a public or private transaction, or
(iv) pursuant to Rule 144A under the Securities Act; provided that a Public Sale
shall not include Transfers of more than 10% of the Common Stock of the Company
on a fully diluted basis by any party in one or a series of related transactions
to any single Person or group (as defined in Rule 13d-5 under the Exchange Act).
PURCHASE AND REGISTRATION RIGHTS AGREEMENT: The Series F Senior Voting
Convertible Preferred Stock Purchase and Registration Rights Agreement, dated as
of the date hereof, between the Company, Questor,
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the Existing Stockholders, ITC Services Company, Edward Blank and trusts created
by Edward Blank as both grantor and trustee under Article Fourth of The Edward
Blank 1995 Grantor Retained Annuity Trust.
QUESTOR ASSIGNEE: Questor and any Affiliate of Questor, and, in the case of
any individual, such individual's spouse, parents, immediate family or lineal
descendants.
QUESTOR PARTIES: Questor, any Questor Assignee and any third party other
than an Involuntary Transferee or Existing Stockholder Party who receives Equity
Securities from Questor or any Questor Assignee pursuant to a Transfer to which
Section 1.2 hereof applies.
SECOND BREAK POINT: the time at which the Total Ownership Ratio for either
the Questor Parties or the Existing Stockholder Parties falls below 10%.
SECURITIES ACT: the Securities Act of 1933, as amended.
SERIES D PREFERRED STOCK: the Series D Preferred Stock of the Company, par
value $.01 per share.
SERIES E PREFERRED STOCK: the Series E Preferred Stock of the Company, par
value $.01 per share.
SERIES F PREFERRED STOCK: the Series F Senior Voting Preferred Stock of the
Company, par value $.01 per share.
SERIES F CERTIFICATE OF DESIGNATION: the Certificate of Designation for the
Series F Preferred Stock.
TOTAL OWNERSHIP: the total Common Stock Equivalents owned beneficially or of
record by the Existing Stockholder Parties and the Questor Parties.
TOTAL OWNERSHIP RATIO: the total Common Stock Equivalents owned,
beneficially or of record, by either the Questor Parties or the Existing
Stockholder Parties, as the case may be, divided by Total Ownership;
TRANSFER: any direct or indirect sale, assignment, mortgage, transfer,
pledge, hypothecation or other disposal.
IN WITNESS WHEREOF this Agreement has been signed by each of the parties
hereto, and shall be effective as of the date first above written.
COMPANY:
AEGIS COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By: __________________________________
Name:
Title:
Address: ATC Communications
Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063
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QUESTOR:
QUESTOR PARTNERS FUND II, L.P.
a Delaware limited partnership
By: Questor General Partner II, L.P.,
its General Partner
By: Questor Principals II, Inc.,
its General Partner
By: __________________________________
Name: ________________________________
Title: _______________________________
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
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QUESTOR SIDE-BY-SIDE
PARTNERS II, L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By: __________________________________
Name: ________________________________
Title: _______________________________
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
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QUESTOR SIDE-BY-SIDE
PARTNERS II 3(C)(1), L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By: __________________________________
Name: ________________________________
Title: _______________________________
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
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TC CO-INVESTORS, LLC
a Delaware limited liability company
By: TC Management Partners, LLC
a Delaware limited liability
company,
its General Partner
By: __________________________________
Name: ________________________________
Title: _______________________________
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
THAYER EQUITY INVESTORS III, L.P.
a Delaware limited partnership
By: TC Equity Partners, LLC
a Delaware limited liability
company,
its General Partner
By: __________________________________
Name: ________________________________
Title: _______________________________
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
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EXHIBIT A
SPOUSAL WAIVER
[INSERT NAME] hereby waives and releases any and all equitable or legal
claims and rights, actual, inchoate or contingent, which she may acquire with
respect to the disposition, voting or control of the shares of Common Stock
subject to the Stockholders' Agreement of Aegis Communications Group, Inc.,
dated as of , 1999, as the same shall be amended from time to time,
except for rights in respect of the proceeds of any disposition of such Common
Stock.
--------------------------------------
Name:
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APPENDIX H
STOCKHOLDERS AND VOTING AGREEMENT
STOCKHOLDERS AND VOTING AGREEMENT, dated as of August 25, 1999 (the
"AGREEMENT"), among Questor Partners Fund II, L.P., a Delaware limited
partnership ("FUND II"), Questor Side-by-Side Partners II, L.P., a Delaware
limited partnership (the "SIDE-BY-SIDE FUND"), and Questor Side-by-Side Partners
II 3(c)(1), L.P., a Delaware limited partnership (the "3(C)(1) FUND" and
together with Fund II and the Side-by-Side Fund, the "QUESTOR INVESTORS") and
the stockholders listed on Schedule A hereto (the "EXISTING INVESTORS").
WHEREAS, concurrently herewith, the Questor Investors are entering into the
Series F Senior Voting Convertible Preferred Stock Purchase and Registration
Rights Agreement (the "PURCHASE AGREEMENT") dated as of the date hereof by and
among Aegis Communications Group, Inc., a Delaware corporation (the "Company"),
the Questor Investors, and the Existing Investors;
WHEREAS, the Purchase Agreement provides, among other things, for (i) the
sale and issuance (the "STOCK ISSUANCE") of an aggregate of 46,750 shares of the
Company's Series F Senior Voting Convertible Preferred Stock (the "SERIES F
PREFERRED"), (ii) amendment of the Certificate of Incorporation of the Company
(A) to increase the authorized shares of capital stock of the Company from 100
million shares of Common Stock and 1 million shares of Preferred Stock to 200
million shares of Common Stock and 2 million shares of Preferred Stock and
(B) to delete Article SIXTH thereof to the extent that it provides for
classification of the Board of Directors into three separate classes (together,
the "CHARTER AMENDMENTS"), and (iii) the calling of a meeting of the Existing
Investors of the Company and the solicitation of proxies in connection with the
foregoing and the election of a new Board of Directors;
WHEREAS, capitalized terms used in this Agreement and not otherwise defined
herein shall have the respective meanings ascribed to them in the Purchase
Agreement; and
WHEREAS, the Questor Investors have required, as a condition to its entering
into the Purchase Agreement, that each Existing Investor enter into, and each
such Existing Investor has agreed to enter into, this Agreement.
NOW, THEREFORE, to induce the Questor Investors to enter into, and in
consideration of its entering into, the Purchase Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF EACH EXISTING INVESTOR. Each Existing
Investor hereby severally represents and warrants to the Questor Investors as
follows:
(a) OWNERSHIP OF SHARES. (i) Such Existing Investor is (A) the record
holder and beneficial owner of or (B) sole trustee of a trust that is the
record holder or beneficial owner of, and whose beneficiaries are the
beneficial owners (such trustee, a "TRUSTEE") of, the number of shares of
the voting stock of the Company (the "COMPANY VOTING STOCK"), set forth
opposite such Existing Investor's name on SCHEDULE A hereto (collectively,
the "EXISTING SHARES," and together with any shares of Company Voting Stock
acquired by such Existing Investor after the date hereof and prior to the
termination hereof, whether upon exercise of options or warrants, conversion
of convertible securities, purchase, exchange or otherwise, the "SHARES")
and (ii) such Existing Investor has (A) sole power of disposition, and
(B) sole voting power, in each case with respect to all of such Existing
Investor's Existing Shares, and with no restrictions on such rights, other
than pursuant to the Existing Investors Agreement dated July 9, 1998 by and
among ATC Communications Group, Inc. and the other parties enumerated
therein (the "ORIGINAL STOCKHOLDERS AGREEMENT"). On the date hereof, the
Existing Shares set forth opposite such Existing Investor's name on SCHEDULE
A constitute all of the shares of Company Voting Stock owned of record or
beneficially by such Existing Investor.
H-1
<PAGE>
(b) POWER; BINDING AGREEMENT. Such Existing Investor has all requisite
legal capacity, power and authority to enter into and perform all of such
Existing Investor's obligations under this Agreement. This Agreement has
been duly and validly authorized, executed and delivered by such Existing
Investor and constitutes a valid and binding agreement of such Existing
Investor, enforceable against such Existing Investor in accordance with its
terms. There is no beneficiary of, or holder of, a voting trust certificate
or other interest of any trust of which an Existing Investor is Trustee
whose consent is required for the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby. If such
Existing Investor is married and such Existing Investor's Shares constitute
community property or otherwise require spousal or other approval for this
Agreement to be legal, valid and binding, this Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and binding
agreement of, such Existing Investor's spouse, enforceable against such
spouse in accordance with its terms.
(c) NO CONFLICTS. No filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by such Existing Investor and
the consummation by such Existing Investor of the transactions contemplated
hereby, and neither the execution and delivery of this Agreement by such
Existing Investor nor the consummation by such Existing Investor of the
transactions contemplated hereby nor compliance by such Existing Investor
with any of the provisions hereof shall (A) conflict with or result in any
breach of any applicable trust, partnership agreement, or other
organizational documents applicable to such Existing Investor; (B) result in
a violation or breach of, or constitute (with or without notice or lapse of
time or both) a default (or give rise to any third party right of
termination, cancellation, modification, prepayment or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding,
agreement or other instrument or obligation of any kind to which such
Existing Investor is a party or by which such Existing Investor or any of
such Existing Investor's properties or assets may be bound or (C) violate
any order, writ, injunction, decree, judgment, statute, rule, regulation or
governmental permit or license applicable to such Existing Investor or any
of such Existing Investor's properties or assets.
(d) ABSENCE OF LIENS. Such Existing Investor's Shares and the
certificates representing such Shares are now and at all times during the
term hereof will be held by such Existing Investor, or by a nominee or
custodian for the benefit of such Existing Investor, free and clear of all
liens, claims, security interests, proxies, voting trusts or agreements,
understandings, arrangements or any other encumbrances whatsoever, except
for any such encumbrances or proxies arising hereunder and under the
Original Stockholders Agreement.
(e) NO BROKERS. No broker, investment banker, financial adviser or
other Person is entitled to any broker's, finder's, financial adviser's or
other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of such
Existing Investor.
(f) REVIEW OF PURCHASE AGREEMENT. Such Existing Investor understands
and acknowledges that the Questor Investors are entering into the Purchase
Agreement in reliance upon such Existing Investor's execution and delivery
of this Agreement. Such Existing Investor has read the Purchase Agreement
carefully and fully understands the terms and provisions thereof.
2. AGREEMENT TO VOTE; PROXY.
(a) VOTING. Each Existing Investor hereby severally agrees that,
during the time this Agreement is in effect, at any meeting of the Existing
Investors of the Company, at any adjournment thereof or in any other
circumstance in which a vote, consent or approval (including any written
consent of the stockholders of the Company) of the Existing Investors of the
Company is called for, such Existing Investor shall, including by initiating
a written consent solicitation if requested by the Company or the
H-2
<PAGE>
Questor Investors, vote (or cause to be voted) the Shares of such Existing
Investor (i) in favor of the Stock Issuance, the Charter Amendments, the
election of six directors designated by Thayer and six directors designated
by Questor, and each of the other transactions contemplated by the Purchase
Agreement and this Agreement and any actions required in furtherance hereof
and thereof; (ii) against any action or agreement that would result in a
breach of any covenant, representation or warranty or any other obligation
or agreement of the Company under the Purchase Agreement, the Existing
Investors Agreement, the Certificate or this Agreement and (iii) except as
specifically requested in writing by the Company or the Questor Investors,
in advance, against the following actions (other than the Stock Issuance and
the other transactions contemplated by the Purchase Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Company or its Subsidiaries; (B) a
sale, lease or transfer of a material amount of assets of the Company or its
Subsidiaries or a reorganization, recapitalization, dissolution, liquidation
or winding up of the Company or any of its Subsidiaries; (C) any change in
the majority of the Board of Directors of the Company; (D) any change in the
present capitalization of the Company or any amendment of the Company's
Certificate of Incorporation other than as described above; (E) any other
material change in the Company's corporate structure or business; and
(F) any other action which would impede, frustrate, interfere with, delay,
postpone, discourage or materially adversely affect the Stock Issuance, the
transactions contemplated by the Purchase Agreement or this Agreement or the
contemplated economic benefits of any of the foregoing. Such Existing
Investor shall not take any action or commit to or enter into any agreement
or understanding with any Person prior to the Termination Date (as defined
in Section 7 hereof) to act in any manner inconsistent with clause (i),
(ii) or (iii) of the preceding sentence.
(b) PROXY. EACH EXISTING INVESTOR HEREBY GRANTS TO, AND APPOINTS EACH
OF THE QUESTOR INVESTORS AND EACH OF HENRY L. DRUKER AND ROBERT E. SHIELDS
AND ANY INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF THE
QUESTOR INVESTORS, AND ANY OTHER DESIGNEE OF THE QUESTOR INVESTORS, AS SUCH
EXISTING INVESTOR'S IRREVOCABLE PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER
OF SUBSTITUTION) TO VOTE OR TAKE OTHER ACTION WITH RESPECT TO THE SHARES AS
INDICATED IN SECTION 2(a) ABOVE. EACH EXISTING INVESTOR INTENDS THIS PROXY
TO BE IRREVOCABLE AND COUPLED WITH AN INTEREST AND WILL TAKE SUCH FURTHER
ACTION AND EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE
THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY
SUCH EXISTING INVESTOR WITH RESPECT TO SUCH EXISTING INVESTOR'S SHARES.
NOTWITHSTANDING THE FOREGOING, THIS PROXY SHALL BE AUTOMATICALLY REVOKED
WITHOUT ANY FURTHER ACTION ON THE PART OF ANY EXISTING INVESTOR OR THE
QUESTOR INVESTOR ON THE TERMINATION DATE.
3. CERTAIN COVENANTS OF THE EXISTING INVESTORS. Except in accordance with
the terms of this Agreement, each Existing Investor hereby severally covenants
and agrees as follows:
(a) RESTRICTION ON TRANSFER, PROXIES AND NON-INTERFERENCE; RESTRICTION
ON WITHDRAWAL. Such Existing Investor shall not, directly or indirectly:
(i) except pursuant to the terms of the Purchase Agreement and this
Agreement, and except for gifts to family members who either are signatories
to this Agreement or who, upon such gift, become signatories to this
Agreement, offer for sale, sell, transfer, tender, pledge, encumber, assign
or otherwise dispose of (each, a "Disposition"), enforce or permit the
execution of the provisions of any agreement with the Company whereby the
Company may be obligated to repurchase, or enter into any other contract,
option or other arrangement or understanding with respect to, or otherwise
consent to the Disposition of, any or all of such Existing Investor's Shares
or any interest therein; (ii) except as contemplated hereby, grant any
proxies or powers of attorney, deposit any Shares into a voting trust or
enter into a voting agreement with
H-3
<PAGE>
respect to any Shares or (iii) take any action that would make any
representation or warranty of such Existing Investor contained herein untrue
or incorrect or have the effect of preventing or disabling such Existing
Investor from performing such Existing Investor's obligations under this
Agreement.
(b) NO TERMINATION OR CLOSURE OF TRUSTS. Such Existing Investor, if a
Trustee, shall not take any action to terminate, close or liquidate any such
trust and shall take all steps necessary to maintain the existence thereof
at least until the first to occur of (i) the Closing Date or (ii) the
Termination Date, in each case unless, in connection therewith, the Shares
held by any trust which are presently subject to the terms of this Agreement
are transferred upon termination to one or more Existing Investors and
remain subject in all respects to the terms of this Agreement.
4. FURTHER ASSURANCES. From time to time, at any party's request and
without further consideration, each other party shall execute and deliver such
additional documents and take all such further action as may be necessary or
desirable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by this Agreement.
5. CERTAIN EVENTS. Each Existing Investor agrees that this Agreement and
the obligations hereunder shall attach to such Existing Investor's Shares and
shall be binding upon any Person to which legal or beneficial ownership of such
Shares shall pass, whether by operation of law or otherwise, including, without
limitation, such Existing Investor's heirs, guardians, administrators or
successors, or as a result of any divorce.
6. STOP TRANSFER. Each Existing Investor agrees with, and covenants to,
the Questor Investors that such Existing Investor shall not request that the
Company register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Existing Investor's Shares,
unless such transfer is made in compliance with this Agreement. Each Existing
Investor agrees, with respect to any Shares in certificated form, that such
Existing Investor will tender to the Company, within ten business days after the
date hereof, the certificates representing such Shares and the Company will
inscribe upon such certificates the following legend:
"THE SHARES OF AEGIS COMMUNICATIONS, INC. (THE "COMPANY") REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AND VOTING AGREEMENT
DATED AS OF AUGUST 25, 1999, AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED, EXCEPT IN ACCORDANCE THEREWITH. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY.".
7. TERMINATION. This Agreement shall terminate as follows: (a) if the
Purchase Agreement is terminated pursuant to Section 21(a) or (b) of the
Purchase Agreement, as of the date of such termination, provided that in the
event Questor terminates the Agreement as a result of or in connection with the
failure of any condition set forth in Section 17(a) of the Purchase Agreement
caused by, resulting from or arising out of or in connection with a material
breach of the Purchase Agreement by the Company or the Existing Investors, this
Agreement shall terminate 3 months following the date of termination of the
Purchase Agreement, (b) if the Stock Issuance occurs, upon the Closing Date. The
date of termination of this Agreement is referred to herein as the "TERMINATION
DATE."
8. MISCELLANEOUS.
(a) ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (i) constitutes the
entire agreement among the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and
(ii) shall not be assigned by operation of law or otherwise without the
prior written consent of (A) in the case of an assignment by an Existing
Investor, the Questor Investors, and (B) in the case of an assignment by the
Questor Investors, each Existing Investor.
H-4
<PAGE>
(b) AMENDMENTS. This Agreement may not be modified, amended, altered
or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto; PROVIDED, HOWEVER, that SCHEDULE A
may be supplemented by the Questor Investors without the agreement of any
other party, by adding the name and other relevant information concerning
any stockholder of the Company who agrees to be bound by the terms of this
Agreement, and thereafter such added stockholder shall be treated as an
"EXISTING INVESTOR" for all purposes of this Agreement.
(c) NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, facsimile, telex or other
standard form of telecommunications, by courier service, or by registered or
certified mail, postage prepaid, return receipt requested, addressed
if to the Questor Investors, to:
Questor Management Company
4000 Town Center
Suite 530
Southfield, Michigan 48075
Fax: (248) 213-2215
Attention:
and if to an Existing Investor, to such Existing Investor's address or
facsimile number set forth in Schedule A hereto, or to such other address or
facsimile number as the Person to whom notice is given shall have previously
furnished to the others in writing in the manner set forth above.
(d) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect
to the conflicts of laws principles thereof.
(e) ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to seek an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement and no Existing
Investor shall oppose the granting of such relief.
(f) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which when taken together shall constitute one and the same Agreement.
(g) DESCRIPTIVE HEADINGS. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
(h) SEVERABILITY. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of
any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not
affect any other provision or portion of any provision in such jurisdiction,
and this Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
(i) DEFINITIONS; CONSTRUCTION. For purposes of this Agreement:
(i) "BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" with respect to any
securities shall mean having "beneficial ownership" of such securities
(as determined pursuant to Rule 13d-3 under the Exchange Act), including
ownership pursuant to any agreement, arrangement or understanding,
whether or not in writing. Without duplicative counting of the same
securities by the same holder,
H-5
<PAGE>
securities beneficially owned by a Person shall include securities
beneficially owned by all other Persons with whom such Person would
constitute a "GROUP" as described in Rule 13d-5 under the Exchange Act.
(ii) "PERSON" shall mean an individual, corporation, partnership,
limited liability company, joint venture, association, trust,
unincorporated organization or other entity.
(iii) In the event of a stock dividend or distribution, or any change
in the Company's Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term
"Shares" shall be deemed to refer to and include the Shares as well as
all such stock dividends and distributions related to the Shares and any
shares into which or for which any or all of the Shares may be changed or
exchanged.
IN WITNESS WHEREOF, the Company, Questor Investors and each Existing
Investor have caused this Agreement to be duly executed as of the day and year
first above written.
THE QUESTOR INVESTORS:
QUESTOR PARTNERS FUND II, L.P.
a Delaware limited partnership
By: Questor General Partner II, L.P.,
its General Partner
By: Questor Principals II, Inc.,
its General Partner
By:
-----------------------------------
Name:
Title:
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
H-6
<PAGE>
QUESTOR SIDE-BY-SIDE PARTNERS II, L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
-----------------------------------
Name:
Title:
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
QUESTOR SIDE-BY-SIDE
PARTNERS II 3(C), L.P.
a Delaware limited partnership
By: Questor Principals II, Inc.
By:
-----------------------------------
Name:
Title:
Address: c/o Organization
Services, Inc.
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Gilbert Warren
With a copy to:
Questor Management Company
Address: 4000 Town Center
Suite 530
Southfield, Michigan 48075
H-7
<PAGE>
THE EXISTING INVESTORS:
TC CO-INVESTORS, LLC
a Delaware limited liability company
By: TC Management Partners, LLC
a Delaware limited liability
company,
its General Partner
By:
-----------------------------------
Name:
Title:
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
THAYER EQUITY INVESTORS III, L.P.
a Delaware limited partnership
By: TC Equity Partners, LLC
a Delaware limited liability
company,
its General Partner
By:
-----------------------------------
Name:
Title:
Address: 1455 Pennsylvania Avenue,
N.W.
Washington, D.C. 20004
H-8
<PAGE>
ITC SERVICES COMPANY
a Delaware corporation
By:
-----------------------------------
Name:
Title:
Address:
EDWARD BLANK
By:
-----------------------------------
Name:
Title:
Address:
TRUSTS CREATED BY EDWARD BLANK AS BOTH
GRANTOR AND TRUSTEE UNDER ARTICLE
FOURTH OF THE EDWARD BLANK 1995
GRANTOR RETAINED ANNUITY TRUST
a New Jersey trust
By:
-----------------------------------
Name:
Title:
Address:
CODINVEST LIMITED
a British Virgin Island corporation
By:
-----------------------------------
Name:
Title:
Address:
H-9
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
EXISTING INVESTOR
NAME AND ADDRESS: CLASS OF SHARES NUMBER OF SHARES* VOTING POWER**
- --------------------------------------------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C>
THAYER EQUITY INVESTORS III, L.P......................... Common Stock 19,224,493 19,224,493
1445 Pennsylvania Ave., NW
Suite 3500 Series D and E 110,155 -- (a)
Washington, DC 20004 Convertible
Preferred Stock
TC CO-INVESTORS III, L.P................................. Common Stock 153,359 153,359
1445 Pennsylvania Ave., NW
Suite 3500
Washington, DC 20004
EDWARD BLANK............................................. Common Stock 2,989,135 2,989,135
1250 Broadway, 37th Floor
New York, NY 10001 Series E 5,106 -- (a)
Convertible
Preferred Stock
EDWARD BLANK 1995 GRANTOR
RETAINED ANNUITY TRUST................................. Common Stock 707,525 707,525
1250 Broadway, 37th Floor
New York, NY 10001 Series E 1,211 -- (a)
Convertible
Preferred Stock
ITC SERVICE COMPANY...................................... Common Stock 2,835,123 2,835,123
1239 O.G. Skinner Drive
West Point, GA 31833 Series E 4,846 -- (a)
Convertible
Preferred Stock
CODINVEST LIMITED........................................ Common Stock 2,200,000 2,200,000
Road Town
Tortola, British Virgin Islands
</TABLE>
- ------------------------
(a) The Series D and E Preferred Stock is non-voting.
* If the Existing Investor listed is a trustee rather than the direct record
and beneficial owner of any of the shares, indicate the number of shares
that are held in the capacity of trustee.
** Indicate number of votes, in the aggregate, which may be cast at a meeting
of stockholders of the Company.
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<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
7880 BENT BRANCH DRIVE
SUITE 150
IRVING, TEXAS 75067
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Aegis Communications Group, Inc. a Delaware
corporation (the "Company"), hereby appoints John R. Birk or Jerry L. Sims, Jr.,
or either of them, the proxy or proxies of the undersigned, each with full power
of substitution, to vote all shares of Common Stock of the Company which the
undersigned would be entitled to vote at the Special Meeting of Stockholders to
be held on Friday, December 10, 1999 at 9:00 a.m., local time at the law offices
of Hughes & Luce, L.L.P., 1717 Main Street, Suite 2800, Dallas, Texas 75201, or
any adjournment thereof, according to the number of votes that the undersigned
would be entitled to if personally present upon the matters referred to in this
proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS.
<TABLE>
<S> <C> <C>
1. PROPOSAL 1--Approval of the Questor Transaction and the issuance of the Preferred F Shares and (if and when the
Preferred F Shares are converted) the issuance of Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
2. PROPOSAL 2--Approval of the amendment to the Fourth Article of the Charter (increasing the number of authorized
shares of common stock).
/ / FOR / / AGAINST / / ABSTAIN
3. PROPOSAL 3--Approval of the amendment to the Fourth Article of the Charter (increasing the number of authorized
shares of preferred stock).
/ / FOR / / AGAINST / / ABSTAIN
4. PROPOSAL 4--Approval of the amendments to the Sixth Article of the Charter (removing the provisions relating to
a classified board).
/ / FOR / / AGAINST / / ABSTAIN
5. PROPOSAL 5--Approval of each of the nominees for director.
/ / FOR / / WITHHOLD ALL / / FOR ALL EXCEPT*
<S> <C>
1. PROPOSAL 1--Approval of the Questor Trans
Preferred F Shares are converted) the issua
/ / FOR
2. PROPOSAL 2--Approval of the amendment to
shares of common stock).
/ / FOR
3. PROPOSAL 3--Approval of the amendment to
shares of preferred stock).
/ / FOR
4. PROPOSAL 4--Approval of the amendments to
a classified board).
/ / FOR
5. PROPOSAL 5--Approval of each of the nomin
/ / FOR
</TABLE>
JOHN R. BIRK, STEPHEN A. MCNEELY, EDWARD BLANK, FREDERIC V. MALEK, MICHAEL G.
SANTRY, PAUL G. STERN, MICHAEL D. MADDEN, HENRY L. DRUKER, PETER D. FITZSIMMONS,
ROBERT D. DENIOUS, DEAN ANDERSON, KEVIN J. PROKOP.
- --------------------------------------------------------------------------------
*(Instruction: To withhold authority to vote for any individual nominee(s),
write that nominee's name above.)
(CONTINUED AND TO BE SIGNED ON REVERSE)
<PAGE>
(CONTINUED FROM REVERSE)
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. The Board does not know of any other
matters to be presented at the Meeting. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE PROPOSALS SET FORTH HEREIN.
The undersigned acknowledges receipt of Notice of Special Meeting of
Stockholders dated November 29, 1999, and the accompanying Proxy Statement.
Date: _______________________, 1999
___________________________________
Signature
___________________________________
Name(s) (typed or printed)
___________________________________
___________________________________
Address(es)
Please sign exactly as name appears
on this Proxy. When shares are held
by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
If a corporation, please sign in
full corporate name by the
President or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
