<PAGE> 1
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. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
AMERICA SERVICE GROUP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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:
<PAGE> 2
AMERICA SERVICE GROUP INC.
105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of
America Service Group Inc.:
The Annual Meeting of Stockholders of America Service Group Inc. (the
"Company") will be held at Bank of America Plaza, Third Floor, 414 Union Street,
Nashville, Tennessee, on Monday, August 30, 1999, at 10:00 a.m., local time, to
consider and vote on:
1. The election of directors for the ensuing year;
2. The ratification of the Company's issuance in a private placement
of (i) $15 million aggregate principal amount of the Company's 12%
Convertible Bridge Notes due January 26, 2000 (the "Notes") with two
detachable warrants (the "Warrants") to purchase an aggregate of 135,000
shares of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), and (ii) 50,000 shares of the Company's Series A Preferred Stock,
par value $ .01 per share (the "Preferred Stock," and collectively with the
Notes and the Warrants, the "Convertible Securities");
3. The approval of the issuance of shares of Common Stock and
Preferred Stock upon the conversion or exercise, as applicable, of the
Convertible Securities;
4. The approval and adoption of the America Service Group Inc. 1999
Incentive Stock Plan; and
5. Such other matters as may properly come before the meeting or any
adjournments thereof.
The shares of Common Stock and Preferred Stock referenced in items 2 and 3
above are already authorized by the Company's Certificate of Incorporation. The
Company is requesting that the stockholders authorize it to issue shares of
Common Stock and Preferred Stock upon the conversion or exercise, as applicable,
of the Convertible Securities to comply with a requirement of The Nasdaq Stock
Market National Market System which requires stockholder approval of certain
issuances of stock. This rule is described in greater detail in the attached
proxy statement.
The close of business on June 22, 1999, has been fixed as the record date
for determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments thereof. A list of stockholders entitled to
vote at the Annual Meeting will be maintained during the ten-day period
preceding the meeting at the offices of the Company in Brentwood, Tennessee.
Your attention is directed to the proxy statement accompanying this notice.
You are cordially invited to attend the Annual Meeting in person. EVEN IF
YOU PLAN TO ATTEND IN PERSON, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. You may revoke your proxy at any
time prior to its use.
By Order of the Board of Directors,
/s/ JEAN L. BYASSEE
---------------------------------------
JEAN L. BYASSEE
Secretary
Brentwood, Tennessee
July 29, 1999
<PAGE> 3
AMERICA SERVICE GROUP INC.
105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027
PROXY STATEMENT
---------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 30, 1999
---------------------
This Proxy Statement is furnished to the holders of shares of (i) the $.01
par value per share Common Stock (the "Common Stock") of America Service Group
Inc. (the "Company") and (ii) the $.01 par value per share Series A Convertible
Preferred Stock of the Company (the "Preferred Stock") in connection with the
solicitation by the Company's Board of Directors of proxies for use at the
Annual Meeting of Stockholders to be held at Bank of America Plaza, Third Floor,
414 Union Street, Nashville, Tennessee, on Monday, August 30, 1999, at 10:00
a.m. local time, and at any adjournments thereof (the "1999 Annual Meeting"). It
is anticipated that this Proxy Statement and accompanying form of proxy will be
first sent to stockholders on or about July 29, 1999.
The cost of this solicitation will be borne by the Company. In addition to
solicitation by mail, certain officers and employees of the Company, who will
receive no compensation for their services other than their regular salaries,
may solicit proxies in person, by telephone or otherwise. The Company may also
make arrangements with brokerage houses, custodians, nominees and other
fiduciaries to send proxy materials to their principals at the Company's
expense. The Company has retained Corporate Communications, Inc. to aid in
solicitation of proxies at a fee of approximately $15,000, plus certain
expenses.
VOTING PROCEDURES
VOTING STOCK
Only holders of record of the Common and Preferred Stock, as of the close
of business on June 22, 1999 (the "Record Date"), will be entitled to vote at
the 1999 Annual Meeting. The Company had outstanding 3,588,613 shares of Common
Stock and 50,000 shares of Preferred Stock on the Record Date. Each share of
Common Stock entitles the holder thereof to one vote on each matter submitted to
the stockholders. Each share of Preferred Stock entitles the holder thereof to a
number of votes equal to the number of shares of Common Stock into which such
share of Preferred Stock could be converted as of the Record Date. The holders
of shares of Preferred Stock are entitled to vote together with the holders of
the Common Stock as a single class on all matters being submitted to the
Company's stockholders, except as otherwise stated in this Proxy Statement. As
of the Record Date, the holders of the Preferred Stock would be entitled to an
aggregate of 529,101 votes based upon an assumed Conversion Price (as defined)
of $9.45. The actual number of votes to which the holders of the Preferred Stock
will be entitled to vote at the Annual Meeting cannot be determined on the date
of this Proxy Statement. The actual Conversion Price will be equal to the
average of the average daily closing price of the Common Stock for the 30
consecutive Trading Days prior to the date of the 1999 Annual Meeting. The
average of the average daily closing prices of the Common Stock for the 30
consecutive Trading Days (as defined) prior to the Record Date, as reported on
the Nasdaq National Market System, was $14.125.
Stockholders who do not expect to attend the 1999 Annual Meeting are urged
to execute and return the enclosed proxy card promptly. Any stockholder signing
and returning a proxy may revoke the same at any time prior to the voting of the
proxy by giving written notice to the Secretary of the Company or by voting in
person at the meeting. All properly executed proxy cards delivered by
stockholders and not revoked will be voted at the 1999 Annual Meeting in
accordance with the directions given. With respect to the proposal regarding
<PAGE> 4
election of directors, stockholders may (a) vote in favor of all nominees, (b)
withhold their votes as to all nominees, or (c) withhold their votes as to
specific nominees by so indicating in the appropriate space on the enclosed
proxy card. With respect to each other proposal being submitted to the
stockholders for their consideration, stockholders may (i) vote "FOR" such
proposal, (ii) vote "AGAINST" such proposal, or (iii) abstain from voting on
such proposal. If no specific instructions are given with regard to the matters
to be voted upon, the shares represented by a signed proxy card will be voted
"FOR" the election of all nominees for director, "FOR" the proposal to ratify
the Private Placement (as defined), "FOR" the proposal to authorize the Stock
Issuance (as defined) and "FOR" the proposal to approve and adopt the America
Service Group Inc. 1999 Incentive Stock Plan (the "Plan"). Management knows of
no other matters that may come before the meeting for consideration by the
stockholders. However, a signed proxy card will confer authority on the persons
named in the enclosed proxy card (the "Proxies") to vote the shares represented
thereby in their discretion on any other matter that comes before the meeting.
The shares represented by a signed proxy card will be voted in accordance with
the instructions indicated thereon with respect to the proposals described in
this Proxy Statement and in the discretion of the Proxies on any other matter.
If no specific instructions are given with regard to the matters to be voted
upon, the shares represented by a signed proxy card will be voted as indicated
above with respect to each of the proposals described in this Proxy Statement
and in the discretion of the Proxies on any other matter.
QUORUM AND VOTING REQUIREMENTS
A quorum at the 1999 Annual Meeting will consist of a majority of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are outstanding and entitled to vote. A plurality of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are present at the 1999 Annual Meeting and entitled to vote will be
necessary to elect the director-nominees listed herein. A majority of the votes
entitled to be cast by the holders of all shares of Common Stock that are
present at the meeting and entitled to vote will be necessary to ratify the
Private Placement and to authorize the Stock Issuance. A majority of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are present at the meeting and entitled to vote will be necessary to
approve and adopt the Plan. Abstentions and proxies relating to "street name"
shares for which brokers have not received voting instructions from the
beneficial owner ("Broker Non-Votes") are counted in determining whether a
quorum is present. With respect to all matters submitted to the stockholders for
their consideration, other than the election of directors, abstentions will be
counted as part of the total number of votes cast on such proposals in
determining whether the proposals have received the requisite number of
favorable votes, whereas Broker Non-Votes will not be counted as part of the
total number of votes cast on such proposals. Thus, abstentions will have the
same effect as votes against any given proposal, whereas Broker Non-Votes will
have no effect in determining whether any given proposal has been approved by
the stockholders. In the election of directors, the nominees receiving the
highest number of votes will be elected. Therefore, withholding authority to
vote for a director nominee will have no effect.
2
<PAGE> 5
INFORMATION AS TO DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table sets forth certain information, including ownership of
the Common Stock, as of March 23, 1999, with respect to: (i) each director or
nominee; (ii) each executive officer; and (iii) all directors and executive
officers as a group. Except as set forth under the caption "Principal
Stockholders" with respect to David A. Freeman, none of such persons owned any
shares of Preferred Stock.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
Michael Catalano, 47 President and Chief Executive 1998 50,666 1.4%
Officer since September 1,
1998; Executive Vice
President of Development,
General Counsel and Secretary
of the Company from July 1996
to September 1, 1998; Senior
Vice President Planning and
Development and Chief Legal
Counsel of Magellan Health
Services, Inc. from 1989
through February 1996.
William D. Eberle, 75(2) Chairman of the Executive 1991 49,000(3) 1.4%
Committee of the Board of
Directors since September 1,
1998; Chairman of the Board
of Directors from March 1995
to September 1, 1998;
Chairman, Manchester
Associates, Ltd., an
international consulting
company, since 1995; Of
Counsel to Kaye Scholer,
Fierman, Hays & Handler, a
law firm, since 1993.
David A. Freeman, 37 Member of Ferrer Freeman 1999(3) 679,101(4) 16.1%
Thompson & Co., General Part-
ner of Health Care Capital
Partners L.P. and Health Care
Executive Partners L.P., each
of which is an investment
management company, since
October 1995; Managing
Director of J.P. Morgan &
Co., Inc., an investment
banking firm, from Septem-
ber 1983 through September
1995.
John W. Gildea, 55(5) Managing Director, Gildea 1986 39,115 1.1%
Management Co., an investment
management company.
Carol R. Goldberg, 68(6) President, AVCAR Group, Ltd., 1991 23,000 *
a management consulting firm.
Jeffrey L. McWaters, 42 Chairman, President and Chief N/A 0 --
Executive Officer of
Amerigroup Corporation
(formerly Americaid, Inc.), a
managed health
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
care company, since October
1994; President and Chief
Executive Officer of Options
Mental Health, a managed
mental health care company
and a subsidiary of First
Hospital Corporation, from
1991 through September 1994.
Richard M. Mastaler, 53 Chairman and Chief Executive N/A 0 --
Officer of CCN Managed Care,
Inc., a managed health care
company, since August 1997;
Executive Vice
President -- Mergers and
Acquisitions and Product
Development of Magellan
Health Services, Inc., a
managed behavioral health
care company, from September
1996 through August 1997;
President and Chief Execu-
tive Officer of Unilab
Corporation, a clinical and
pathological laboratory, from
April 1994 through March
1996.
Scott L. Mercy, 37 Chairman and Chief Executive 1996 361,000(7) 9.6%
Officer of LifePoint
Hospitals, a hospital
management company, since
September 1998; Chairman of
the Board of Directors since
September 1, 1998; President
and Chief Executive Officer
of the Company from April 1,
1996 through September 1,
1998; Senior Vice
President -- Financial
Operations of Columbia/HCA
Healthcare Corporation from
1994 through 1995; Vice
President -- Financial
Operations and
Director -- Financial
Operations Support of
Hospital Corporation of
America from 1987 through
1994.
Richard D. Wright, 53 Chairman, President and Chief N/A 0 *
Executive Officer of Covation
LLC, a provider of software
integration and data
management services for
health care providers and
organizations, since Decem-
ber 1998; Co-Founder and
Executive Vice President,
Corporate Services of PhyCor,
Inc., a physi-
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
cian practice management com-
pany, from 1997 through
December 1998; Executive Vice
President of Operations from
1988 through 1997.
OTHER EXECUTIVE OFFICERS
Gerard F. Boyle, 44 Executive Vice President of -- 25,671 *
the Company since February
1998; President and Chief
Executive Officer of Prison
Health Services, Inc., a
wholly owned subsidiary of
the Company ("PHS"), since
March 1998; Vice President of
Operations of EMSA Correc-
tional Care, Inc., from
September 1996 through
February 1998; Vice President
and Administrator of Sales
for EMSA Correctional Care,
Inc. from July 1994 through
August 1996; Regional
Administrator for Operations
(Southeast Virginia) for EMSA
Correctional Care, Inc. from
January 1993 through July
1994.
Bruce A. Teal, 37 Executive Vice President and -- 23,807 *
Chief Financial Officer of
the Company since July 1999;
Senior Vice President and
Chief Financial Officer of
the Company from February
1998 through June 1999; Vice
President, Controller and
Treasurer of the Company from
December 1996 through
February 1998; Vice President
of Financial Operations of
Vendell Healthcare, Inc. from
October 1992 through November
1996.
All continuing Directors and 1,251,359 27.9%
executive officers as a
group (10 persons)
</TABLE>
- ---------------
* Less than 1%
(1) Includes the following shares subject to options exercisable presently or
within 60 days: Mr. Catalano, 44,000 shares; Mr. Eberle, 48,000 shares; Mr.
Freeman, 15,000; Mr. Gildea, 38,000 shares; Ms. Goldberg, 23,000 shares; Mr.
Mercy, 175,000 shares; Mr. Boyle, 25,000 shares; Mr. Teal, 22,110 shares;
and all continuing directors and executive officers as a group, 390,110
shares.
(2) Mr. Eberle also serves on the Boards of Directors of Ampco-Pittsburgh
Corporation, Mitchell Energy & Development Corporation, Konover Property
Trust and Showscan Entertainment, Inc.
(3) Mr. Freeman was appointed to the Board of Directors on January 26, 1999
pursuant to the terms of the Securities Purchase Agreement (as defined
below). See "Certain Transactions."
5
<PAGE> 8
(4) Mr. Freeman is deemed to beneficially own the shares of Common Stock which
are issuable upon the exercise of the Warrants (as defined) and the
conversion of the 50,000 shares of Preferred Stock (the "Initial Preferred
Stock") issued on January 26, 1999 to Health Care Capital Partners L.P.
("Capital Partners") and Health Care Executive Partners L.P. ("Executive
Partners"). See "Certain Transactions." The Warrants entitle the holders
thereof to purchase 135,000 shares of Common Stock. The Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the per-share liquidation preference of the Preferred Stock ($100)
by the Conversion Price. The Conversion Price is equal to the lower of (i)
$9.45 and (ii) the Current Market Price (as defined) of the Common Stock
during the 30 consecutive Trading Days prior to the Stockholders Meeting (as
defined); provided that, the Conversion Price shall in no event be less than
$5.50 per share. Upon conversion of the Initial Preferred Stock, Capital
Partners and Executive Partners will be entitled to receive between 529,101
and 909,091 shares of Common Stock, depending upon the applicable Conversion
Price. Such shares of Common Stock, together with the 135,000 shares of
Common Stock issuable upon exercise of the Warrants, would represent between
15.7% and 22.6% of the outstanding shares of Common Stock. In computing Mr.
Freeman's beneficial ownership as reported in the table above, the Company
has assumed that Capital Partners and Executive Partners will be entitled to
receive 529,101 shares of Common Stock upon conversion of the Initial
Preferred Stock (assuming a Conversion Price of $9.45), in addition to the
135,000 shares of Common Stock Capital Partners and Executive Partners will
be entitled to receive upon exercise of the Warrants and the 15,000 shares
of Common Stock Mr. Freeman is entitled to receive pursuant to the exercise
of stock options. See Note 1. If Proposal No. 3 is approved, the Notes (as
defined), all of which are held by Capital Partners and Executive Partners,
will be converted into Preferred Stock which may in turn be converted into
Common Stock. On July 2, 1999, the Company redeemed $7.5 million aggregate
principal amount of the Notes. Mr. Freeman will also be deemed to
beneficially own any such shares of Preferred Stock or Common Stock owned by
Capital Partners and Executive Partners. Upon conversion of the Notes into
Preferred Stock and such Preferred Stock into Common Stock, Capital Partners
and Executive Partners will be entitled to receive between 793,651 and
1,363,636 shares of Common Stock, depending upon the applicable Conversion
Price. Such shares of Common Stock, together with the shares of Common Stock
issuable upon exercise of the Warrants and conversion of the Initial
Preferred Stock would represent between 29.0% and 40.2% of the shares of
Common Stock outstanding following such conversion and exercise.
Consequently, including the 15,000 shares of Common Stock Mr. Freeman is
entitled to receive pursuant to the exercise of stock options, Mr. Freeman
would be deemed to beneficially own between 29.2% and 40.4% of the
outstanding shares of Common Stock.
(5) Mr. Gildea also serves on the Boards of Directors of General Chemical Group
Inc. and Konover Property Trust.
(6) Ms. Goldberg also serves on the Board of Directors of The Gillette Company
and Selfcare, Inc.
(7) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(as defined), (which are presently held in the name of his spouse and
beneficial ownership of which he disclaims), and options to purchase 175,000
shares of Common Stock. The shares of Common Stock purchased by Mr. Mercy
and the shares of Common Stock issued under the Old Mercy Agreement are
subject to certain repurchase rights in favor of the Company and Mr. Mercy.
See "Executive Compensation -- Employment Agreements."
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock, as of June 7, 1999, by each person who
was known by the Company to own beneficially more than 5% of the Common Stock as
of such date, based on information furnished to the Company. Except as otherwise
indicated, each person has sole voting and dispositive power with respect to the
shares beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY % OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
- ---------------- ------------ -----------
<S> <C> <C>
A group comprised of Health Care Capital Partners L.P. and
Health Care Executive Partners L.P........................ 679,101(1) 16.1%
Value Partners, Ltd......................................... 525,575(2) 14.7%
c/o Ewing & Partners
Suite 808
4514 Cole Avenue
Dallas, Texas 75205
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY % OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
- ---------------- ------------ -----------
<S> <C> <C>
A group comprised of J. Carlo Cannell D/B/A Cannell Capital
Management, Tonga Partners LP, Pleiades Investment
Partners, LP, the Cuttyhunk Fund Limited and Canal
Ltd.(3)................................................... 397,300(4) 11.1%
Scott L. Mercy.............................................. 361,000(5) 9.6%
LifePoint Hospitals
4526 Harding Road
Nashville, Tennessee 37205
Sirach Capital Management, Inc. ............................ 267,000(6) 7.5%
3323 One Union Square
Seattle, Washington 98101
Frontier Capital Management Company, Inc.................... 194,670(7) 5.4%
99 Summer Street
Boston, Massachusetts 02110
A group comprised of Mark E. Brady, Robert J. Suttman, III
and Ronald Eubel.......................................... 190,170(8) 5.3%
777 Washington Village Drive
Suite 210
Dayton, Ohio 45459
A group comprised of Wachovia Corporation and Wachovia Bank,
N.A. (collectively, the "Wachovia Group")................. 183,500(9) 5.1%
100 North Main Street
Winston Salem, North Carolina 27104
A group comprised of Sandera Partners, L.P., Sandera Capital
Management, L.L.C., Sandera Capital, L.L.C., John A.
Bricker, Jr., Hunt Financial Partners, L.P. (collectively,
the "Sandera Group"), and Newcastle Partners, L.P. and
Mark Schwartz (collectively, the "Newcastle Group")(10)... 155,500(11) 4.4%
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon exercise of the Warrants and
the conversion of the Initial Preferred Stock, which Capital Partners and
Executive Partners are deemed to beneficially own, and 15,000 shares
subject to options exercisable by David A. Freeman which Capital Partners
and Executive Partners are deemed to beneficially own. The Warrants entitle
Capital Partners and Executive Partners to purchase 135,000 shares of
Common Stock. The Preferred Stock is convertible into such number of shares
of Common Stock as is determined by dividing the per-share liquidation
preference of the Preferred Stock ($100) by the Conversion Price, which may
vary between $5.50 and $9.45. Upon conversion of the Initial Preferred
Stock, Capital Partners and Executive Partners will be entitled to receive
between 529,101 and 909,091 shares of Common Stock, depending upon the
applicable Conversion Price. Such shares of Common Stock, together with the
135,000 shares of Common Stock issuable upon exercise of the Warrants,
would represent between 15.7% and 22.6% of the outstanding shares of Common
Stock. If Proposal No. 3 is approved, the Notes, all of which are held by
Capital Partners and Executive Partners, will be converted into Preferred
Stock which may in turn be converted into Common Stock. On July 2, 1999,
the Company redeemed $7.5 million aggregate principal amount of their
Notes. Upon conversion of the Notes into Preferred Stock and such Preferred
Stock into Common Stock, Capital Partners and Executive Partners will be
entitled to receive between 793,651 and 1,363,636 shares of Common Stock,
depending upon the applicable Conversion Price. Such shares of Common
Stock, together with the shares of Common Stock issuable upon exercise of
the Warrants and conversion of the Initial Preferred Stock would represent
between 29.0% and 40.2% of the shares of Common Stock outstanding following
such conversion and exercise.
(2) Based on Amendment No. 4 to a Schedule 13D filed with the SEC on June 7,
1999. According to such Schedule 13D, each of Ewing & Partners, as general
partner of Value Partners, Ltd., and Timothy G. Ewing, as managing general
partner of Ewing & Partners, may direct the vote and disposition of the
7
<PAGE> 10
shares of Common Stock owned by Value Partners, Ltd. The business address
of Ewing & Partners and Timothy G. Ewing is Suite 808, 4514 Cole Avenue,
Dallas, Texas 75205.
(3) The address of J. Carlo Cannell D/B/A Cannell Capital Management and Tonga
Partners LP is 600 California Street, Floor 14, San Francisco, California
94108. The address of Pleiades Investment Partners, LP is 6022 West Chester
Pike, Newtown Square, Pennsylvania 19073. The address of the Cuttyhunk Fund
Limited is 73 Front Street, Hamilton, HM12, Bermuda. The address of Canal,
Ltd. is 9 Church Street, HM 951, Hamilton HM DX, Bermuda.
(4) Based on a Schedule 13G filed with the SEC on March 1, 1999, J. Carlo
Cannell D/B/A Cannell Capital Management beneficially owns 397,300 shares
of Common Stock, Tonga Partners, LP beneficially owns 167,800 shares of
Common Stock, Pleiades Investment Partners beneficially owns 46,600 shares
of Common Stock, the Cuttyhunk Fund Limited beneficially owns 146,200
shares of Common Stock and Canal Ltd. beneficially owns 36,700 shares of
Common Stock.
(5) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(which are presently held in the name of his spouse and beneficial
ownership of which he disclaims), and options to purchase 175,000 shares of
Common Stock. The shares of Common Stock purchased by Mr. Mercy and the
shares of Common Stock issued under the Old Mercy Agreement are subject to
certain repurchase rights in favor of the Company and Mr. Mercy. See
"Executive Compensation -- Employment Agreements."
(6) Based upon a Schedule 13G filed with the SEC on February 2, 1999.
(7) Based on a Schedule 13G filed with the SEC on February 27, 1998.
(8) Based on a Schedule 13G filed with the SEC on March 11, 1999, each of Mark
E. Brady, Robert J. Suttman and Ronald Eubel beneficially owns 190,170
shares of Common Stock.
(9) Based on a Schedule 13G filed with the SEC on February 12, 1999, each of
Wachovia Corporation and Wachovia Bank, N.A. beneficially owns 183,500
shares of Common Stock.
(10) The address of each member of the Sandera Group is 1601 Elm Street, Suite
4000, Dallas, Texas 75201. The address of each member of the Newcastle
Group is 4650 Cole Avenue, Suite 331, Dallas, Texas 75205.
(11) Based upon Amendment No. 1 to Schedule 13G filed with the SEC on February
16, 1999, the Sandera Group beneficially owns 151,500 shares of Common
Stock, Newcastle Partners L.P. beneficially owns 4,000 shares and Mark
Schwartz beneficially owns 155,500 shares.
PREFERRED STOCK
Capital Partners owns 48,020 shares of Preferred Stock, which represents
approximately 96% of the outstanding shares of Preferred Stock. Executive
Partners owns 1,980 shares of Preferred Stock, which represents approximately 4%
of the outstanding shares of Preferred Stock. The principal business address of
Capital Partners and Executive Partners is c/o Ferrer Freeman Thompson & Co.
LLC, The Mill, 10 Glenville Street, Greenwich, Connecticut 06831. The shares of
Preferred Stock owned by Capital Partners and Executive Partners constitute all
of the outstanding shares of Preferred Stock. The general partner of each of
Capital Partners and Executive Partners is Ferrer Freeman Thompson & Co ("FFT").
David A. Freeman, a director and director-nominee of the Company, is a member of
FFT and is thereby deemed to beneficially own all of the Preferred Stock owned
by Capital Partners and Executive Partners.
8
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the two most highly compensated
executive officers other than the CEO (the "Named Executives") for each of the
years 1996 through 1998. The Company has no executive officers other than the
individuals named below.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- -----------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION STOCK($) OPTIONS(#) COMPENSATION(1)
------------------ ---- -------- -------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy(2)............ 1998 $155,000 $175,375 $ -- $ -- -- $ --
1997 190,000 -- -- -- -- 16,533
1996 138,846 -- -- 350,000 175,000 9,223
Michael Catalano(3).......... 1998 $186,862 $187,832 $ -- $ -- 62,000 $ 3,454
President and Chief 1997 165,500 -- 56,000(4) -- -- 13,384
Executive Officer 1996 83,077 -- -- -- 60,000 4,452
Gerard F. Boyle(5)........... 1998 $162,413 $ 71,445 $29,068(4) $ -- 85,000 $ 2,500
Executive Vice 1997 -- -- -- -- -- --
President and Chief 1996 -- -- -- -- -- --
Operating Officer
Bruce A. Teal(6)............. 1998 $159,259 $160,643 $ -- $ -- 33,000 $ 2,500
Executive Vice 1997 115,000 -- -- -- -- 102
President and Chief 1996 4,423 -- -- -- 17,000 9
Financial Officer
</TABLE>
- ---------------
(1) Includes matching contributions by the Company to its 401(k) Profit Sharing
Plan and life and health insurance premiums paid by the Company on behalf of
the Named Executives.
(2) Mr. Mercy became President and Chief Executive Officer of the Company on
April 1, 1996. Mr. Mercy resigned his position as President and Chief
Executive Officer on September 1, 1998.
(3) Mr. Catalano served as Executive Vice President of Development, General
Counsel and Secretary of the Company from July 12, 1996 through September 1,
1998. Mr. Catalano became President and Chief Executive Officer of the
Company on September 1, 1998.
(4) Represents reimbursement for relocation costs.
(5) Mr. Boyle became Executive Vice President and Chief Operating Officer of the
Company on February 12, 1998.
(6) Mr. Teal served as Vice President, Controller and Treasurer of the Company
from December 10, 1996 through February 20, 1998. Mr. Teal became Senior
Vice President and Chief Financial Officer of the Company on February 20,
1998 and Executive Vice President on July 20, 1999.
9
<PAGE> 12
STOCK OPTION GRANTS AND VALUES
The following table sets forth certain information with respect to stock
options granted to the Named Executives during 1998 and the potential realizable
value of such options.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTION TERM
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------ ------------ ----------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Catalano
Feb. 20, 1998........... 12,000 3.7 9.69 Feb. 20, 2008 73,080 185,280
Sept. 1, 1998........... 50,000 15.8 8.69 Sept. 1, 2008 273,000 692,000
Gerald Boyle
Feb. 12, 1998........... 75,000 23.4 9.376 Feb. 12, 2008 442,500 1,120,500
Sept. 1, 1998........... 10,000 3.1 8.69 Sept. 1, 2008 54,600 138,400
Bruce Teal
Feb. 20, 1998........... 33,000 10.3 9.69 Feb. 20, 2008 200,970 509,520
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
TABLE
The following table sets forth certain information with respect to option
exercises by the Named Executives during 1998 and the value of options owned by
the Named Executives at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES --------------------- --------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Scott L. Mercy....................... -- $ -- 175,000/0 $ 743,750/-
Michael Catalano..................... -- -- 40,000/82,000 -/225,406
Gerard F. Boyle...................... -- -- 0/85,000 -/315,380
Bruce A. Teal........................ -- -- 11,220/38,780 41,374/130,643
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock on the Nasdaq National Market
System on December 31, 1998 of $13.00 per share.
EMPLOYMENT AGREEMENTS
Scott L. Mercy was employed as President and Chief Executive Officer of the
Company from April 1, 1996 through September 1, 1998 pursuant to an employment
agreement, which was amended on June 30, 1997 (the "Old Mercy Agreement"). The
Old Mercy Agreement provided for a minimum annual base salary of $190,000, an
annual bonus based upon performance objectives, and such additional compensation
as determined by the Compensation Committee from time to time. On September 1,
1998, Mr. Mercy and the Company amended and restated the Old Mercy Agreement
(the "New Mercy Agreement") pursuant to which Mr. Mercy was appointed Chairman
of the Board of Directors. Pursuant to the New Mercy Agreement, Mr. Mercy was
paid a base salary of $60,000 for his service as Chairman of the Board during
1998. For years after 1998, the New Mercy Agreement establishes a minimum annual
base salary of $24,000 and such additional compensation as may be determined by
the Compensation Committee from time to time. Pursuant to the Old Mercy
Agreement, Mr. Mercy purchased 146,000 shares of Common Stock from the Company
at $8.75 per share, the mean between the high and low sale prices for the Common
Stock on April 1, 1996, received 40,000 shares as a restricted stock award under
the Company's Incentive Stock Plan, and was awarded options to purchase 175,000
additional shares of Common Stock, at $8.75 per share. Pursuant to the Old Mercy
Agreement the restricted stock and stock options were to vest in installments
over four years, or
10
<PAGE> 13
earlier in one-third installments when the closing price of the Common Stock
reached $12, $14 and $16, respectively. Mr. Mercy's restricted stock and stock
options vested in 1996 when the closing price of the Common Stock exceeded $16
per share. Pursuant to the New Mercy Agreement, Mr. Mercy has the right to
require the Company to purchase (and the Company has the right to require Mr.
Mercy to sell), at a price not less than $9.90 per share, the purchased shares
and the award shares, but not the option shares, upon Mr. Mercy's termination of
employment. Mr. Mercy is subject to certain non-competition and confidentiality
agreements following termination. The New Mercy Agreement provides for perpetual
employment until terminated by 30 days written notice by either party. The New
Mercy Agreement also provides that the Board of Directors shall take all
necessary actions to ensure that Mr. Mercy is slated as a management nominee to
the Board and elected Chairman of the Board during his employment. Pursuant to
the New Mercy Agreement, Mr. Mercy may terminate his position as Chairman of the
Board, remain a director and otherwise continue his employment under the New
Mercy Agreement, unless it is otherwise terminated.
Michael Catalano was employed as Executive Vice President of Development,
General Counsel and Secretary of the Company from July 12, 1996 through
September 1, 1998 pursuant to an employment agreement (the "Old Catalano
Agreement") which established a minimum annual base salary of $160,000 and such
additional compensation as determined by the Compensation Committee from time to
time. On September 1, 1998, Mr. Catalano and the Company amended and restated
the Old Catalano Agreement (the "New Catalano Agreement") pursuant to which Mr.
Catalano was appointed President and Chief Executive Officer of the Company. The
New Catalano Agreement establishes a minimum annual base salary of $190,000 and
such additional compensation as may be determined by the Compensation Committee
from time to time. Pursuant to the Old Catalano Agreement, on July 12, 1996, the
Company awarded to Mr. Catalano options to purchase 60,000 shares of Common
Stock at an exercise price of $13.125 per share under the Company's Amended
Incentive Stock Plan. The stock options vest ratably on each of the succeeding
three anniversaries of the date of the options and shall be exercisable for a
period of ten years from the date of the grant. Upon termination without cause
or a change of control of the Company, all unexercised stock options granted to
Mr. Catalano under the Company's Amended Incentive Stock Plan shall accelerate
and immediately vest. The issuance of the Preferred Stock to Capital Partners
and Executive Partners upon conversion of the Notes would constitute a change of
control under the New Catalano Agreement. Also, in the event of termination as a
result of death or disability, termination without cause or termination
following a change in control of the Company, Mr. Catalano or his estate is
entitled to two-year's compensation plus an amount equal to the incentive
compensation that Mr. Catalano would have earned in the year of termination, not
to be less than 45% of Mr. Catalano's annual base salary on the date of
termination. Mr. Catalano is subject to certain non-competition and
confidentiality agreements following termination. The New Catalano Agreement
provides for perpetual employment until terminated by appropriate written notice
by either party. The New Catalano Agreement also provides that the Board of
Directors shall take all necessary actions to ensure that Mr. Catalano is slated
as a management nominee to the Board during his employment.
On February 12, 1998, Gerard F. Boyle entered into an employment agreement
(the "Boyle Agreement") with the Company pursuant to which he was appointed
Executive Vice President and Chief Operating Officer of the Company. The Boyle
Agreement establishes a minimum annual salary of $180,000 and such additional
compensation as may be determined by the Compensation Committee from time to
time. The Boyle Agreement provides for perpetual employment until terminated by
either party upon thirty days notice. If there is a change of control of the
Company, all unexercised stock options granted to Mr. Boyle under the Company's
Amended Incentive Stock Plan shall accelerate and immediately vest. The issuance
of the Preferred Stock to Capital Partners and Executive Partners upon
conversion of the Notes would constitute a change of control under the Boyle
Agreement. Also, in the event of a termination without cause, including
termination following a change in control, Mr. Boyle's options shall vest and
his annual base salary as of the date of his termination shall be continued for
one year following such termination date. Mr. Boyle is subject to certain
non-competition and confidentiality agreements following termination.
On February 20, 1998, Bruce Teal entered into an employment agreement (the
"Teal Agreement") with the Company pursuant to which he was appointed Senior
Vice President and Chief Financial Officer of the Company. Mr. Teal had been
serving as Vice President, Controller and Treasurer of the Company since
11
<PAGE> 14
December 1996; however, the Company and Mr. Teal had not entered into an
employment agreement for his service in that capacity. The Teal Agreement
establishes a minimum annual salary of $160,000 and such additional compensation
as may be determined by the Compensation Committee from time to time. The Teal
Agreement provides for perpetual employment until terminated by either party
upon thirty days notice. If there is a change of control of the Company, all
unexercised stock options granted to Mr. Teal under the Company's Amended
Incentive Stock Plan shall accelerate and immediately vest. The issuance of the
Preferred Stock to Capital Partners and Executive Partners upon conversion of
the Notes would constitute a change of control under the Teal Agreement. Also,
in the event of a termination without cause, including termination following a
change in control, Mr. Teal's options shall vest and his annual base salary as
of the date of his termination shall be continued for one year following such
termination date. Mr. Teal is subject to certain non-competition and
confidentiality agreements following termination.
COMPENSATION OF DIRECTORS
During 1998, the Company granted each non-employee Director options to
purchase 4,000 shares of Common Stock at an exercise price of $13.56 per share
for serving on the Board and its committees. The Chairman of the Board of
Directors of the Company until September 1, 1998, Mr. William D. Eberle, was
also paid $25,000 for consulting services which he provided to the Company
during 1998. Directors who are also employees of the Company receive no
additional compensation from the Company for attendance at Board or committee
meetings. Under the terms of the Company's Amended Incentive Stock Plan, any
person who is not an employee or independent contractor of the Company and who
becomes a Director will receive an option to purchase 15,000 shares of the
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date such person becomes a Director. Such options will vest with
respect to 25% of the shares covered thereby on each successive anniversary of
the date of grant. David A. Freeman was granted such options, effective January
26, 1999, upon his appointment to the Board.
CERTAIN TRANSACTIONS
David A. Freeman, a director and a director-nominee of the Company, is a
member of FFT. On January 26, 1999, the Company entered into the Securities
Purchase Agreement (as defined) and certain other agreements with Capital
Partners and Executive Partners, investment management companies whose general
partner is FFT, pursuant to which the Company issued the Convertible Securities
to Capital Partners and Executive Partners. See "Ratification of the Private
Placement -- Description of the Proposal." On July 2, 1999, the Company redeemed
$7.5 million aggregate principal amount of the Notes. Capital Partners and
Executive Partners currently own 100% of the outstanding shares of the Preferred
Stock, the Notes and the Warrants. In addition, if the Stock Issuance is
approved by the Company's stockholders at the 1999 Annual Meeting, Capital
Partners and Executive Partners will have the right to receive additional shares
of Preferred Stock upon conversion of the Notes and shares of Common Stock upon
conversion of the Preferred Stock and the Warrants. Mr. Freeman is deemed to
beneficially own the Convertible Securities currently owned by Capital Partners
and Executive Partners and will be deemed to beneficially own any additional
Convertible Securities or Common Stock acquired by Capital Partners and
Executive Partners.
On the January 26, 1999, the Board of Directors appointed Mr. Freeman to
the Board of Directors, pursuant to a provision of the Securities Purchase
Agreement which obligated the Company to appoint a designee of Capital Partners
and Executive Partners to the Board of Directors on the date of the closing of
the Securities Purchase Agreement. See "Ratification of the Private
Placement -- Summary of the Securities Purchase Agreement -- Board of Directors
Representation." Pursuant to the Securities Purchase Agreement, if the
stockholders approve the Stock Issuance at the 1999 Annual Meeting, the Company
will be obligated to increase the number of members of the Board of Directors to
nine and to nominate designees of Capital Partners and Executive Partners to
three of the nine directorships. Capital Partners and Executive Partners have
designated Mr. Freeman, Richard D. Wright and Jeffrey L. McWaters to be
nominated to directorships. FFT has a 17.3% ownership interest in Amerigroup
Corporation of which Mr. McWaters is Chairman, President and Chief Executive
Officer.
12
<PAGE> 15
Scott L. Mercy, Chairman of the Board of Directors, is a limited partner of
Executive Partners. His interest in Executive Partners represents 1.5% of
Executive Partners' capital.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") of the Board of Directors
consists of five non-employee members of the Board of Directors. The Incentive
Stock Committee (the "Stock Committee"), which is responsible for administering
the Company's Amended Incentive Stock Plan, is comprised of Ms. Goldberg, Mr.
Bogan, Mr. Bovender, and Mr. Gildea.
EXECUTIVE COMPENSATION POLICIES
Generally, the Company's executive compensation program is designed to be
competitive with that offered by other companies against which the Company
competes for executive resources. At the same time, the Company links a
significant portion of executive compensation to the achievement of the
Company's short- and long-term financial and strategic objectives and to the
performance of the Common Stock. The Company's executive compensation program
consists of three primary elements: base salary, annual incentive bonus and
stock options or other stock benefits. Base salary is intended to be competitive
in the marketplace. However, although the Committee considers competitive data,
salaries are determined subjectively by the Committee rather than by reference
to any specific target group of companies. Base salary is reviewed at a minimum
annually and adjusted based on changes in competitive pay levels, the
executive's performance as measured against individual, business group, and
Company-wide goals, as well as changes in the executive's role in the Company.
The Committee awards incentive bonuses to the Named Executives based on the
achievement of certain targets and objectives which are set at the beginning of
each year. The Company does not make annual stock option or other stock benefit
grants to all executives. Rather, the Stock Committee determines each year
which, if any, executives will receive benefits, based on individual performance
and each executive's existing stock option position.
EXECUTIVE OFFICER COMPENSATION
On September 1, 1998, the Company promoted Michael Catalano from Executive
Vice President of Development and General Counsel to President and Chief
Executive Officer of the Company. During February 1998, the Company recruited
Gerard F. Boyle to become Executive Vice President and Chief Operating Officer
of the Company and the Company promoted Bruce A. Teal from Vice President,
Controller and Treasurer to Senior Vice President and Chief Financial Officer of
the Company. The base compensation, incentive bonus and stock option agreements
entered into by the Company with such individuals were determined by
arm's-length negotiations between the Committee and other members of the Board
of Directors and such individuals. The Committee believes that the specific base
compensation, incentive bonus and stock option arrangements were necessary to
attract and retain management of the caliber sought by the Board. Future
adjustments of such arrangements will be made in accordance with the general
principles outlined above.
For 1998, the Committee authorized annual bonuses to the Named Executive
Officers in amounts equal to up to 45% of base compensation, based upon the
performance of the Company against defined objectives, plus certain additional
compensation if the Company exceeded the defined objectives. The Company
achieved the defined performance objectives. Accordingly, the Committee awarded
bonuses for 1998 equal to 45% of each executive officer's base compensation. The
amount of such bonuses paid to Messrs. Mercy, Catalano, Boyle and Teal was
$66,000, $85,500, $71,445 and $72,000, respectively.
In October 1997, the Company entered into a merger agreement with
MedPartners, Inc. ("MedPartners"), pursuant to which the Company would have been
acquired by MedPartners. The Company terminated the merger agreement during the
first quarter of 1998 because of a material decline in the value of the proposed
merger consideration. The Company's management was required to negotiate a
release and settlement agreement with MedPartners pursuant to which the merger
agreement was terminated and the Company was compensated for damages it incurred
as a result of the termination of the proposed merger. The
13
<PAGE> 16
Committee awarded Messrs. Mercy, Catalano and Teal cash bonuses of $109,375,
$102,332 and $88,643, respectively, and Messrs. Catalano and Teal options to
purchase 12,000 and 33,000 shares of Common Stock, respectively, based on their
performance in connection with the negotiation of the settlement agreement.
COMPENSATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
Michael Catalano has served as President and Chief Executive Officer of the
Company since September 1, 1998 pursuant to the New Catalano Agreement. See
"Executive Compensation -- Employment Agreements." The terms of the agreement
were approved by the Committee and the Stock Committee. During 1998, the Company
(i) paid Mr. Catalano a bonus of $102,332 and awarded him 12,000 stock options
in connection with negotiation of the settlement agreement with MedPartners
referred to above, (ii) awarded Mr. Catalano 50,000 stock options in connection
with his assumption of new responsibilities as President and Chief Executive
Officer and (iii) paid Mr. Catalano an incentive bonus of $85,500, equal to 45%
of his base annual compensation, based upon the Company achieving defined
performance objectives. The Committee believes that the incentive bonuses
awarded to Mr. Catalano created an appropriate relationship between Mr.
Catalano's level of compensation and the Company's performance.
Scott L. Mercy served as President and Chief Executive Officer of the
Company from April 1, 1996, through September 1, 1998 pursuant to the Old Mercy
Agreement. See "Executive Compensation -- Employment Agreements." The terms of
the agreement, including the restricted stock awards and stock options issued
pursuant to the agreement, were approved by the Committee, the Stock Committee
and subsequently by the stockholders. The employment agreement provided for the
payment of an annual bonus to Mr. Mercy in an amount to be determined by the
Committee based upon the performance of the Company against defined objectives.
The target amount of the bonus was to be an amount equal to Mr. Mercy's base
compensation, in no event to exceed an amount equal to twice Mr. Mercy's base
salary. Amounts less than the target amount could be paid for performance less
than the pre-approved performance targets, and cash bonuses in excess of the
target amount were to be paid for performance in excess of the pre-approved
targets, or otherwise at the discretion of the Committee. Mr. Mercy received a
bonus of $66,000 for 1998. During 1998, the Company paid Mr. Mercy an additional
cash bonus of $109,375 for his work in connection with the negotiation of the
settlement agreement with MedPartners referred to above. The Committee believes
that the incentive bonuses awarded to Mr. Mercy created an appropriate
relationship between Mr. Mercy's level of compensation and the Company's
performance.
This report by the Committee shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts.
Respectfully submitted by
The Compensation Committee:
CAROL R. GOLDBERG, Chair
THOMAS F. BOGAN
JACK O. BOVENDER, JR.
WILLIAM D. EBERLE
DAVID A. FREEMAN
JOHN W. GILDEA
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee at any time during the
last fiscal year served as an officer of, or was employed by, the Company.
Furthermore, none of the executive officers of the Company currently serves as a
director or member of the compensation committee of any other entity or any
other committee of the board of directors of another entity performing similar
functions.
14
<PAGE> 17
PERFORMANCE GRAPH
The following graph sets forth the total return (stock price plus
dividends) on a $100 investment in each of (i) the Company's Common Stock, (ii)
the Wilshire 5000 Index and (iii) the NASDAQ Health Care Services Index, from
December 31, 1993 through December 31, 1998.
AMERICA SERVICE GROUP INC.
STOCK PERFORMANCE GRAPH
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1993
WITH DIVIDENDS REINVESTED
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
DEC-93 DEC-94 DEC-95 DEC-96 DEC-97 DEC-98
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
America Service Group Inc. $100 $180 $274 $369 $542 $467
- ------------------------------------------------------------------------------------------------------------
Wilshire 5000 $100 $100 $136 $165 $217 $268
- ------------------------------------------------------------------------------------------------------------
Nasdaq Health Services Index $100 $107 $136 $136 $138 $119
- ------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
ELECTION OF DIRECTORS (PROPOSAL NO. 1)
On January 26, 1999, the Board of Directors increased the size of Board of
Directors from seven to eight directors and appointed David A. Freeman, a
designee of Capital Partners and Executive Partners, to the newly-created vacant
directorship pursuant to a provision of the Securities Purchase Agreement which
obligated the Company to so increase the size of the Board of Directors and
appoint a designee of Capital Partners and Executive Partners to the vacant
directorship. If Proposal No. 3 is approved by the Stockholders, the Notes,
which are currently outstanding in the aggregate principal amount of $7.5
million, will be converted to Preferred Stock. Upon conversion of the Notes,
pursuant to the Securities Purchase Agreement, the Company will further be
obligated to increase the size of the Board of Directors to nine directors and
to nominate designees of Capital Partners and Executive Partners to three of the
directorships. If, however, the stockholders do not approve Proposal No. 3, the
Notes will not be converted to Preferred Stock and the Company will be obligated
to maintain the number of directors at eight members and to nominate a designee
of Capital Partners and Executive Partners to only one of the directorships.
Accordingly, the number of directors to be elected at the annual meeting
will be contingent on whether the stockholders approve Proposal No. 3. In
anticipation of the stockholders approving Proposal No. 3, the Board of
Directors has increased the size of the Board to nine members and has nominated
nine directors, six of whom are Company nominees and three of whom are designees
of Capital Partners and Executive Partners. The Company nominees are Michael
Catalano, William D. Eberle, John W. Gildea, Carol R. Goldberg, Scott L. Mercy
and Richard M. Mastaler. The designees of Capital Partners and Executive
Partners are David A. Freeman, Richard D. Wright, and Jeffrey L. McWaters. If
Proposal No. 3 is approved by the stockholders, each of these nine nominees, if
elected, will become a director and collectively those nine directors will
constitute the full Board of Directors.
If Proposal No. 3 is not approved, the Board of Directors will reduce the
number of members of the Board of Directors to six and Capital Partners and
Executive Partners will not be entitled to any representation on the Board of
Directors. If Proposal No. 3 is not approved by the stockholders, Messrs.
Freeman, Wright and McWaters will not become directors, even if they otherwise
receive sufficient votes from the stockholders.
The Board has nominated the nine nominees listed above to serve as a
directors until the next annual meeting of stockholders in 2000 or until their
successors are elected and qualified. Each of the nominees other than Messrs.
Wright, McWaters and Mastaler is currently a member of the Board of Directors.
Each nominee has consented to serve on the Board until the next annual meeting
of stockholders or until his or her successor is duly elected and qualified. If
any of the nominees should be unable to serve for any reason (which management
has no reason to anticipate at this time), the Board of Directors may designate
a substitute nominee or nominees (in which case the persons named as proxies in
the enclosed proxy card will vote all valid proxy cards for the election of such
substitute nominee or nominees), allow the vacancy or vacancies to remain open
until a suitable candidate or candidates are located, or eliminate the vacancy.
The affirmative vote of a plurality of votes entitled to be cast by the holders
of all shares of Common and Preferred Stock that are present in person or by
proxy and entitled to vote at the 1999 Annual Meeting is required to elect the
persons nominated.
Mr. Catalano, the President and Chief Executive Officer of the Company, has
entered into the New Catalano Agreement which provides, among other things, that
the Board shall, during the term of such employment agreement, take all
necessary steps to ensure that Mr. Catalano is slated as a management nominee to
the Board. See "Executive Compensation -- Employment Agreements."
Mr. Mercy, the Chairman of the Board of Directors of the Company, has
entered into the New Mercy Agreement which provides, among other things, that
the Board shall, during the term of such employment agreement, take all
necessary steps to ensure that Mr. Mercy is slated as a management nominee to
the Board and is appointed Chairman of the Board. See "Executive
Compensation -- Employment Agreements."
The Board of Directors recommends a vote FOR each nominee for director.
16
<PAGE> 19
RATIFICATION OF THE PRIVATE PLACEMENT
("PROPOSAL NO. 2")
DESCRIPTION OF THE PROPOSAL
The Board of Directors is requesting that the stockholders ratify the
Company's issuance of (i) $15.0 million aggregate principal amount of the
Company's 12% Subordinated Convertible Bridge Notes due January 26, 2000 (the
"Notes") with two detachable warrants (the "Warrants") to purchase an aggregate
of 135,000 shares of the Common Stock and (ii) 50,000 shares of Preferred Stock
(the "Initial Preferred Stock") for an aggregate purchase price of $5.0 million.
The Notes, Warrants and Initial Preferred Stock were issued in a private
placement (the "Private Placement") which was consummated on January 26, 1999
simultaneously with the Company's acquisition of EMSA Government Services, Inc.
("EMSA"), which was a wholly-owned subsidiary of InPhyNet Administrative
Services, Inc. ("InPhyNet"). InPhyNet is a wholly-owned subsidiary of
MedPartners. The Notes, Warrants and Preferred Stock are referred to
collectively as the "Convertible Securities."
The material terms of the Securities Purchase Agreement (as defined), the
Notes, the Warrants, the Certificate of Designation of the Preferred Stock (the
"Preferred Stock Certificate"), the Registration Rights Agreement (as defined),
the "Stock Purchase Agreement" (as defined) and the "First Amendment" (as
defined) are summarized by the following description of Proposal No. 2 and the
summary of Proposal No. 3. Such summaries are qualified in their entirety by
reference to all the provisions of such documents, including the definitions
therein of certain terms which are not otherwise defined herein. A copy of the
Stock Purchase Agreement was filed as an exhibit to the Company's Current Report
on Form 8-K which was filed on January 5, 1999. A copy of an amendment to the
Securities Purchase Agreement was filed as an exhibit to the Company's Form 10-K
for the year ended December 31, 1998. Copies of all of the other documents
listed above were filed as exhibits to the Company's Current Report on Form 8-K
which was filed on February 10, 1999.
RATIONALE FOR THE PROPOSAL
Pursuant to the Private Placement, the Company issued $15.0 million
aggregate principal amount of the Notes, which bear interest at 12% per annum,
the Initial Preferred and the Warrants. The Initial Preferred Stock and the
Warrants may be converted into shares of Common Stock which would represent
between 15.7% and 22.6% of the outstanding Common Stock, although if Proposal
No. 3 is not approved by the stockholders, the maximum number of shares of
Common Stock the Company may issue upon conversion of the Preferred Stock and
exercise of the Warrants may not exceed 19.9% of the outstanding Common Stock.
In addition, if Proposal No. 3 is approved, the Notes, which are currently
outstanding in the aggregate principal amount of $7.5 million, may be converted
into or exercised for shares of Common Stock which together with the shares of
Common Stock issuable upon conversion of the Initial Preferred Stock and
exercise of the Warrants would represent between 29.0% and 40.2% of the shares
of Common Stock outstanding following such conversion and exercise. As discussed
below, the Board of Directors concluded, prior to the issuance of the
Convertible Securities, that the consideration paid or received by the Company,
as the case may be, (i) for EMSA, (ii) for the Convertible Securities and (iii)
for the Senior Debt (as defined), with all such transactions being taken as a
whole, was fair, from a financial point of view, to the holders of shares of
Common Stock. See "-- Recommendation of the Board of Directors." However, the
Board was unable to seek approval of the issuance of the Convertible Securities
from the Company's stockholders because of time constraints imposed by the
Company's pending acquisition of EMSA. The Board of Directors has determined to
seek stockholder ratification of the Private Placement in order to preclude, or
enhance its defense against, a subsequent stockholder challenge to the Private
Placement. The failure of the stockholders to approve Proposal No. 2 will not
result in a recision of the Private Placement.
EFFECT OF THE ADOPTION OF THE PROPOSAL
Stockholder approval of Proposal No. 2 will result in ratification of the
Private Placement which, pursuant to Delaware law, will either preclude a
subsequent stockholder challenge to the Private Placement or
17
<PAGE> 20
will enhance the ability of the Board of Directors to successfully defend such a
claim, depending on the effect a particular court gives to the ratification.
Under Delaware law, a stockholder could bring an action against the Board of
Directors challenging the Directors' approval of the Private Placement as a
breach of their fiduciary duties to the stockholders. The Board of Directors
does not believe there is any basis for such a claim and is unaware of any
pending or threatened challenge to the Private Placement. However, if the
stockholders approve Proposal No. 2, the stockholders of the Company, or any one
or more of them, will either lose the right to challenge the Private Placement
or will have greater difficulty in successfully bringing such a claim. The
failure of the stockholders to approve Proposal No. 2 will not result in a
recision of the Private Placement. The shares of Initial Preferred Stock issued
in the Private Placement and the shares of Common Stock issuable upon conversion
of the Initial Preferred Stock and exercise of the Warrants are already
authorized by the Company's Certificate of Incorporation. The Board of Directors
is not requesting that the stockholders authorize additional shares of the
Company's capital stock.
INTERESTS OF CERTAIN PERSONS
Certain members of the Board of Directors have interests in the approval of
Proposal No. 2 which are in addition to the interests of the Company's
stockholders. See "Certain Transactions" for a description of such interests.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors unanimously recommends that each stockholder vote in
favor of Proposal No. 2. A majority of the votes entitled to be cast by the
holders of all shares of Common Stock that are present at the meeting and
entitled to vote will be necessary to adopt Proposal No. 2. In connection with
entering into the Securities Purchase Agreement, Capital Partners and Executive
Partners entered into a letter agreement with Scott L. Mercy, the Chairman of
the Board of Directors, pursuant to which Mr. Mercy agreed to vote his shares of
Common Stock, and granted Capital Partners and Executive Partners a proxy to
vote his shares of Common Stock, (i) to approve the Stock Issuance and any
transactions appropriate to implement the Stock Issuance, (ii) against actions
or agreements that would result in a material breach of the Securities Purchase
Agreement and (iii) against any action or agreement that would impede, interfere
with or attempt to discourage approval of the Stock Issuance. As of the Record
Date, Mr. Mercy owned 146,000 shares of Common Stock, representing approximately
4.1% of the outstanding shares of Common Stock as of such date.
The Fairness Opinion. The Company retained SunTrust Equitable Securities
Corporation ("SunTrust Equitable") to act as financial advisor in connection
with the EMSA acquisition, the issuance of the Convertible Securities and the
incurrence of the Senior Debt. On December 18, 1998, SunTrust Equitable
delivered an oral opinion to the Board of Directors, confirmed in writing, that,
based upon and subject to factors and assumptions set forth in the opinion, and
as of the date of such opinion, the consideration to be paid or received by the
Company, as the case may be, (i) for the outstanding shares of EMSA's common
stock (the "EMSA Stock"), (ii) for the Convertible Securities and (iii) for the
Senior Debt, with all such transactions being taken as a whole, is fair, from a
financial point of view, to the holders of shares of the Common Stock. SunTrust
Equitable subsequently confirmed its opinion in writing on January 26, 1999, the
date of the consummation of the EMSA acquisition.
The full text of the SunTrust Equitable opinion, which sets forth
assumptions made, procedures followed, matters considered and limits on the
review undertaken, is attached to this Proxy Statement as Annex A. The SunTrust
Equitable opinion is not a recommendation to any stockholder of the Company as
to how to vote on Proposal No. 2. This summary of the SunTrust Equitable opinion
is qualified in its entirety by reference to the full text of the SunTrust
Equitable opinion.
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<PAGE> 21
In arriving at its opinion, SunTrust Equitable considered certain
publicly-available information as well as other information concerning the
Company, MedPartners and EMSA, which was provided to SunTrust Equitable by the
Company. The information considered included:
- the Stock Purchase Agreement;
- the term sheet, dated November 13, 1998, entered into between the Company
and FFT regarding the Convertible Securities (the "Convertible Securities
Term Sheet");
- the term sheet, dated November 13, 1998, entered into between the Company
and NationsBank regarding the Senior Debt (the "Senior Debt Term Sheet");
- financial reports and forecasts provided by the Company and EMSA;
- the financial terms of precedent transactions involving public and
private companies, including both health maintenance organizations
("HMOs") and corrections companies ("Corrections Companies");
- the financial position and operating results of three different sets of
public companies comprising HMOs, physician practice management companies
("PPMs"), and Corrections Companies; and
- the anticipated pro forma financial effects of the EMSA acquisition to
the Company.
SunTrust Equitable also held discussions with the management and
representatives of the Company and EMSA concerning the historical and current
operations, financial condition, business, strategic objectives and prospects
and the anticipated benefits of the EMSA acquisition to the Company.
Furthermore, SunTrust Equitable conducted such additional financial analyses and
considered such other factors as it deemed appropriate.
In rendering its opinion, SunTrust Equitable relied upon, without
independent verification, the accuracy and completeness of the information
reviewed. SunTrust Equitable assumed that the financial projections provided by
the Company and EMSA were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the respective
managements of the Company and EMSA concerning the future financial performance
of the Company and EMSA and the potential strategic implications and operational
benefits anticipated from the EMSA acquisition. SunTrust Equitable has not made
any independent valuation or appraisal of the assets or liabilities of EMSA, nor
has SunTrust Equitable been furnished with such appraisals. The SunTrust
Equitable opinion does not address the solvency of the Company.
SunTrust Equitable further assumed that:
- the Company would acquire the EMSA Stock under the Stock Purchase
Agreement, with each of the parties performing everything required to be
done by it under the Stock Purchase Agreement and with all conditions to
each party's obligations being satisfied without waiver, except to the
extent that any non-compliance or waiver would not be material to
SunTrust Equitable's analysis;
- all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the EMSA acquisition
would be obtained, without any restrictions, amendments or waivers which
would have a material adverse effect on EMSA or the Company or materially
reduce the contemplated benefits of the EMSA acquisition;
- definitive documents would be negotiated and executed with respect to the
Convertible Securities and the Senior Debt which contain terms and
conditions reasonably customary for such securities and indebtedness that
currently are available to similarly situated entities; and
- the terms of the Convertible Securities and the Senior Debt in the
definitive documents relating thereto would not vary from the terms set
forth in the Convertible Securities Term Sheet or the Senior Debt Term
Sheet, as the case may be, in any regard that would be material to its
analysis.
The SunTrust Equitable opinion is based upon economic, monetary, stock
market and other conditions existing as of the date of such opinion and does not
address the fairness of the consideration to be paid or
19
<PAGE> 22
received by the Company, as the case may be, in these transactions as of any
other date. Furthermore, forecasts of future financial performance prepared by
the Company and EMSA and relied on by SunTrust Equitable may not be indicative
of future results because such analyses contain assumptions as to industry
performance, general business and economic conditions and other matters beyond
the control of the Company and EMSA.
The SunTrust Equitable opinion encompasses the consideration to be paid or
received by the Company, as the case may be, (i) for the EMSA Stock, (ii) for
the Convertible Securities and (iii) for the Senior Debt, with all such
transactions being taken as a whole. As such, the SunTrust Equitable opinion
should be considered in its entirety.
The following paragraphs summarize the material quantitative analyses
performed by SunTrust Equitable in arriving at the opinion delivered to the
Company's Board.
Analysis of Certain Publicly-Traded Companies. Due to the unique nature of
the Company's business, SunTrust Equitable selected certain companies from
industries which it considered to have aspects of comparability to the Company
and EMSA and their respective businesses: HMOs, due to similarities between the
nature of their businesses and their funding sources; PPMs, because of the
market's view of EMSA as a subsidiary of MedPartners and the market's assessment
of PPMs generally; and Corrections Companies, which is the sector to which the
Company and EMSA provide their services. Using publicly-available information,
SunTrust Equitable reviewed the current stock prices, market capitalization and
debt levels relative to various historical operating measures and earnings
expectations forecasted by securities analysts. SunTrust Equitable noted that,
based upon closing stock market prices and multiples on December 15, 1998, the
$67.0 million in cash paid by the Company (the "Acquisition Consideration") was
within the range of multiples of the publicly-traded companies it considered.
The implied multiple of Acquisition Consideration to EMSA's 1998 estimated
EBITDA was 8.8x. To the extent the $27.6 million working capital surplus is
deducted from the Acquisition Consideration of $67.0 million (resulting in
adjusted Acquisition Consideration of $39.4 million), the EMSA acquisition
implies an EBITDA multiple of 5.2x.
<TABLE>
<CAPTION>
TRAILING 12 MONTH
EBITDA MULTIPLE
----------------------
HIGH LOW AVERAGE
----- ---- -------
<S> <C> <C> <C>
HMOs........................................................ 10.2x 3.9x 7.9x
PPMs........................................................ 17.0x 3.9x 8.2x
Corrections Companies....................................... 19.9x 7.4x 13.6x
</TABLE>
Discounted Cash Flow Analysis. Using the information provided by the
Company, SunTrust Equitable performed a standalone discounted cash flow analysis
for EMSA. Based upon this analysis, SunTrust Equitable noted that the value of
the Acquisition Consideration to be paid by the Company was below the range of
the values calculated by this analysis.
<TABLE>
<CAPTION>
EMSA
LOW HIGH PURCHASE PRICE
-------------- -------------- --------------
<S> <C> <C> <C>
Implied adjusted enterprise value(1)............... $102.6 million $141.9 million $67.0 million
</TABLE>
- ---------------
(1) Including a working capital surplus of $27.6 million.
20
<PAGE> 23
Analysis of Precedent Acquisition Transactions. Using publicly-available
information, SunTrust Equitable reviewed precedent merger and acquisition
transactions involving public and private companies, including both HMOs and
Corrections Companies. SunTrust Equitable examined 47 transactions involving
HMOs since May 8, 1992, and 37 transactions involving Corrections Companies
since February 1, 1993. Each transaction was evaluated for the aggregate
transaction value relative to various financial measures for the targets in the
most recent twelve-month period preceding the acquisition.
<TABLE>
<CAPTION>
HMOS CORRECTIONS EMSA
---- ----------- ----
<S> <C> <C> <C>
Aggregate Transaction Value to:
Trailing 12 months revenues............................... 1.0x 0.9x 0.4x
Trailing 12 months gross profit........................... 5.8x 2.6x 5.5x
Trailing 12 months EBITDA................................. 9.9x 5.3x 8.8x(1)
</TABLE>
- ---------------
(1) Based upon Acquisition Consideration of $67.0 million. The deduction of a
working capital surplus of $27.6 million would imply Acquisition
Consideration of $39.6 million and an EBITDA multiple of 5.2x.
Pro Forma Combination Analysis. SunTrust Equitable analyzed certain pro
forma effects resulting from the EMSA acquisition. This pro forma combination
analysis involved estimating the potential financial impact of the proposed
transaction on the historical and projected financial performance of the
Company. This analysis incorporated purchase accounting adjustments, assumptions
with respect to structure and financing for the EMSA acquisition, and the
effects of the cash utilized to fund the EMSA acquisition as well as the
operating contribution of EMSA to the Company's financial performance. Based
upon this analysis and assuming conversion of the Notes, SunTrust Equitable
noted that the Company could contemplate a transaction in excess of the
Acquisition Consideration which would not be dilutive to the Company's
forecasted earnings for 1999.
Evaluation of Financing
In its evaluation of the contemplated financing for the EMSA acquisition,
SunTrust Equitable considered that the Company intended to finance the EMSA
acquisition with a combination of (i) cash on hand, (ii) the Senior Debt and,
(iii) the proceeds from the sale of the Convertible Securities. SunTrust
Equitable noted that certain terms of the Convertible Securities, including the
ultimate conversion price of the Preferred Stock, were dependent upon the market
price for the Common Stock during certain periods set forth in the Convertible
Securities Term Sheet. These presently unascertainable variables could lead to a
number of different outcomes. Accordingly, SunTrust Equitable analyzed two
different scenarios:
- The base case assumed (i) Capital Partners and Executive Partners
acquired $15.0 million of Notes and $5.0 million of Preferred Stock from
the Company, (ii) the Company acquired EMSA for approximately $67.0
million, (iii) the Notes are converted into Preferred Stock on June 30,
1999 and (iv) the Common Stock price appreciates modestly during the
conversion price adjustment period.
- The pessimistic case assumed (i) Capital Partners and Executive Partners
acquired $15.0 million of Notes and $5.0 million of Preferred Stock from
the Company, (ii) the Company acquired EMSA for approximately $67.0
million, (iii) the Notes are not converted into Preferred Stock and (iv)
the Common Stock price does not appreciate during the conversion price
adjustment period.
SunTrust Equitable analyzed each of these scenarios with respect to (i) the
impact on the Company's future financial performance, (ii) the covenants
associated with the Senior Debt pursuant to the Credit Facility (as defined),
and (iii) the percentage ownership of the Common Stock which might be owned by
the purchasers of the Convertible Securities as a result of the potential
adjustment in the conversion price of the Preferred Stock. The following table
summarizes SunTrust Equitable's evaluation of the financing of the EMSA
acquisition with the Convertible Securities and the Senior Debt:
<TABLE>
<CAPTION>
BASE CASE PESSIMISTIC CASE
-------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Purchase price...................................... $ 67,000 $ 67,000
Estimated transaction costs......................... 2,500 2,500
------------- ------------
Total uses.......................................... 69,500 69,500
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
BASE CASE PESSIMISTIC CASE
-------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Notes issued........................................ 15,000 15,000
Initial Preferred Stock............................. 5,000 5,000
Senior Debt drawn................................... 47,000 47,000
Cash used........................................... 2,500 2,500
------------- ------------
Total sources....................................... 69,500 69,500
Notes converted..................................... June 30, 1999 No
Conversion price per share for Initial Preferred
Stock............................................. $ 9.45 $ 5.50
Common Shares issued upon conversion................ 2,116,402 909,091
Warrants issued..................................... 135,000 135,000
Capital Partners and Executive Partners percentage
ownership of ASG(1),(2)........................... 38.7% 22.6%
Covenants violated in 1999.......................... None None
Covenants violated in 2000 (and thereafter)......... None Fixed Charge
Senior Debt retired................................. 2002 2003
</TABLE>
- ---------------
(1) Based on approximately 3.6 million shares of Common Stock outstanding.
(2) Although the pessimistic case indicates Capital Partners and Executive
Partners ownership of 22.6%, the Convertible Securities Term Sheet limits
the ownership of Capital Partners and Executive Partners to 19.9% prior to
stockholder approval.
SunTrust Equitable, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the past, SunTrust
Equitable has performed investment banking and financial advisory services for
the Company. In early 1998, it received a fee of $85,000 in connection with the
proposed merger of the Company with and into MedPartners, which was not
consummated. In the ordinary course of business, SunTrust Equitable trades the
equity securities of the Company and MedPartners for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such companies' securities.
Pursuant to the engagement letter between the Company and SunTrust
Equitable in connection with the contemplated transactions, the Company has paid
SunTrust Equitable a fee of $325,000. The Company has also agreed to reimburse
SunTrust Equitable for the expenses reasonably incurred by it in connection with
its engagement (including reasonable counsel fees) and to indemnify SunTrust
Equitable and its officers, directors, employees, agents and controlling persons
against certain liabilities in connection with its services, including those
arising under federal securities laws.
THE EMSA ACQUISITION
On January 26, 1999, the Company purchased all of the outstanding stock of
EMSA for $67.0 million in cash pursuant to a Stock Purchase Agreement, dated as
of December 18, 1998 (the "Stock Purchase Agreement"), as amended by the First
Amendment to Stock Purchase Agreement, dated as of January 26, 1999 (the "First
Amendment"), between the Company and InPhyNet.
EMSA conducts its operations through two wholly-owned subsidiaries, EMSA
Correctional Care, Inc. ("EMSA Correctional") and EMSA Military Services, Inc.
("EMSA Military"), each of which the Company acquired pursuant to its
acquisition of EMSA. EMSA Correctional provides comprehensive managed health
care solutions to state and local correctional facilities, managing health care
for approximately 70,000 inmates. Following the EMSA acquisition, the Company,
through EMSA Correctional and Prison Health Services, Inc., the Company's
operating subsidiary, manages health care for approximately 133,000 inmates in
25 states. EMSA Military contracts with the U.S. Department of Defense (the
"DOD") and the Veterans Administration (the "VA") to provide emergency medicine
and primary health care services to active and retired military personnel and
their dependents at medical facilities operated by the DOD and the
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<PAGE> 25
VA. EMSA Military currently provides such services for military personnel and
their dependents at 10 DOD and VA medical facilities.
The purchase price paid to InPhyNet was subject to increase or decrease on
a dollar-for-dollar basis by an amount equal to the amount by which EMSA's
working capital (as defined in the Stock Purchase Agreement), as reflected on
its balance sheet as of January 25, 1999 (the "Closing Date Balance Sheet"), was
in excess of or was less than $27.6 million. The Closing Date Balance Sheet
reflected working capital of $24.0 million. Accordingly, InPhyNet repaid $3.6
million of the purchase price. The Company will account for the EMSA acquisition
using the purchase method of accounting.
In connection with the EMSA acquisition, the Company and all of its
subsidiaries, including EMSA, EMSA Correctional and EMSA Military, entered into
an Amended and Restated Credit Agreement, dated as of January 26, 1999, with
NationsBank, as Administrative Agent and Issuing Bank, which provides for a
senior, secured revolving credit facility (the "Credit Facility") of up to $52.0
million (the "Senior Debt"). The Company also entered into a Securities Purchase
Agreement, dated as of January 26, 1999, with Capital Partners and Executive
Partners. The Company amended the Securities Purchase Agreement on June 17,
1999. The Securities Purchase Agreement, as amended is referred to in this Proxy
Statement as the "Securities Purchase Agreement." The Company used approximately
$47.0 million in borrowings under the Credit Facility and the aggregate $20.0
million in proceeds received from the Private Placement to partially finance the
EMSA acquisition. The Company used its cash on hand to finance the remainder of
the purchase price for the EMSA acquisition
SUMMARY OF THE NOTES
General. The aggregate principal amount of the outstanding Notes is
currently $7.5 million, the Company having redeemed $7.5 million of the Notes on
July 2, 1999. The Notes will mature on January 26, 2000 and are subject to
annual interest on the unpaid principal at a rate of 12%. As long as the Notes
remain outstanding, interest on the Notes is due and payable monthly, in
arrears, in cash at the rate of 1% per month. At maturity, the aggregate
principal amount of the Notes, plus accrued and unpaid interest, is payable in
cash. The Notes are unsecured and subordinated to all indebtedness of the
Company arising under the Credit Facility.
Timing of Stockholder Approval of the Convertible Securities. The
Securities Purchase Agreement obligates the Company to convene a meeting of the
Company's stockholders (the "Stockholder Meeting") to consider and vote upon
ratifying the issuance of the Warrants and the Initial Preferred Stock and to
authorize the Stock Issuance as soon as practicable following the Closing Date,
but no later than August 31, 1999. Within 30 days after the obtaining
stockholder approval of the Stock Issuance (the "Stockholder Approval"), the
Company is also obligated have the Common Stock issuable upon conversion of
Preferred Stock approved for listing on Nasdaq (the "Nasdaq Approval").
Conversion Rights. At the option of the holders of not less than 66-2/3%
of the outstanding Notes, the Notes are convertible into shares of Preferred
Stock at a conversion ratio of one share of Preferred Stock for each $100 of
outstanding principal amount of Notes (the "Conversion Ratio") at any time after
the Closing Date, provided that the Stockholder Approval has been obtained. At
the option of the Company, the Notes are convertible at any time into shares of
Preferred Stock at the Conversion Ratio, provided (i) the Stockholder Approval
and Nasdaq Approval have been obtained, (ii) the Current Market Price (as
defined) of the Common Stock exceeded $5.50 per share during the 30 consecutive
Trading Days (as defined) immediately preceding the Stockholder Meeting, and
(ii) certain other conditions are satisfied. Upon conversion of the Notes, the
Company will pay all accrued and unpaid interest in cash to the holders thereof.
Penalty Interest. If the Company (i) fails to convene the Stockholders
Meeting on or before August 31, 1999, (ii) fails to take other actions with
respect to convening the Stockholders Meeting and seeking Stockholder Approval
on or before August 31, 1999, (iii) fails to obtain the Nasdaq Approval within
30 days after the Stockholder Approval (the "Conversion Defaults"), or (iv)
fails to pay the principal of and accrued and unpaid interest due on the Notes
at maturity, the interest on the Notes will immediately increase by 0.05% per
month and will further increase by 0.05% per month during which such Conversion
Default or failure to
23
<PAGE> 26
pay principal and interest on the Notes at maturity continues, but in no event
will the monthly interest rate exceed 1.5% (which is equivalent to an annual
interest rate of 18%) (the "Penalty Interest"). The Company will not be
obligated to pay the Penalty Interest until the maturity of the Notes if (i) the
sole reason the Company fails to obtain Stockholder Approval is the failure of
the holders of the Common Stock to approve the Stock Issuance at a meeting duly
called and convened in accordance with the Securities Purchase Agreement (a
"Stockholder Rejection"), and (ii) prior to the Stockholder Rejection, none of
the Conversion Defaults exists and SunTrust Equitable has not withdrawn the
Fairness Opinion.
Redemption. On July 2, 1999, the Company redeemed $7.5 million aggregate
principal amount of the Notes pursuant to an optional redemption provision of
the Securities Purchase Agreement. The Company may redeem the remaining
outstanding Notes, in whole but not in part, at its option at any time following
the Closing Date at a redemption price equal to the outstanding principal amount
of the Notes plus any accrued but unpaid interest to the date of redemption, in
cash (the "Redemption Price") if (a) the Company shall have duly convened the
Stockholders Meeting and (b) the Company is entitled to defer the payment of the
Penalty Interest until the maturity of the Notes, as described above. If a
Change of Control (as defined) occurs prior to the Company providing notice to
the holders of the Notes that it will redeem the Notes, the Redemption Price of
each Note shall be equal to the Notes Change of Control Price (as defined) for
90 days following the date the Company mails notice of such Change of Control to
the holders of the Notes. The aggregate redemption price of the outstanding
Notes is $7.5 million, plus any accrued and unpaid interest. As is required by
the terms of the Notes, the Company pays the interest on unpaid principal amount
of the Notes monthly, in arrears, at the rate of 1% per month. Prior to the
redemption of the Notes, the monthly interest was $150,000. Following the
redemption of the Notes, monthly interest will be $75,000. See "Approval of the
Stock Issuance -- Description of the Proposal."
Change of Control. In the event that there is a Change of Control, any
record holder of Notes may require the Company to redeem any or all of the Notes
held by such holder for an amount (the "Notes Change of Control Price") equal to
the greater of (i) the outstanding principal amount of such Notes or (ii) the
form and amount of consideration that such holder would have received had such
holder converted such Notes into Preferred Stock and converted such Preferred
Stock into Common Stock, plus all accrued and unpaid interest on the Notes being
redeemed, to and including the date of redemption, in cash.
Acceleration of the Notes. Pursuant to the Securities Purchase Agreement,
the holders of 66-2/3% of the outstanding principal amount of the Notes may
declare the entire outstanding principal balance of the Notes to be due and
payable upon the occurrence of an Event of Default (as defined). In addition to
certain other Events of Default described in the Securities Purchase Agreement,
the receipt of the Nasdaq Approval by the Company and the requirement that the
Company convene the Stockholder Meeting by August 31, 1999 are each Events of
Default under the Securities Purchase Agreement.
SUMMARY OF THE WARRANTS
The Warrants entitle the holder thereof to purchase 135,000 shares of
Common Stock, at any time following the Closing Date until January 26, 2006, at
the price per share, subject to reduction as described below, equal to the lower
of (i) $9.45 and (ii) the closing sale price of the Common Stock for the thirty
(30) consecutive Trading Days prior to the Stockholder Meeting, provided that
such price shall in no event be less than $5.50 per share (the "Warrant Exercise
Price").
Upon the occurrence of any of the Conversion Defaults, the Warrant Exercise
Price will be reduced to $.01; provided, however, that the Warrant Exercise
Price will not be reduced to $.01 until the maturity of the Notes, if (i) the
sole reason the Company fails to obtain Stockholder Approval is a Stockholder
Rejection and (ii) prior to the Stockholder Rejection, none of the Conversion
Defaults exists and SunTrust Equitable has not withdrawn the Fairness Opinion.
The term Stockholder Rejection means that the sole reason the Company fails to
obtain Stockholder Approval is the failure of the holders of the Common Stock to
approve the Stock Issuance at a meeting duly called and convened in accordance
with the Securities Purchase Agreement. In addition, unless by such time the
Company has converted or redeemed all of the Notes, the Warrant Exercise Price
will decrease by $1.00 on the last business day of each month, beginning on
August 31, 1999 through and including December 31, 1999, provided that the
Warrant Exercise Price will not
24
<PAGE> 27
be decreased below the par value of the Common Stock. The Warrant Exercise Price
will also be reduced to $.01 per share upon a Change of Control or the maturity
date of the Notes. Notwithstanding the foregoing, in connection with the
Company's redemption of $7.5 million aggregate principal amount of the Notes on
July 2, 1999, the Warrant Exercise Price for one-half the Warrants held by each
entity was reduced to $.01.
In any event, the Warrant Exercise Price will be adjusted if there is a
stock split, stock dividend, combination, reclassification or similar event with
respect to the Common Stock, if certain distributions with respect to the Common
Stock are made, if the Company issues shares of Common Stock or securities
convertible into Common Stock under certain terms and in the event of certain
mergers, certain consolidations, or a sale or transfer of all or substantially
all of the Company's assets.
SUMMARY OF THE PREFERRED STOCK
The rights, preferences and privileges of the Preferred Stock are set forth
in the Preferred Stock Certificate which the Company filed with the Secretary of
State of the State of Delaware simultaneously with the issuance of the Initial
Preferred Stock.
Designation, Number and Rank. The Preferred Stock Certificate authorizes
500,000 shares of Preferred Stock, which number may be decreased (but not
increased) by the Board of Directors without a vote of stockholders; provided,
however, that such number may not be decreased (i) prior to conversion or
redemption of all of the Notes and (ii) after conversion or redemption of all of
the Notes, below the number of then outstanding shares of Preferred Stock. The
Company may issue (i) up to 50,000 shares of the Preferred Stock as an original
issuance, (ii) up to 75,000 shares of the Preferred Stock upon conversion of the
Notes, and (iii) such number of additional shares as may be required to pay
dividends on the Preferred Stock in shares of Additional Preferred Stock (as
defined).
Subject to certain exceptions, the Preferred Stock ranks senior to the
Common Stock and all other existing or future capital stock of the Company with
respect to dividend rights and rights on liquidation, dissolution or winding up
of the Corporation.
Dividends. Each share of Preferred Stock entitles the holder thereof to
receive cumulative dividends at an annual rate equal to 5% from and after the
date of issuance of such share of Preferred Stock (the "Issue Date"). Dividends
shall be (i) computed on the basis of the Liquidation Preference (as defined);
(ii) accrue and be payable quarterly (each, a "Quarterly Dividend"), and (iii)
payable in cash; provided, however, that if payment of cash dividends is
restricted by the terms of any instrument or agreement relating to the Senior
Debt or any other senior indebtedness of the Company, such dividends shall be
payable in additional Preferred Stock ("Additional Preferred Stock"), which
shall be issued on the date such dividend would otherwise be paid.
The Company may not pay dividends or make distributions in cash, shares of
stock or other property on the Common Stock or other capital stock of the
Company unless (i) all accumulated and unpaid dividends on the Preferred Stock
have been paid and (ii) at the same time, the same dividend or distribution is
declared or paid or set apart, as the case may be, on the Preferred Stock and is
payable on the same date, at the rate per share of Preferred Stock based upon
the number of shares of Common Stock into which each share of Preferred Stock is
convertible on the record date for such dividend or distribution (a "Permitted
Dividend").
In the event that (i) any Quarterly Dividend shall not have been paid in
full, whether in cash or in kind, (ii) an event of default under the Securities
Purchase Agreement (an "Event of Default") shall have occurred and be continuing
for 30 days following the date notice of such event is required to be given, or
(iii) the Company fails to redeem in full the shares of Preferred Stock on the
Mandatory Redemption Date (as defined), whether or not by reason of the absence
of legally available funds, then, in any such case, the holders of Preferred
Stock shall be entitled to annual dividends (in addition to any dividend
otherwise payable) at a rate of 7.0% from the applicable payment date for the
Quarterly Dividend or date of such breach, or Event of Default or failure to
redeem, as the case may be, through the date of payment of such dividend, cure
of such breach or Event of Default or redemption, as the case may be (a "Penalty
Dividend").
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<PAGE> 28
Voting. Each share of Preferred Stock entitles the holder thereof to vote
on all matters submitted to a vote of the stockholders of the Company, voting
together as a single class with the holders of Common Stock. Each share of
Preferred Stock entitles the holder thereof to the number of votes equal to the
number of shares of Common Stock into which such share of Preferred Stock is
convertible on the record date for such vote.
So long as all of the shares of the Initial Preferred Stock and the shares
of Preferred Stock issuable upon conversion of the Notes (collectively, the "FFT
Preferred Stock") are outstanding, the Company may not take any of the following
actions (each, a "Fundamental Change") without first obtaining the approval of
the holders of 66-2/3% of the outstanding shares of Preferred Stock (the
"66-2/3% Holders"): (i) sell all or substantially all of the assets of the
Company or undertake a merger or consolidation transaction in which the
stockholders of the Company immediately prior to the transaction possess less
than 50% of the voting securities of the surviving entity immediately after the
transaction; (ii) effect a reclassification or recapitalization of the issued
and outstanding capital stock of the Company; or (iii) file a petition in
bankruptcy for relief pursuant to the Federal Bankruptcy Code of 1978, as
amended, consent to the appointment of or taking possession by a receiver (or
other similar official) of the Company or an assignment for the benefit of the
Company's creditors or take any similar action.
The affirmative vote of the 66-2/3% Holders is necessary to: (i)
authorize, increase the authorized number of shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of any class or classes or series within a class of
the Company's capital stock ranking prior to (either as to dividends or upon
voluntary or involuntary liquidation, dissolution or winding up), or pari passu
with, the Preferred Stock, subject to certain exceptions; (ii) increase the
authorized number of shares of, or issue (including on conversion or exchange of
any convertible or exchangeable securities or by reclassification) any shares
of, Preferred Stock other than upon the conversion of the Notes or to issue
Additional Preferred Stock; or (iii) authorize, adopt or approve an amendment to
the Company's Certificate of Incorporation or the Preferred Stock Certificate
which would increase or decrease the par value of the Preferred Stock, or alter
or change the powers, preferences or special rights of the Preferred Stock.
Certain Restrictions. The Company shall not declare or pay dividends, or
make any other distributions, on any shares of Parity Stock or Junior Stock,
except for Permitted Dividends, at any time when (i) any Quarterly or Penalty
Dividend payable on the Preferred Stock has not been paid in full, (ii) an Event
of Default has occurred and has continued 30 days following the date notice of
such event is required to be given, (iii) the Company has failed to redeem in
full the shares of Preferred Stock on the Mandatory Redemption Date, (iv) the
Company has defaulted on certain of its indebtedness, (v) the occurrence of an
early termination date with respect to any interest rate swap agreement entered
into by the Company as the result of the occurrence of an event of default
pursuant to the swap agreement or (vi) a Fundamental Change has occurred and is
continuing. "Parity Stock" means any capital stock of the Company ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Preferred Stock. "Junior Stock" means any capital stock of the Company
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Preferred Stock.
Subject to certain exceptions, the Company shall not, and shall not permit
any of its subsidiaries to, redeem, repurchase or otherwise acquire any shares
of Preferred Stock, Parity Stock or Junior Stock at any time when dividends
payable on the Preferred Stock have not been paid in full, whether in cash or in
kind, or any of the events set forth in clauses (i) through (iv) in the
preceding paragraph has occurred and is continuing.
Redemption. On July 26, 2006 (the "Mandatory Redemption Date"), the
Company shall be required to redeem each outstanding share of Preferred Stock by
paying the Liquidation Preference (as defined) in cash (the "Redemption Price")
for each such share of Preferred Stock.
The Company has the right, at its sole option, to redeem the Preferred
Stock, in an amount not less than one-third of the amount of FFT Preferred
Stock, for a per share amount equal to the Redemption Price; provided, however,
that, (i) the Company shall not be permitted to redeem any shares of Preferred
Stock on or prior to June 30, 2001 unless the Current Market Price per share of
the Common Stock is equal to or greater than the Conversion Price multiplied by
225% for at least 45 consecutive Trading Days immediately
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<PAGE> 29
preceding the date of the notice of redemption from the Company (the "Redemption
Notice") and (ii) the Company shall not be permitted to redeem any shares of
Preferred Stock any time after June 30, 2001 unless the Current Market Price per
share of the Common Stock is equal to or greater than the Conversion Price
multiplied by 225% for at least 30 consecutive Trading Days immediately
preceding the date of the Redemption Notice.
If a Change of Control occurs prior to the delivery of a Redemption Notice,
the Redemption Price of each share of Preferred Stock shall be equal to the
Change of Control Price for 90 days following the date the Company mails notice
of such Change of Control to the holders of the Preferred Stock.
As of June 30, 1999, the per share Redemption Price for the Preferred Stock
was $102.18 and the aggregate Redemption Price for the Initial Preferred Stock
was $5,108,904.
Change of Control. In the event that there occurs a Change of Control, any
record holder of Preferred Stock may require the Company to redeem any or all of
the Preferred Stock held by such holder for an amount ("Change of Control
Price") equal to the greater of (i) $150.00 per share of Preferred Stock, plus
any accrued and unpaid dividends or (ii) the form and amount of consideration
that such holder would have received had such holder converted such Preferred
Stock into Common Stock prior to the Change of Control.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the Company, each holder of outstanding shares of Preferred Stock is entitled to
receive $100.00 per share (as adjusted for any stock dividends, combinations or
splits with respect to such share), plus an amount equal to all accrued but
unpaid dividends on such share ("Liquidation Preference") before any
distribution shall be made to the holders of shares of Junior Stock or Parity
Stock.
Conversion. Each share of Preferred Stock is convertible into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing $100.00 by the Conversion Price (as defined) at the option of the
holder at any time after the Issue Date and prior to the close of business on
the day prior to a date which the Company has set to redeem such shares of
Preferred Stock. If the Company elects to redeem any shares of Preferred Stock,
the right of the holders of the Preferred Stock to convert such shares of
Preferred Stock will terminate the close of business on the business day
preceding the date fixed for redemption. The Company shall pay to each holder of
shares of Preferred Stock an amount equal to any accrued and unpaid dividends on
the shares of Preferred Stock surrendered for conversion to the date of such
conversion.
The Conversion Price is equal to the lower of (i) $9.45 per share and (ii)
the Current Market Price of the Common Stock during the 30 consecutive Trading
Days prior to the Stockholders Meeting; provided that, the Conversion Price
shall in no event be less than $5.50 per share. Notwithstanding the foregoing,
the Warrants and the terms of the Preferred Stock each provide that, prior to
the date of Stockholder Approval, the maximum number of shares of Common Stock
that will be issued or be issuable upon exercise of the Warrants together with
the shares of Common Stock that will be issued or be issuable upon conversion of
the Preferred Stock, may not exceed 19.9% of the Company's outstanding Common
Stock. However, if prior to Stockholder Approval the total number of shares of
Common Stock which are issuable upon exercise of the Warrants and conversion of
the Preferred Stock would exceed 19.9% but for the 19.9% limitation described in
the previous sentence, following Stockholder Approval the number of shares of
Common Stock which are issuable will be recalculated to give effect to the full
amount of shares of Common Stock that would have been issuable but for such
limitation.
Except with respect to the shares of Preferred Stock which have been
converted or redeemed prior to June 30, 2001, if (i) the Conversion Price
exceeds $8.00 per share and (ii) during the period beginning on the earlier of
(x) June 30, 2000 and (y) the date twelve months after the Stockholders Meeting
and ending on June 30, 2001, the Current Market Price of Common Stock per share
does not exceed 225% of the Initial Conversion Price for 45 consecutive Trading
Days, the Conversion Price shall be reduced to $8.00. Except with respect to the
shares of Preferred Stock which have been converted or redeemed prior to June
30, 2001, if (i) the Conversion Price exceeds $8.00 per share and (ii) during
the period beginning on the earlier of (x) June 30, 2000 and (y) the date twelve
months after the Stockholders Meeting and ending on June 30,
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<PAGE> 30
2001, the Current Market Price of Common Stock per share is more than 225% but
less than 250% of the Initial Conversion Price for 45 consecutive Trading Days,
the Conversion Price shall be reduced to an amount equal to the product of the
Conversion Price multiplied by a quotient, the numerator of which shall equal
the sum of (x) the Initial Conversion Price and (y) $8.00 and the denominator of
which shall be 2.
In any event, the Conversion Price will be adjusted if there is a stock
split, stock dividend, combination, reclassification or similar event with
respect to the Common Stock, if certain distributions with respect to the Common
Stock are made, if the Company issues shares of Common Stock or securities
convertible into Common Stock under certain terms and in the event of certain
mergers, certain consolidations, or a sale or transfer of all or substantially
all of the Company's assets.
SUMMARY OF THE SECURITIES PURCHASE AGREEMENT
Board of Directors Representation. Pursuant to the Securities Purchase
Agreement, on the Closing Date, the Board of Directors increased the size of the
Board of Directors from seven to eight directors and appointed David A. Freeman,
a designee of Capital Partners and Executive Partners, to the newly-created
vacant directorship. Following the conversion of the Notes and for so long as
Capital Partners and Executive Partners and their affiliates and affiliates of
FFT own the percentage of FFT Preferred Stock or the Common Stock issuable upon
conversion of the FFT Preferred Stock specified in the table below, the Company
will be obligated to appoint the number of designees of Capital Partners and
Executive Partners specified in such table (the "FFT Directors").
<TABLE>
<CAPTION>
PERCENTAGE OF FFT PREFERRED NUMBER OF FFT
STOCK/COMMON STOCK SIZE OF BOARD DIRECTORS
- --------------------------- ------------- -------------
<S> <C> <C>
Greater than or equal to 62.5%.............................. 9 3
Less than 62.5%, but greater than 33-1/3%................... 8 2
Less than or equal to 33-1/3%, but greater than 25%......... 7 1
</TABLE>
At each subsequent annual meeting of the Company, the Company will be
obligated to nominate and recommend the number of designees of Capital Partners
and Executive Partners as directors corresponding to the ownership of the FFT
Preferred Stock by Capital Partners and Executive Partners at such time and to
maintain the corresponding size of the Board, as indicated above. Executive
Partners and Capital Partners will not have the right to designate a nominee to
the Board if they, their affiliates and affiliates of FFT own 25% or less of the
FFT Preferred Stock. If the Notes are converted into shares of Preferred Stock,
Capital Partners and Executive Partners will own all of the FFT Preferred Stock,
or the resulting Common Stock. Therefore, the Company will be obligated to
maintain a nine member Board of Directors and FFT will be entitled to designate
three nominees to the Board of Directors.
Additional Agreements Contingent on Conversion of the Notes. At any time
any Notes remain outstanding, the Securities Purchase Agreement, among other
things prohibits (i) the Company from violating certain financial ratios and
tests, (ii) subject to certain exceptions, any of the Company's subsidiaries
from incurring any indebtedness or guaranteeing any indebtedness of the Company
other than any borrowings under the Credit Facility or the outstanding principal
amount of the Notes, (iii) the Company from incurring any additional
indebtedness unless such indebtedness is pari passu with, or subordinate in
right of payment to, the Notes; (iv) the Company and its subsidiaries from
extending credit or making any form of investment in any other entity; (v) the
Company from permitting any of its subsidiaries to issue any capital stock and
(vi) the Company and its subsidiaries from taking any action which might
restrict the ability of the Company's subsidiaries to pay dividends, make
distributions, repay indebtedness, make loans or transfer assets to the Company
or its other subsidiaries or guarantee any indebtedness of the Company or its
other subsidiaries (collectively, the "Notes Covenants").
Continuing Agreements. At any time that any Notes or one-third of the FFT
Preferred Stock remains outstanding, the Securities Purchase Agreement obligates
the Company to, among other things (i) satisfy certain financial ratios and
tests, (ii) not issue any debt securities convertible or exchangeable into
Common Stock or any equity securities ranking senior to or on a parity with the
Preferred Stock, (iii) not to, and not permit any of its subsidiaries to,
declare or pay any dividend on, or make any other distribution in respect of, or
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<PAGE> 31
redeem, purchase or otherwise acquire any shares of Common Stock or any shares
of Parity Stock or Junior Stock.
Registration Rights Agreement. The Company entered into a Registration
Rights Agreement, dated January 26, 1999 (the "Registration Rights Agreement"),
with Capital Partners and Executive Partners pursuant to which it agreed to
register the Common Stock issuable upon conversion of the FFT Preferred Stock
and the Warrants for resale by the holders thereof.
CERTAIN DEFINITIONS.
The following terms have the meanings indicated:
"Change of Control" means: (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becoming, in a
transaction or series of related transactions, the beneficial owner of
voting securities entitled to exercise 50% or more of the total voting
power of all outstanding voting securities of the Company (including any
voting securities that are not then outstanding of which such person or
group is deemed the beneficial owner) (the "Control Party"); (ii) the
acquisition of beneficial ownership of 20 percent or more of the number of
voting securities of the Company by any person or group, together with
contractual rights, which would enable such person or group to prevent a
merger, consolidation or sale of all or substantially all of the assets or
other sale of the Company; (iii) individuals who at the beginning of any
period of two consecutive calendar years constituted the Board of Directors
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the members of the Board of Directors
then still in office who either were members of the Board of Directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the members of the Board of Directors then in office, or (iv) sale of
all or substantially all of the assets of the Company.
"Current Market Price" when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing sale price
per share of Common Stock or such other securities on such date and, when
used with reference to shares of Common Stock or other securities for any
period shall mean the average of the daily closing sale prices per share of
Common Stock or such other securities for such period. The closing price
for each day shall be the closing sale price in the over-the-counter
market, as reported by Nasdaq or such other system then in use, or, if on
any such date the Common Stock or such other securities are not quoted by
any such organization, the closing sale price as furnished by a
professional market maker making a market in the Common Stock or such other
securities selected by the Board of Directors. If the Common Stock is
listed or admitted to trading on a national securities exchange, the
closing price shall be the closing sale price, regular way, as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the Common Stock or
such other securities are listed or admitted to trading. If the Common
Stock or such other securities are not publicly held or so listed or
publicly traded, "Current Market Price" shall mean the Fair Market Value
per share of Common Stock or of such other securities as determined in good
faith by the Board of Directors based on an opinion of an independent
investment banking firm acceptable to holders of a majority of the shares
of Preferred Stock.
"Fair Market Value" means, as to shares of Common Stock or any other
class of capital stock or securities of the Company or any other issuer
which are publicly traded, the average of the Current Market Prices of such
shares of securities for each day of the five consecutive Trading Days
preceding the date as of which the Fair Market Value of a security is to be
determined. The "Fair Market Value" of any security which is not publicly
traded or of any other property shall mean the fair value thereof as
determined by an independent investment banking or appraisal firm
experienced in the valuation of such securities or property selected in
good faith by the Board of Directors or a committee thereof.
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<PAGE> 32
"Trading Day" means any day other than a Saturday, Sunday, or a day on
which banking institutions in the States of New York or Tennessee are
authorized or obligated by law or executive order to close or, if the
Common Stock is listed or admitted to trading on any national securities
exchange, a day on which such exchange is open for the transaction of
business.
APPROVAL OF THE STOCK ISSUANCE
(PROPOSAL NO. 3)
DESCRIPTION OF THE PROPOSAL
The Board of Directors is asking that the stockholders approve the issuance
of the shares of Preferred Stock that are issuable upon conversion of the Notes,
which are currently outstanding in the aggregate principal amount of $7.5
million, and the shares of Common Stock that are issuable upon conversion or
exercise of the Warrants and Preferred Stock (the "Stock Issuance").
RATIONALE FOR THE PROPOSAL
The Common Stock is currently traded on The Nasdaq Stock Market National
Market System maintained by the National Association of Securities Dealers, Inc.
("Nasdaq"). The rules of Nasdaq require that the Company obtain stockholder
approval in connection with the acquisition of the stock or assets of another
company if, due to the present or potential issuance of Common Stock, or
securities convertible into or exercisable for Common Stock, other than a public
offering for cash, the number of shares of Common Stock to be issued is or will
be equal to or in excess of 20% of the number of shares of Common Stock
outstanding before the issuance of the stock or securities. The conversion of
the Notes into shares of Preferred Stock and the issuance of shares of Common
Stock upon the conversion or exercise of the Convertible Securities would cause
the number of shares of Common Stock issuable in connection with the securities
issued in connection with the Company's acquisition of EMSA to exceed 20% of the
number of shares of Common Stock outstanding. Therefore, the Board of Directors
is seeking the stockholders' approval of the Stock Issuance.
EFFECT OF THE ADOPTION OF THE PROPOSAL
The vote of the stockholders on Proposal No. 3 will determine whether the
Notes may be converted into the shares of Preferred Stock, which may in turn be
converted into Common Stock. If Proposal No. 3 is approved, the Notes will be
converted into shares of Preferred Stock. If Proposal No. 3 is not approved, the
Notes will remain outstanding until their maturity or earlier redemption. The
conversion of the Notes into Preferred Stock and Common Stock will have the
effects on the Company described below. The Warrants may be exercised and the
Initial Preferred Stock may be converted into Common Stock whether or not
Proposal No. 3 is adopted. However, if Proposal No. 3 is not approved by the
stockholders, the maximum number of shares of Common Stock issuable upon
exercise of the Warrants together with the shares of Common Stock that may be
issued upon conversion of the Initial Preferred Stock may not exceed 19.9% of
the Company's outstanding Common Stock. The shares of the Initial Preferred
Stock and the shares of Preferred Stock and Common Stock which would be issuable
pursuant to the Stock Issuance are already authorized by the Company's
Certificate of Incorporation. The Company is requesting stockholder approval of
the Stock Issuance in order to comply with the Nasdaq rule described above that
requires stockholder approval of certain issuance of stock. See " -- Rationale
for the Proposal."
The issuance of shares of Common Stock upon the conversion of the Preferred
Stock that would be issuable upon conversion of the Notes would be dilutive to
the interests of the holders of the currently outstanding shares of Common
Stock. If the stockholders approve Proposal No. 3, the Notes may be converted
into an aggregate of 75,000 shares of Preferred Stock. The Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the per-share liquidation preference of the Preferred Stock ($100) by
the Conversion Price. The Conversion Price is equal to the lower of (i) $9.45
and (ii) the Current Market Price of the Common Stock during the 30 consecutive
Trading Days prior to the
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<PAGE> 33
Stockholders Meeting; provided that, the Conversion Price shall in no event be
less than $5.50 per share. Upon conversion of the Notes into Preferred Stock and
such Preferred Stock into Common Stock, Capital Partners and Executive Partners
would be entitled to receive between 793,651 and 1,363,636 shares of Common
Stock, depending upon the applicable Conversion Price. Such shares of Common
Stock, together with the shares of Common Stock issuable upon exercise of the
Warrants and conversion of the Initial Preferred Stock, would represent between
29.0% and 40.2% of the shares of Common Stock outstanding following such
conversion and exercise. The dilutive effect of the conversion of the
Convertible Securities may also negatively affect the market price of the Common
Stock.
If the stockholders fail to adopt Proposal No. 3, the Company will suffer
certain adverse financial consequences, as follows: (i) the Company will be
required to secure sufficient financing to redeem the Notes on their maturity
date, January 26, 2000; (ii) if the Notes are not so redeemed, effective as of
such maturity date (x) the interest rate on the Notes will increase by 0.05% per
month, to a maximum monthly interest rate of 1.5% (which is equivalent to an
annual interest rate of 18%), (y) the holders of the Initial Preferred Stock
will be entitled to receive annual dividends (in addition to any dividend
otherwise payable) at a rate of 7.0% until the Notes are redeemed, and (z) the
exercise price of the Warrants will be reduced to $0.01. (As noted above,
however, the exercise price of one-half of the Warrants has been reduced to
$0.01 as a result of the Company's redemption of $7.5 million aggregate
principal amount of the Notes on July 2, 1999.) The aggregate redemption price
of the Notes is $7.5 million, plus any accrued and unpaid interest. As is
required by the terms of the Notes, the Company pays the interest on unpaid
principal amount of the Notes monthly, in arrears, at the rate of 1% per month,
which is equal to $75,000 per month.
There can be no assurance that the Company will be able to obtain the
financing required to redeem the Notes on their maturity date, or, if the
Company is able to obtain such financing, that the terms of such financing would
be favorable to the Company. The Company's ability to obtain such financing is
restricted pursuant to the terms of the Credit Facility. If the Company is
unable to refinance the Notes, the Company could be in default with respect to
certain covenants contained in the Credit Facility. Such defaults could permit
acceleration of the indebtedness outstanding pursuant to the Credit Facility.
The Securities Purchase Agreement obligates the Company to comply with the
Notes Covenants as long as any of the Notes remain outstanding. If the
stockholders approve Proposal No. 3, the Notes will be converted to Preferred
Stock and the Company will no longer be obligated to comply with the Notes
Covenants. See "Ratification of the Private Placement -- Summary of the
Securities Purchase Agreement -- Additional Agreements Contingent on Conversion
of the Notes" for a description of the Notes Covenants.
INTERESTS OF CERTAIN PERSONS
Certain members of the Board of Directors have interests in the approval of
Proposal No. 3 which are in addition to the interests of the Company's
stockholders. See "Certain Transactions" for a description of such interests.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors unanimously recommends that each stockholder vote in
favor of Proposal No. 3. A majority of the votes entitled to be cast by the
holders of all shares of Common Stock that are present at the meeting and
entitled to vote will be necessary to adopt Proposal No. 3. In connection with
entering into the Securities Purchase Agreement, Capital Partners and Executive
Partners entered into a letter agreement with Scott L. Mercy, the Chairman of
the Board of Directors, pursuant to which Mr. Mercy agreed to vote his shares of
Common Stock, and granted Capital Partners and Executive Partners a proxy to
vote his shares of Common Stock, (i) to approve the Stock Issuance and any
transactions appropriate to implement the Stock Issuance, (ii) against actions
or agreements that would result in a material breach of the Securities Purchase
Agreement and (iii) against any action or agreement that would impede, interfere
with or attempt to discourage approval of the Stock Issuance. As of the Record
Date, Mr. Mercy owned 146,000 shares of Common Stock, representing approximately
4.1% of the outstanding shares of Common Stock as of such date.
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<PAGE> 34
APPROVAL AND ADOPTION OF THE 1999 INCENTIVE STOCK PLAN
(PROPOSAL NO. 4)
GENERAL
On April 16, 1999, the Board of Directors approved and adopted the America
Service Group Inc. 1999 Incentive Stock Plan (the "Plan") and subject to
stockholder approval, the Plan will become effective as of April 16, 1999. A
copy of the Plan is attached hereto as Annex B. The Board of Directors
unanimously recommends that the stockholders vote for approval and adoption of
the Plan.
SUMMARY OF THE PLAN
The primary purpose of the Plan is to attract, retain and motivate selected
employees and outside directors of the Company. The following discussion
summarizes the principal features of the Plan. This discussion does not purport
to be complete and is qualified in its entirety by reference to the Plan.
Administration. The Plan will be administered by the Incentive Stock
Committee, a committee of two or more directors serving on the Board. Each
director, while a member of the Committee, must in addition satisfy the
requirements for a "non-employee" director under Rule 16b-3 of the Securities
and Exchange Act of 1934 (the "Exchange Act") and an "outside director" under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
All grants under the Plan will be evidenced by a certificate that will
incorporate such terms and conditions as the Committee deems necessary or
appropriate.
Coverage and Participants. The Plan will provide for the issuance of stock
options ("Stock Options") and restricted stock ("Restricted Stock") to certain
of the Company's key employees and outside directors, for the issuance of stock
appreciation rights ("SARs") to certain of the Company's key employees and for
the purchase of shares of Common Stock and the extension of loans to certain of
the Company's key employees and outside directors to permit them to purchase
such shares of Common Stock. A key employee shall be any employee of, or any
independent contractor providing consulting or advisory services to, the Company
(or any subsidiary, parent, or affiliate of the Company) designated by the
Committee who, in the judgment of the Committee acting in its absolute
discretion, is a key to the success of the Company.
Initial Share Authorization. There will be 786,000 shares of Common Stock
available for use under the Plan. However, no key employee in any calendar year
may be granted a Stock Option to purchase more than 100,000 shares of Common
Stock or an SAR with respect to more than 100,000 shares of Common Stock.
Stock Options. Under the Plan, either incentive stock options ("ISOs"),
which are intended to qualify for special tax treatment under Code Section 422,
or non-incentive stock options ("Non-ISOs") may be granted to key employees by
the Committee. Each Stock Option granted under the Plan entitles the holder
thereof to purchase the number of shares of Common Stock specified in the grant
at the option price specified in the related stock option certificate. The terms
and conditions of each Stock Option granted under the Plan will be determined by
the Committee, but no Stock Option will be granted at an exercise price which is
less than the fair market value of the Common Stock as determined on the grant
date in accordance with the Plan. Non-ISO's granted upon the purchase of Common
Stock under the Plan will be granted at an exercise price which is not less than
the greater of (i) the fair market value of the Common Stock as determined on
the grant date in accordance with the Plan and (ii) $9.45. In addition, if the
Stock Option is an ISO that is granted to a ten percent shareholder of the
Company, the option price may be no less than 110% of the fair market value of
the shares of Common Stock on the grant date. An ISO by its terms may not be
exercisable more than ten years from the grant date or, if the ISO is granted to
a ten percent shareholder of the Company, it may not be exercisable more than
five years from the grant date. Moreover, no participant may be granted ISOs
which are first exercisable in any calendar year for stock having an aggregate
fair market value (determined as of the date that the ISO was granted) that
exceeds $100,000.
The Committee may grant a Non-ISO to each outside director, upon
nomination, pending election to the Board by the Company's stockholders, or as
of the first day he or she first serves as an outside director to purchase a
number of shares of Common Stock that is determined by the Committee in its
absolute
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discretion, and such number shall be the same for each outside director whose
service as such starts on such date. Such number is currently 15,000. In
addition, the Committee may grant a Non-ISO to each outside director who is
serving as such on the date of the Company's annual stockholder's meeting to
purchase a number of shares of Common Stock that is determined by the Committee
in its absolute discretion and such number shall be the same for each outside
director who is serving as such on such date. Such number is currently 6,000.
Stock Appreciation Rights. SARs may be granted by the Committee to key
employees under the Plan. SARs entitle the holder to receive an amount equal to
the excess of the fair market value of one share of Common Stock as of the date
such right is exercised over the baseline price specified in the SAR (the "SAR
Value"), multiplied by the number of shares of Common Stock in respect of which
the SAR is being exercised. The SAR Value for an SAR will be the fair market
value of a share of Common Stock as determined on the grant date. SARs may be
granted as part of a Stock Option or as stand-alone SARs.
Restricted Stock. Restricted Stock may be granted by the Committee to key
employees and outside directors subject to such terms and conditions, if any, as
the Committee acting in its absolute discretion deems appropriate. The
Committee, in its discretion, may prescribe that a key employee's or outside
director's rights in a Restricted Stock award will be nontransferable or
forfeitable or both unless certain conditions are satisfied. These conditions
may include, for example, a requirement that the key employee or outside
director continue employment or service with the Company for a specified period
or that the Company or the key employee or outside director achieve stated
performance or other objectives. Each grant of Restricted Stock shall be
evidenced by a certificate which will specify what rights, if any, a key
employee or outside director has with respect to such Restricted Stock as well
as any conditions applicable to the Restricted Stock.
Non-transferability. No Stock Option, SAR or Restricted Stock will be
transferable (absent the Committee's consent) by a key employee or an outside
director other than by will or by the laws of descent and distribution, and any
Stock Option or SAR will (absent the Committee's consent) be exercisable during
a key employee's or outside director's lifetime only by the key employee or
outside director. Shares of Common Stock purchased under the Plan are
transferrable in accordance with rules set forth in the Plan.
Share Purchase Program. The Committee acting in its absolute discretion
may (subject to such terms and conditions as the Committee deems appropriate
under the circumstance) offer a key employee or outside director the right to
purchase at fair market value under the Plan on any date shares of Common Stock
having an aggregate fair market value of no less than $7,500 and no more than
$150,000 for a key employee and no less than $7,500 and no more than $37,500 for
an outside director. No share of Common Stock purchased by a key employee or an
outside director under the Plan shall be transferable unless such transfer is
made subject to all the terms and conditions set forth in the Plan.
Upon the key employee's voluntary termination of employment or a
termination of key employee for "cause" or upon the voluntary termination of the
director's service as such or the termination of the director's service as such
for "cause" (all as determined by the Committee in its discretion), the Company
shall have the right (but not the obligation) to purchase from the key employee
or director (or his or her transferee) at any time during the period determined
by the Committee acting in its absolute discretion that starts on the date of
such termination and that runs no longer than six months, and the key employee
or director (or his or her transferee) shall have the obligation to sell to the
Company, for a price equal to the purchase price of the Common Stock plus, if a
loan was extended to the key employee or outside director under the Plan to
permit the key employee or outside director to purchase such shares of Common
Stock, the interest paid on the loan, the shares of Common Stock purchased by
the key employee or outside director under the Plan plus any additional shares
attributable to such shares.
The Committee acting in its absolute direction may grant to any Key
Employee or outside director who purchases shares of Common Stock under the Plan
a Non-ISO under the Plan to purchase a number of shares of Common Stock that is
determined by the Committee acting in its absolute discretion and that is not
less than two times the number of shares of Stock purchased and not more than
three times the number of shares of stock purchased.
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The Option Price for any such Non-ISO shall be no less than the greater of
the fair market value of a share of Common Stock on the date the Non-ISO is
granted or $9.45 per share. Except as expressly provided in the Plan, any such
Non-ISO shall be granted subject to such terms and conditions as the Committee
acting in its absolute discretion deems consistent with the terms of this Plan,
and such terms and conditions shall be set forth in an Option Certificate
evidencing the grant of such Non-ISO.
No such Non-ISO shall be exercisable on any date unless the key employee or
the outside director continues to hold on such date 100% of the shares of Common
Stock he or she purchased in order to receive the grant of such Non-ISO, and
such Non-ISO shall be forfeited in full if the key employee's employment
terminates or the outside director's service as such terminates before the
fourth anniversary of the date such Non-ISO is granted to such key employee or
outside director; provided, however, that if the key employee's employment
terminates involuntarily other than for "cause" or if the outside director's
service as such terminates involuntarily other than for "cause" (all as
determined by the Committee acting in its absolute discretion), then the key
employee or the outside director shall have the right to exercise the Non-ISO
with respect to:
(1) one-fourth of the shares of Common Stock underlying the grant of
the Non-ISO (rounding down to the nearest whole number) if he or she
remained a key employee or outside director until the first anniversary of
the date the Non-ISO was granted;
(2) half of the shares of Common Stock underlying the grant of the
Non-ISO (rounding down to the nearest whole number) if he or she remained a
key employee or outside director until the second anniversary of the date
the Non-ISO was granted; and
(3) three-fourths of the shares of Common Stock underlying the grant
of the Non-ISO (rounding down to the nearest whole number) if he or she
remained a key employee or outside director until the third anniversary of
the date the Non-ISO was granted;
provided, further, that if the key employee's employment terminates
involuntarily other than for "cause" or if the outside director's service as
such terminates involuntarily other than for "cause" (all as determined by the
Committee in its discretion) on any date before or after the fourth anniversary
of the date the Non-ISO was granted, the key employee or the outside director
shall have the right to exercise the Non-ISO (to the extent exercisable under
the Plan as of the date his or her employment or service so terminates) until
the earlier of (A) the expiration of the six-month period immediately following
the date his or her employment or service so terminates or (B) the date that is
the tenth anniversary of the date the Non-ISO is granted.
The Committee acting in its absolute discretion may cause the Company to
extend a loan to a key employee or outside director to permit the key employee
or outside director to purchase shares of Common Stock under the Plan, and any
such loan must have a principal amount that is no less than $7,500 and no more
than $150,000 for key employees and $37,500 for outside directors. The term of
any such loan shall be fixed and shall be set by the Committee acting in its
absolute discretion, and any such loan shall bear interest at the "applicable
Federal rate" (as defined in Code Section 7872 and the regulations thereunder
(including any final, proposed and temporary regulations)) for a term loan. All
of the terms and conditions of any such loan (except as expressly provided under
the Plan) will be determined by the Committee acting in its absolute discretion
at the time of the loan.
No share of Common Stock purchased with the proceeds of a loan extended
pursuant to the Plan may be transferred by the key employee or the outside
director until the principal amount of and any accrued interest on such loan is
repaid in full; provided, however, that such shares may be sold to repay the
loan, as determined by the Committee acting in its discretion. The aggregate
principal amount of all loans outstanding under the Plan to key employees and
outside directors on any date shall not exceed $1,300,000.
Upon the termination of the key employee's employment for any reason or
upon the termination of director's service as such for any reason, such loan
shall become due and payable in full within six months following the date of his
or her termination.
Amendments to the Plan. The Plan may be amended by the Board to the extent
it deems necessary or appropriate (within the limits of Code Section 422), and
the Plan may be terminated by the Board at any time. The Board may not
unilaterally modify, amend or cancel any Stock Option, SAR or Restricted Stock
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<PAGE> 37
previously granted or shares of Common Stock purchased without the consent of
the holder of such Stock Option, SAR or Restricted Stock or Common Stock or
unless there is a dissolution or liquidation of the Company or a similar
transaction.
Adjustment of Shares. The number, kind or class of shares of Common Stock
reserved for issuance under the Plan, the annual grant caps, the $9.45 floor on
the option price for Non-ISO's automatically granted upon the purchase of Common
Stock under the Plan, the number, kind or class of shares of Common Stock
subject to Stock Options or SARs granted under the Plan, and the option price of
the Stock Options and the SAR Value of the SARs, as well as the number, kind or
class of shares of Restricted Stock granted under the Plan, shall be adjusted by
the Committee in an equitable manner to reflect any change in the capitalization
of the Company.
Sale or Merger of the Company. If on any date the Company agrees to sell
all or substantially all of its assets or agrees to any merger, consolidation,
reorganization, division or other corporate transaction in which Common Stock is
converted into another security or into the right to receive securities or
property or if a tender offer is made which could lead to a change in control of
the Company (as defined in the Plan and other than a tender offer by the Company
or an employee benefit plan established and maintained by the Company, a "Change
in Control"), or if there otherwise is a Change in Control of the Company on any
date, any and all conditions to the exercise of outstanding Stock Options and
SARs and any and all outstanding issuance and forfeiture conditions on any
Restricted Stock on such date automatically shall be deemed satisfied in full,
the Company's repurchase right with respect to shares of Common Stock purchased
under the Plan shall immediately expire and the Board will have the right (to
the extent required as part of such transaction) to cancel such Stock Options,
SARs and Restricted Stock grants after each key employee and outside director is
provided a reasonable opportunity to exercise his or her Stock Options, SARs and
to take such other actions as necessary or appropriate to receive the Common
Stock subject to any Restricted Stock grants.
Loans. If approved by the Committee, the Company may lend money to, or
guarantee loans by a third party to, any key employee to finance the exercise of
any Stock Option granted under the Plan.
Term of the 1999 Incentive Stock Plan. No Stock Option, SAR or Restricted
Stock shall be granted under the Plan and no shares of Common Stock shall be
purchased under the Plan after April 16, 2009 or, if earlier, on the date on
which all of the Common Stock reserved under the Plan has been issued or no
longer is available for use under the Plan.
FEDERAL INCOME TAX CONSEQUENCES
The rules concerning the federal income tax consequences with respect to
grants made pursuant to the Plan are technical, and reasonable persons may
differ on the proper interpretation of such rules. Moreover, the applicable
statutory and regulatory provisions are subject to change, as are their
interpretations and applications, which may vary in individual circumstances.
Therefore, the following discussion is designed to provide only a brief, general
summary description of the federal income tax consequences associated with such
grants, based on a good faith interpretation of the current federal income tax
laws, regulations (including certain proposed regulations) and judicial and
administrative interpretations. The following discussion does not set forth (i)
any federal tax consequences other than income tax consequences or (ii) any
state, local or foreign tax consequences that may apply.
ISOs. In general, a key employee will not recognize taxable income upon
the grant or the exercise of an ISO. For purposes of the alternative minimum
tax, however, the key employee will be required to treat an amount equal to the
difference between the fair market value of the Common Stock on the date of
exercise over the exercise price as an item of adjustment in computing the key
employee's alternative minimum taxable income. If the key employee does not
dispose of the Common Stock received pursuant to the exercise of the ISO within
either (i) two years after the date of the grant of the ISO or (ii) one year
after the date of exercise of the ISO, a subsequent disposition of the Common
Stock will generally result in long-term capital gain or loss to such individual
with respect to the difference between the amount realized on the disposition
and the exercise price. The Company will not be entitled to any income tax
deduction as a result of such disposition.
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The Company normally will not be entitled to take an income tax deduction at
either the grant or the exercise of an ISO.
If the key employee disposes of the Common Stock acquired upon exercise of
the ISO within either of the above-mentioned time periods, then in the year of
such disposition, such individual generally will recognize ordinary income, and
the Company will be entitled to an income tax deduction (provided the Company
satisfies applicable federal income tax reporting requirements), in an amount
equal to the lesser of (i) the excess of the fair market value of the Common
Stock on the date of exercise over the exercise price or (ii) the amount
realized upon disposition over the exercise price. Any gain in excess of such
amount recognized by the key employee as ordinary income would be taxed to such
individual as short-term or long-term capital gain (depending on the applicable
holding period).
Non-ISOs. A key employee or an outside director will not recognize any
taxable income upon the grant of a Non-ISO, and the Company will not be entitled
to take an income tax deduction at the time of such grant. Upon the exercise of
a Non-ISO, the key employee or outside director generally will recognize
ordinary income and the Company will be entitled to take an income tax deduction
(provided the Company satisfies applicable federal income tax reporting
requirements) in an amount equal to the excess of the fair market value of the
Common Stock on the date of exercise over the exercise price. Upon a subsequent
sale of the Common Stock by the key employee or outside director, such
individual will recognize short-term or long-term capital gain or loss
(depending on the applicable holding period).
SARs. A key employee will recognize ordinary income for federal income tax
purposes upon the exercise of an SAR under the Plan for cash, Common Stock or a
combination of cash and Common Stock, and the amount of income that the key
employee will recognize will depend on the amount of cash, if any, and the fair
market value of the Common Stock, if any, that the key employee receives as a
result of such exercise. The Company generally will be entitled to a federal
income tax deduction in an amount equal to the ordinary income recognized by the
key employee in the same taxable year in which the key employee recognizes such
income, if the Company satisfies applicable federal income tax reporting
requirements.
Restricted Stock. A key employee or outside director is not subject to any
federal income tax upon the grant of Restricted Stock, nor does the grant of
Restricted Stock result in an income tax deduction for the Company, unless the
restrictions on the stock do not present a substantial risk of forfeiture as
defined under Section 83 of the Code. In the year that the Restricted Stock is
no longer subject to a substantial risk of forfeiture, the key employee or
outside director will recognize ordinary income in an amount equal to the fair
market value of the shares of Common Stock transferred to the key employee or
outside director, generally determined on the date the Restricted Stock is no
longer subject to a substantial risk of forfeiture. If a key employee or outside
director is subject to Section 16(b) of the Exchange Act and cannot sell the
Common Stock without being subject to liability under such section, the stock
will be treated as subject to a substantial risk of forfeiture. If the
Restricted Stock is forfeited, the key employee or outside director will
recognize no gain.
A key employee or outside director may make an election under Section 83(b)
of the Code to recognize the fair market value of the Common Stock as taxable
income at the time of grant of the Restricted Stock. If such an election is
made, (i) the key employee or outside director will not otherwise be taxed in
the year that the Restricted Stock is no longer subject to a substantial risk of
forfeiture and (ii) if the Restricted Stock is subsequently forfeited, the key
employee or outside director will be allowed no deduction with respect to such
forfeiture. Cash dividends paid to a key employee or outside director on shares
of Restricted Stock prior to the date the Restricted Stock is no longer subject
to a substantial risk of forfeiture or is forfeited are treated as ordinary
income of the key employee or outside director in the year received. The Company
generally will be entitled to a federal income tax deduction equal to the amount
of ordinary income recognized by the key employee or outside director when such
ordinary income is recognized by the key employee or outside director, provided
the Company satisfies applicable federal income tax reporting requirements.
Depending on the period shares of Common Stock are held after receipt by the key
employee or outside director, the sale or other taxable disposition of such
shares will result in short-term or long-term capital gain or loss equal to the
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<PAGE> 39
difference between the amount realized on such disposition and the fair market
value of such shares generally when the Restricted Stock is no longer subject to
a substantial risk of forfeiture.
Share Purchases and Loans. The purchases of shares of Common Stock under
the terms of the Plan will be at fair market value, and the loans that may be
extended under the Plan to permit a key employee or outside director to purchase
such shares of Common Stock will bear market interest rates. Thus, upon the key
employee's or outside director's purchase of shares of Common Stock or the
extension to the key employee or outside director of a loan under the Plan to
permit him or her to purchase such shares, the key employee or outside director
will not recognize any taxable income, and the Company will not be entitled to
take an income tax deduction.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL AND ADOPTION OF THE PLAN.
ADDITIONAL INFORMATION
PROPOSALS FOR 2000 MEETING
The Company anticipates that its 2000 Annual Meeting will be held during
May 2000. Accordingly, any proposal of stockholders that is intended to be
presented at the Company's 2000 Annual Meeting of Stockholders must be received
at the Company's principal executive offices no later than December 31, 1999 and
must comply with all other applicable legal requirements in order to be included
in the Company's proxy statement and form of proxy for that meeting. The Company
will have the right to confer to the persons named in its proxy cards for the
Company's 2000 Annual Meeting discretionary authority to vote on any stockholder
proposal that is not received at the Company's principal executive offices by
March 16, 2000.
COMMITTEE AND MEETINGS
The Board of Directors of the Company held 12 meetings during the year
ended December 31, 1998. The Audit Committee, which consists of Messrs. Bogan,
Bovender, Eberle and Gildea, and Ms. Goldberg, held four meetings during 1998.
The functions of the Audit Committee are (i) to recommend the appointment of the
Company's independent accountants, (ii) to meet periodically with the Company's
management and its independent accountants on matters relating to the annual
audit, internal controls, and accounting principles of the Company, and the
Company's financial reporting and (iii) to review potential conflict of interest
situations, where appropriate. The Compensation Committee, which during 1998
consisted of Messrs. Bogan, Bovender, Eberle and Gildea, and Ms. Goldberg, held
two meetings during 1998. The functions of the Compensation Committee are (i) to
review and approve all employment and termination of executive officers, (ii) to
monitor compensation of all management staff and (iii) to review and approve
compensation of the Chief Executive Officer and other senior management. The
Stock Committee, which consists of Messrs. Bogan, Bovender, and Gildea, and Ms.
Goldberg, held three meetings during 1998. The function of the Stock Committee
is to administer the Company's Amended Incentive Stock Plan and the Employee
Stock Purchase Plan. The Company does not have a standing nominating committee.
The Executive Committee, which consists of Messrs. Mercy and Eberle, held two
meetings during 1998. The function of the Executive Committee is to exercise all
powers and authority of the Board of Directors in the management of the business
and affairs of the Company except as may be limited by the Delaware General
Corporation Law. During 1998, each director, except Messrs. Bogan and Bovender,
attended more than 75% of all meetings of the Board of Directors and the
committees on which he or she served.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission.
Officers, directors and greater than ten percent shareholders are required by
law to furnish the Company copies of all Forms 3, 4 and 5 they file. Based
solely on the Company's review of the copies of such forms it has received and
representations from certain reporting persons that they were not required to
file Forms 5 for specified fiscal
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years, the Company believes that its officers, directors and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's audited financial statements, supplementary financial
information, management's discussion and analysis of financial condition and
results of operations and quantitative and qualitative disclosures about market
risk are incorporated herein by reference to the Company's Annual Report on Form
10-K/A for the year ended December 31, 1998, a copy of which is being mailed
with this Proxy Statement. Certain unaudited financial information of the
Company is incorporated herein by reference to Amendment No. 2 to the Company's
Current Report on Form 8-K, dated July 28, 1999, a copy of which is being mailed
with this Proxy Statement.
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[LETTERHEAD OF SUNTRUST EQUITABLE SECURITIES]
ANNEX A
January 26, 1999
Board of Directors
America Service Group
105 Westpark Drive, Ste. 300
Brentwood, Tennessee 37027
Lady and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock of America Service Group Inc., a Delaware corporation (the
"Company"), of the consideration to be paid or received by the Company, as the
case may be, with all such transactions being taken as a whole:
(i) in exchange for all the outstanding capital stock (the "EMSA Stock") of
EMSA Government Services, Inc., a Florida corporation ("EMSA"), pursuant
to the Stock Purchase Agreement, dated as of December 18, 1998 (the
"Purchase Agreement"), by and between Inphynet Administrative Services,
Inc. ("Seller") and the Company (the "Acquisition");
(ii) for the issuance of $15,000,000 aggregate principal amount of
Subordinated Convertible Bridge Notes (the "Notes") with detachable
warrants for the purchase of shares of Common Stock of the Company (the
"Warrants") and $5,000,000 of convertible preferred stock (the
"Preferred Stock") to funds managed by Ferrer, Freeman, Thompson & Co.
("FFT"), on the terms and subject to the conditions set forth in the
term sheet dated November 13, 1998 and executed by FFT and the Company
(the "FFT Securities Term Sheet"); and
(iii) in borrowing up to $52,000,000 (the "Senior Debt") from NationsBank of
Tennessee, N.A. ("NationsBank") pursuant to an Amended and Restated
Credit Agreement, on the terms and subject to the conditions set forth
in the term sheet issued by NationsBank, dated November 13, 1998 (the
"Senior Debt Term Sheet").
The purchase price to be paid for the EMSA Stock under the Purchase
Agreement is $67,000,000, subject to adjustment, upwards or downwards, based
upon EMSA's working capital as of the closing date. The terms and conditions of
the Acquisition are more fully set forth in the Purchase Agreement. The FFT Term
Sheet provides for the issuance of $15,000,000 principal amount of Notes with
detachable Warrants to purchase 135,000 shares of the Company's Common Stock for
a purchase price of $15,000,000, and shares of Preferred Stock for a purchase
price of $5,000,000. The Notes, Warrants and Preferred Stock are sometimes
referred to collectively as the "FFT Securities". The Notes are convertible into
additional shares of Preferred Stock for a period of one year from closing
subject to certain conditions, including approval by the Company's stockholders.
The terms of the FFT Securities and certain conditions to their issuance,
including the delivery to the Company of a fairness opinion of its financial
advisor and the negotiation and execution of definitive agreements and
documentation, are summarized in the FFT Securities Term Sheet. The terms and
conditions of the Senior Debt are summarized in the Senior Debt Term Sheet, and
the availability to the Company of the Senior Debt is subject to the negotiation
and execution of definitive agreements and documentation.
SunTrust Equitable Securities Corporation ("SunTrust Equitable"), as part
of its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We will receive a fee for rendering this opinion. In the past,
SunTrust Equitable has performed investment banking and financial advisory
services for the Company from time to time for which we have received
compensation. In the ordinary course of our business, we may trade the equity
securities of the Company and MedPartners, Inc., a Delaware corporation
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and the parent of EMSA ("MedPartners"), for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
In connection with our opinion, we have reviewed, among other things, (i)
the Purchase Agreement; (ii) the FFT Securities Term Sheet; (iii) the Senior
Debt Term Sheet; (iv) certain financial and other information with respect to
EMSA, MedPartners and the Company that was publicly available; and (v) certain
financial analyses, financial forecasts, reports and other information prepared
by the respective managements and representatives of the Company and EMSA which
was furnished to us by you. We held discussions with the management and
representatives of the Company and EMSA concerning the historical and current
operations, financial condition, business, strategic objectives and prospects of
EMSA and the Company. In addition, we (a) conducted a comparable companies
analysis in which we reviewed three different sets of publicly traded companies,
comprising health maintenance organizations, physician practice management
companies and corrections companies, including an analysis of historical
financial information, historical stock market prices and current market
capitalization and debt levels relative to various operating measures and
earnings estimates, and earnings expectations forecasted by securities analysts;
(b) performed a discounted cash flow analysis; (c) reviewed the financial terms
of certain recent acquisitions involving public and private companies, including
both health maintenance organizations and corrections companies; (d) performed a
pro forma combination analysis which involved estimating the potential financial
impact of the Acquisition on the historical and projected earnings per share of
the Company, based upon factors which included the anticipated accounting
treatment for the Acquisition, the source of funds to effectuate the
Acquisition, and the anticipated operating contribution of EMSA to the Company's
financial performance; and (e) conducted such other financial studies, and
analyses and considered such other factors as we deemed appropriate in arriving
at our opinion. We note that certain terms of the FFT Securities, including the
ultimate conversion price of the Preferred Stock, are dependent upon the market
price for the Company's Common Stock during certain periods set forth in the FFT
Securities Term Sheet. These presently unascertainable variables could lead to a
number of different outcomes. Accordingly, we analyzed two different scenarios:
(A) a "base case" in which we assumed that the Notes are converted into
Preferred Stock on June 30, 1999, and that there is a modest increase in the
market price of the Company's Common Stock during the period within which the
conversion price of the Common Stock would be subject to adjustment (the
"Adjustment Period"); and (B) a "pessimistic case" in which we assumed that the
Notes are not converted into Preferred Stock and that the market price of the
Company's Common Stock does not appreciate during the Adjustment Period. Each of
these scenarios was analyzed with regard to (1) the impact on the Company's
diluted earnings per share; (2) the anticipated financial covenants under the
Senior Debt credit facility; and (3) the percentage of the Common Stock of the
Company which might be owned by the purchasers of the FFT Securities as a result
of the potential adjustment in the conversion price of the Preferred Stock.
In rendering this opinion, we have relied, without assuming any
responsibility for independent verification, on the accuracy and completeness of
all financial and other information reviewed by us that was publicly available
or furnished to us concerning the Company or EMSA. We have assumed that the
financial forecasts and other information and data furnished to us and which we
examined were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgment of the respective managements of the
Company and EMSA with respect to the future financial performance of the Company
and EMSA and the potential strategic implications and operational benefits
anticipated from the Acquisition. We have also assumed, with your consent, (I)
that the Company will acquire the EMSA Stock under the Purchase Agreement, that
each of the parties thereto will perform all of the covenants and agreements to
be performed by it under the Purchase Agreement, and that all conditions to the
obligations of each party will be satisfied without any waiver thereof, except
to the extent that any non-compliance or waiver would not be material to our
analysis; (II) that all material governmental, regulatory or other approvals and
consents required in connection with the consummation of the Acquisition will be
obtained, and that in connection with obtaining any such approvals and consents,
no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made, that would have a material adverse effect on EMSA
or the Company or materially reduce the contemplated benefits of the
Acquisition; and (III) definitive documents will be negotiated and executed with
respect to the FFT Securities and the Senior Debt that contain terms and
conditions reasonably customary for such securities and indebtedness that
currently are available to similarly
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situated entities, and that the terms of the FFT Securities and the Senior Debt
in the definitive documents relating thereto will not vary from the terms set
forth in the FFT Securities Term Sheet or the Senior Debt Term Sheet, as the
case may be, in any regard that would be material to our analysis. We have not
made an independent evaluation or appraisal of the assets or liabilities
(individually or collectively, contingent or otherwise) of EMSA, nor were we
furnished with any such evaluations or appraisals. We understand that the
purchase price for the EMSA Stock was determined in arms-length negotiations
between the Company and the Seller. Our opinion does not address the solvency of
the Company. Our opinion is based upon economic, monetary, stock market and
other conditions existing on the date hereof.
It is understood that this opinion is addressed to and for the use and
benefit of the Board of Directors of the Company in evaluating each of the
contemplated transactions. This opinion is not a recommendation to the
stockholders of the Company with respect to any aspect of the contemplated
transactions for which the approval of stockholders of the Company may be sought
or required.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the consideration to be paid or received by
the Company, as the case may be, (i) for the EMSA Stock, (ii) for the FFT
Securities and (iii) for the Senior Debt, with all such transactions being taken
as a whole, is fair, from a financial point of view, to the holders of shares of
the Company's Common Stock.
Very truly yours,
/s/ SunTrust Equitable Securities Corporation
SUNTRUST EQUITABLE SECURITIES CORPORATION
A-3
<PAGE> 44
ANNEX B
AMERICA SERVICE GROUP INC.
1999 INCENTIVE STOCK PLAN
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
sec. 1 BACKGROUND AND PURPOSE.......................................... B-1
sec. 2 DEFINITIONS..................................................... B-1
2.1 ASG......................................................... B-1
2.2 Affiliate................................................... B-1
2.3 Board....................................................... B-1
2.4 Change in Control........................................... B-1
2.5 Code........................................................ B-1
2.6 Committee................................................... B-1
2.7 Director.................................................... B-1
2.8 Fair Market Value........................................... B-1
2.9 ISO......................................................... B-2
2.10 Key Employee................................................ B-2
2.11 1933 Act.................................................... B-2
2.12 1934 Act.................................................... B-2
2.13 Non-ISO..................................................... B-2
2.14 Option...................................................... B-2
2.15 Option Certificate.......................................... B-2
2.16 Option Price................................................ B-2
2.17 Parent...................................................... B-2
2.18 Plan........................................................ B-2
2.19 Restricted Stock............................................ B-2
2.20 Restricted Stock Certificate................................ B-2
2.21 Rule 16b-3.................................................. B-2
2.22 Stock....................................................... B-2
2.23 SAR Value................................................... B-2
2.24 Stock Appreciation Right.................................... B-2
2.25 Stock Appreciation Right Certificate........................ B-2
2.26 Subsidiary.................................................. B-2
2.27 Ten Percent Shareholder..................................... B-2
sec. 3 SHARES RESERVED UNDER PLAN...................................... B-3
sec. 4 EFFECTIVE DATE.................................................. B-3
sec. 5 COMMITTEE....................................................... B-3
sec. 6 ELIGIBILITY AND ANNUAL GRANT CAPS............................... B-3
sec. 7 OPTIONS......................................................... B-3
7.1 Committee Action............................................ B-3
7.2 $100,000 Limit.............................................. B-4
7.3 Grants to Directors......................................... B-4
7.4 Option Price................................................ B-5
7.5 Exercise Period............................................. B-5
sec. 8 STOCK APPRECIATION RIGHTS....................................... B-5
8.1 Committee Action............................................ B-5
8.2 Terms and Conditions........................................ B-5
(a) Stock Appreciation Right Certificate.................... B-5
(b) Option Certificate...................................... B-5
8.3 Exercise.................................................... B-5
sec. 9 RESTRICTED STOCK................................................ B-6
9.1 Committee Action............................................ B-6
9.2 Effective Date.............................................. B-6
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
9.3 Conditions.................................................. B-6
(a) Conditions to Issuance of Stock......................... B-6
(b) Forfeiture Conditions................................... B-6
9.4 Dividends and Voting Rights................................. B-6
9.5 Satisfaction of Forfeiture Conditions; Provision for Income
and Excise Taxes............................................ B-6
9.6 Section 162(m).............................................. B-7
sec. 10 SHARE PURCHASE PROGRAM......................................... B-7
10.1 Share Purchases............................................. B-7
10.2 Non-ISO Grants.............................................. B-7
10.3 Loans to Purchase Shares.................................... B-8
sec. 11 NONTRANSFERABILITY............................................. B-9
sec. 12 SECURITIES REGISTRATION........................................ B-9
sec. 13 LIFE OF PLAN................................................... B-9
sec. 14 ADJUSTMENT..................................................... B-10
14.1 Capital Structure........................................... B-10
14.2 Mergers..................................................... B-10
14.3 Fractional Shares........................................... B-10
sec. 15 SALE, MERGER OR CHANGE IN CONTROL.............................. B-10
sec. 16 AMENDMENT OR TERMINATION....................................... B-11
sec. 17 MISCELLANEOUS.................................................. B-11
17.1 Shareholder Rights.......................................... B-11
17.2 No Contract of Employment................................... B-11
17.3 Withholding................................................. B-11
17.4 Construction................................................ B-11
17.5 Other Conditions............................................ B-11
17.6 Rule 16b-3.................................................. B-12
17.7 Loans....................................................... B-12
</TABLE>
<PAGE> 47
SEC. 1
BACKGROUND AND PURPOSE
The purpose of this Plan is to promote the interest of ASG by authorizing
the Committee to grant Options and Restricted Stock to Key Employees and
Directors, to grant Restricted Stock and Stock Appreciation Rights to Key
Employees and to offer Key Employees or Directors the right to purchase shares
of Stock in order (1) to attract and retain Key Employees and Directors, (2) to
provide an additional incentive to each Key Employee or Director to work to
increase the value of Stock and (3) to provide each Key Employee or Director
with a stake in the future of ASG which corresponds to the stake of each of
ASG's stockholders.
SEC. 2
DEFINITIONS
2.1 ASG -- means America Service Group Inc. and successor to America
Service Group Inc.
2.2 Affiliate -- means any organization (other than a Subsidiary) that
would be treated as under common control with ASG under sec. 414(c) of the Code
if "50 percent" were substituted for "80 percent" in the income tax regulations
under sec. 414(c) of the Code.
2.3 Board -- means the Board of Directors of ASG.
2.4 Change in Control -- means (1) a "change in control" of ASG of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
for a proxy statement filed under Section 14(a) of the 1934 Act, (2) a "person"
(as that term is used in Section 14(d)(2) of the 1934 Act) becomes after the
effective date of this Plan the beneficial owner (as defined in Rule 13d-3 under
the 1934 Act) directly or indirectly of securities representing 50% or more of
the combined voting power for election of directors of the then outstanding
securities of ASG, (3) the individuals who at the beginning of any period of two
consecutive years or less constitute the Board cease for any reason during such
period to constitute at least a majority of the Board, unless the election or
nomination for election of each new member of the Board was approved by vote of
at least two-thirds of the members of the Board then still in office who were
members of the Board at the beginning of such period, (4) the shareholders of
ASG approve any dissolution or liquidation of ASG or any sale or disposition of
50% or more of the assets or business of ASG or (5) the shareholders of ASG
approve a merger or consolidation to which ASG is a party (other than a merger
or consolidation with a wholly-owned subsidiary of ASG) or a share exchange in
which ASG shall exchange ASG shares for shares of another corporation as a
result of which the persons who were shareholders of ASG immediately before the
effective date of such merger, consolidation or share exchange shall have
beneficial ownership of less than 50% of the combined voting power for election
of directors of the surviving corporation following the effective date of such
merger, consolidation or share exchange.
2.5 Code -- means the Internal Revenue Code of 1986, as amended.
2.6 Committee -- means the Incentive Stock Committee, a committee of the
Board which shall have at least 2 members, each of whom shall be appointed by
and shall serve at the pleasure of the Board and shall come within the
definition of a "non-employee director" under Rule 16b-3 and an "outside
director" under sec. 162(m) of the Code.
2.7 Director -- means any member of the Board who is not an employee of ASG
or a Parent or Subsidiary or affiliate (as such term is defined in Rule 405 of
the 1933 Act) of ASG.
2.8 Fair Market Value -- means (1) the closing price on any date for a
share of Stock as reported by The Wall Street Journal or, if The Wall Street
Journal no longer reports such closing price, such closing price as reported by
a newspaper or trade journal selected by the Committee or, if no such closing
price is available on such date, (2) such closing price as so reported in
accordance with sec. 2.8(1) for the immediately preceding business day, or, if
no newspaper or trade journal reports such closing price or if no such price
quotation is
B-1
<PAGE> 48
available, (3) the price which the Committee acting in good faith determines
through any reasonable valuation method that a share of Stock might change hands
between a willing buyer and a willing seller, neither being under any compulsion
to buy or to sell and both having reasonable knowledge of the relevant facts.
2.9 ISO -- means an option granted under this Plan to purchase Stock which
is intended to satisfy the requirements of sec. 422 of the Code.
2.10 Key Employee -- means an employee of, or an independent contractor
providing consulting or advisory services to, ASG or any Subsidiary or Parent or
Affiliate designated by the Committee who, in the judgment of the Committee
acting in its absolute discretion, is key directly or indirectly to the success
of ASG.
2.11 1933 Act -- means the Securities Act of 1933, as amended.
2.12 1934 Act -- means the Securities Exchange Act of 1934, as amended.
2.13 Non-ISO -- means an option granted under this Plan to purchase Stock
which is intended to fail to satisfy the requirements of sec. 422 of the Code.
2.14 Option -- means an ISO or a Non-ISO which is granted under sec. 7 of
this Plan.
2.15 Option Certificate -- means the written certificate which sets forth
the terms and conditions of an Option granted to a Key Employee or Director
under this Plan.
2.16 Option Price -- means the price which shall be paid to purchase one
share of Stock upon the exercise of an Option granted under this Plan.
2.17 Parent -- means any corporation which is a parent of ASG within the
meaning of sec. 424(e) of the Code.
2.18 Plan -- means this America Service Group Inc. 1999 Incentive Stock
Plan as effective as of the date adopted by the Board in 1999 and as amended
from time to time thereafter.
2.19 Restricted Stock -- means Stock granted to a Key Employee or Director
under sec. 9 of this Plan.
2.20 Restricted Stock Certificate -- means the written certificate which
sets forth the terms and conditions of a Restricted Stock grant to a Key
Employee or Director.
2.21 Rule 16b-3 -- means the exemption under Rule 16b-3 to Section 16(b) of
the 1934 Act or any successor to such rule.
2.22 Stock -- means $.01 par value common stock of ASG.
2.23 SAR Value -- means the value assigned by the Committee to a share of
Stock in connection with the grant of a Stock Appreciation Right under sec. 10.
2.24 Stock Appreciation Right -- means a right to receive the appreciation
in a share of Stock which is granted under sec. 8 of this Plan either as part of
an Option or independent of any Option.
2.25 Stock Appreciation Right Certificate -- means the written certificate
which sets forth the terms and conditions of a Stock Appreciation Right which is
not granted to a Key Employee as part of an Option.
2.26 Subsidiary -- means a corporation which is a subsidiary corporation
(within the meaning of sec. 424(f) of the Code) of ASG.
2.27 Ten Percent Shareholder -- means a person who owns (after taking into
account the attribution rules of sec. 424(d) of the Code) more than ten percent
of the total combined voting power of all classes of stock of either ASG, a
Subsidiary or Parent.
B-2
<PAGE> 49
SEC. 3
SHARES RESERVED UNDER PLAN
There shall be 1,060,000 shares of Stock reserved for use under this Plan.
Such shares of Stock shall be reserved to the extent that ASG deems appropriate
from authorized but unissued shares of Stock and from shares of Stock which have
been reacquired by ASG. Any shares of Stock subject to an Option which remain
unissued after the cancellation, expiration or exchange of such Option, any
shares of Restricted Stock which are forfeited or canceled, any shares of Stock
that are repurchased by ASG under sec. 10 and any shares of Stock subject to a
Stock Appreciation Right with respect to which no exercise has been made under
sec. 8 before the cancellation or expiration of such Stock Appreciation Right
thereafter shall again become available for use under this Plan, but any shares
of Stock used to exercise an Option or to satisfy a withholding obligation shall
not again become available for use under this Plan.
SEC. 4
EFFECTIVE DATE
The effective date of this Plan shall be April 16, 1999, the date of its
adoption by the Board, provided the shareholders of ASG (acting at a duly called
meeting of such shareholders) approve such adoption within twelve (12) months of
such effective date. Any Option or Restricted Stock or Stock Appreciation Right
granted before such shareholder approval automatically shall be granted subject
to such approval.
SEC. 5
COMMITTEE
This Plan shall be administered by the Committee. The Committee acting in
its absolute discretion shall exercise such powers and take such action as
expressly called for under this Plan and, further, the Committee shall have the
power to interpret this Plan and (subject to sec. 14, sec. 15 and sec. 16 and
Rule 16b-3) to take such other action in the administration and operation of
this Plan as the Committee deems equitable under the circumstances, which action
shall be binding on ASG, on each affected Key Employee or Director and on each
other person directly or indirectly affected by such action.
SEC. 6
ELIGIBILITY AND ANNUAL GRANT CAPS
Only Key Employees who are employed by ASG or a Subsidiary or Parent shall
be eligible for the grant of ISOs under this Plan, and Key Employees and
Directors shall be eligible for the grant of Non-ISOs and Restricted Stock and
for the right to purchase shares of Stock under this Plan. Only Key Employees
shall be eligible for the grant of Stock Appreciation Rights under this Plan. No
Key Employee in any calendar year shall be granted an Option to purchase more
than 100,000 shares of Stock or a Stock Appreciation Right with respect to more
than 100,000 shares of stock.
SEC. 7
OPTIONS
7.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant Options to Key Employees under this Plan from time
to time to purchase shares of Stock and, further, the Committee shall have the
right to grant new options in exchange for the cancellation of outstanding
Options which have a lower Option price than the new Options. Notwithstanding
anything in this Plan to the contrary, the Committee shall not have the right to
grant new options in exchange for the cancellation of outstanding Options which
have a higher Option price than the new Options. Each grant of an Option to a
Key Employee
B-3
<PAGE> 50
shall be evidenced by an Option Certificate, and each Option Certificate shall
set forth whether the Option is an ISO or a Non-ISO and shall set forth such
other terms and conditions of such grant as the Committee acting in its absolute
discretion deems consistent with the terms of this Plan; however, if the
Committee grants an ISO and a Non-ISO to a Key Employee on the same date, the
right of the Key Employee to exercise the ISO shall not be conditioned on his or
her failure to exercise the Non-ISO. The Committee also shall have the right in
connection with the grant of one Option to provide in the related Option
Certificate for the automatic grant of one, or more than one, additional Option,
where the grant of the additional Option or Options would be triggered by the
occurrence of such event or such events as the Committee deems appropriate under
the circumstances.
7.2 $100,000 Limit. No Option shall be treated as an ISO to the extent
that the aggregate fair market value of the Stock subject to the Option which
would first become exercisable in any calendar year exceeds $100,000. Any such
excess shall instead automatically be treated as a Non-ISO. The Committee shall
interpret and administer the limitation set forth in this sec. 7.2 in accordance
with sec. 422(d) of the Code, and the Committee shall treat this sec. 7.2 as in
effect only for those periods for which sec. 422(d) of the Code is in effect.
7.3 Grants to Directors. The Committee may grant a Non-ISO to each
Director, upon nomination, pending election to ASG's Board by ASG's
stockholders, or as of the first day he or she first serves as a Director to
purchase a number of shares of Stock that is determined by the Committee in its
absolute discretion and such number shall be the same for each Director whose
service as such starts on such date. In addition, the Committee may grant a
Non-ISO to each Director who is serving as such on the date of ASG's annual
stockholder's meeting to purchase a number of shares of Stock that is determined
by the Committee in its absolute discretion and such number shall be the same
for each Director who is serving as such on such date. Each grant of a Non-ISO
to a Director shall be evidenced by an Option Certificate, and each Option
Certificate shall set forth such terms and conditions of such grant as the
Committee acting in its absolute discretion deems appropriate and proper under
the circumstances and consistent with the terms of this Plan. No Director shall
be eligible to receive an Option under this Plan except as provided in this
sec. 7.3. A grant of a Non-ISO to a Director under this sec. 7.3 is intended to
be granted in a manner which continues to allow such Director to be a
"non-employee director" within the meaning of Rule 16b-3 and an "outside
director" within the meaning of sec. 162(m) of the Code, and all Non-ISOs
granted to Directors under this sec. 7.3 shall be construed to effect such
intent.
7.4 Option Price. The Option Price for each share of Stock subject to an
Option which is granted to a Key Employee or Director shall be no less than the
Fair Market Value of a share of Stock on the date the Option is granted;
provided, however, if the Option is an ISO granted to a Key Employee who is a
Ten Percent Shareholder, the Option Price for each share of Stock subject to
such ISO shall be no less than 110% of the Fair Market Value of a share of Stock
on the date such ISO is granted; provided, further, however, that Non-ISO's
granted pursuant to sec. 10.2 of this Plan shall be granted at an exercise price
which is not less than the greater of (i) the fair market value of the Common
Stock as determined on the grant date in accordance with this Plan and (ii)
$9.45. The Option Price shall be payable in full upon the exercise of any
Option, and at the discretion of the Committee an Option Certificate can provide
for the payment of the Option Price either in cash, by check or in Stock which
has been held for at least 6 months and which is acceptable to the Committee or
in any combination of cash, check and such Stock. The Option Price in addition
may be paid through any broker facilitated cashless exercise procedure
acceptable to the Committee or its delegate. Any payment made in Stock shall be
treated as equal to the Fair Market Value of such Stock on the date the
certificate for such Stock is presented to the Committee or its delegate in such
form as acceptable to the Committee.
B-4
<PAGE> 51
7.5 Exercise Period. Each Option granted under this sec. 7 to a Key
Employee or Director shall be exercisable in whole or in part at such time or
times as set forth in the related Option Certificate, but no Option Certificate
shall make an Option granted to a Key Employee or Director exercisable on or
after the earlier of
(1) the date such Option is exercised in full, or
(2) the date which is the fifth anniversary of the date the Option is
granted, if the Option is an ISO and the Key Employee is a Ten Percent
Shareholder on the date the Option is granted, or
(3) the date which is the tenth anniversary of the date the Option is
granted, if the Option is (a) a Non-ISO or (b) an ISO which is granted to a
Key Employee who is not a Ten Percent Shareholder on the date the Option is
granted
An Option Certificate may provide for the exercise of an Option after the
employment of a Key Employee or the service of a Director has terminated for any
reason whatsoever, including death or disability.
SEC. 8
STOCK APPRECIATION RIGHTS
8.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant a Stock Appreciation Right to a Key Employee under
this Plan from time to time, and each Stock Appreciation Right grant shall be
evidenced by a Stock Appreciation Right Certificate or, if such Stock
Appreciation Right is granted as part of an Option, shall be evidenced by the
Option Certificate for the related Option.
8.2 Terms and Conditions.
(a) Stock Appreciation Right Certificate. If a Stock Appreciation
Right is evidenced by a Stock Appreciation Right Certificate, such
certificate shall set forth the number of shares of Stock to which the Key
Employee has the right to appreciation and the SAR Value of each share of
Stock. Such SAR Value shall be no less than the Fair Market Value of a
share of Stock on the date that the Stock Appreciation Right is granted.
The Stock Appreciation Right Certificate shall set forth such other terms
and conditions for the exercise of the Stock Appreciation Right as the
Committee deems appropriate under the circumstances, but no Stock
Appreciation Right Certificate shall make a Stock Appreciation Right
exercisable on or after the date which is the tenth anniversary of the date
such Stock Appreciation Right is granted.
(b) Option Certificate. If a Stock Appreciation Right is evidenced by
an Option Certificate, the SAR Value for each share of Stock subject to the
Stock Appreciation Right shall be the Option Price for the related Option.
Each such Option Certificate shall provide that the exercise of the Stock
Appreciation Right with respect to any share of Stock shall cancel the Key
Employee's right to exercise his or her Option with respect to such share
and, conversely, that the exercise of the Option with respect to any share
of Stock shall cancel the Key Employee's right to exercise his or her Stock
Appreciation Right with respect to such share. A Stock Appreciation Right
which is granted as part of an Option shall be exercisable only while the
related Option is exercisable. The Option Certificate shall set forth such
other terms and conditions for the exercise of the Stock Appreciation Right
as the Committee deems appropriate under the circumstances.
8.3 Exercise. A Stock Appreciation Right shall be exercisable only when
the Fair Market Value of a share of Stock subject to such Stock Appreciation
Right exceeds the SAR Value for such share, and the payment due on exercise
shall be based on such excess with respect to the number of shares of Stock to
which the exercise relates. A Key Employee upon the exercise of his or her Stock
Appreciation Right shall receive a payment from ASG in cash or in Stock, or in a
combination of cash and Stock, and any payment in Stock shall be based on the
Fair Market Value of a share of Stock on the date the Stock Appreciation Right
is exercised. The Committee acting in its absolute discretion shall have the
right to determine the form and time of any payment under this sec. 8.3.
B-5
<PAGE> 52
SEC. 9
RESTRICTED STOCK
9.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant Restricted Stock to Key Employees or Directors
under this Plan from time to time and, further, shall have the right to make new
Restricted Stock grants in exchange for the cancellation of an outstanding
Restricted Stock grant to such Key Employee or Director. Each Restricted Stock
grant shall be evidenced by a Restricted Stock Certificate, and each Restricted
Stock Certificate shall set forth the conditions, if any, under which the grant
will be effective and the conditions under which the Key Employee's or
Director's interest in the underlying Stock will become nonforfeitable.
9.2 Effective Date. A Restricted Stock grant shall be effective (1) as of
the date set by the Committee when the grant is made or, if the grant is made
subject to one, or more than one, condition, (2) as of the date such conditions,
or each such condition, have been timely satisfied.
9.3 Conditions.
(a) Conditions to Issuance of Stock. The Committee acting in its
absolute discretion may make the issuance of Restricted Stock to a Key
Employee or Director subject to the satisfaction of one, or more than one,
condition which the Committee deems appropriate under the circumstances for
Key Employees or Directors generally or for a Key Employee or Director in
particular, and the related Restricted Stock Certificate shall set forth
each such condition and the deadline for satisfying each such condition.
Stock subject to a Restricted Stock grant shall be issued in the name of a
Key Employee or Director only after each such condition, if any, has been
timely satisfied, and any Stock which is so issued shall be held by ASG
pending the satisfaction of the forfeiture conditions, if any, under
sec. 9.3(b) for the related Restricted Stock grant.
(b) Forfeiture Conditions. The Committee acting in its absolute
discretion may make Restricted Stock issued in the name of a Key Employee
or Director subject to one, or more than one, objective employment,
performance or other forfeiture condition that the Committee acting in its
absolute discretion deems appropriate under the circumstances for Key
Employees or Directors generally or for a Key Employee or Director in
particular, and the related Restricted Stock Certificate shall set forth
each such condition, if any, and the deadline, if any, for satisfying each
such forfeiture condition. A Key Employee's or Director's nonforfeitable
interest in the shares of Stock underlying a Restricted Stock grant shall
depend on the extent to which he or she timely satisfies each such
condition. Each share of Stock underlying a Restricted Stock grant shall be
unavailable under sec. 3 after such grant is effective unless such share
thereafter is forfeited as a result of a failure to timely satisfy a
forfeiture condition, in which event such share of Stock shall again become
available under sec. 3 as of the date of such failure.
9.4 Dividends and Voting Rights. If a cash dividend is paid on a share of
Stock underlying a Restricted Stock grant during the period which begins on the
date such grant is effective and ends immediately before the first date that a
Key Employee's or Director's interest in such underlying Stock (1) is forfeited
completely or (2) becomes completely nonforfeitable, ASG shall pay such cash
dividend directly to such Key Employee or Director. If a Stock dividend is paid
on such a share of Stock during such period, such Stock dividend shall be
treated as part of the grant of the related Restricted Stock, and a Key
Employee's or Director's interest in such Stock dividend shall be forfeited or
shall become nonforfeitable at the same time as the Stock with respect to which
the Stock dividend was paid is forfeited or becomes nonforfeitable. The
disposition of each other form of dividend which is declared on such a share of
Stock during such period shall be made in accordance with such rules as the
Committee shall adopt with respect to each such dividend. A Key Employee or
Director also shall have the right to vote the Stock underlying his or her
Restricted Stock grant during such period.
9.5 Satisfaction of Forfeiture Conditions; Provision for Income and Excise
Taxes. A share of Stock shall cease to be Restricted Stock at such time as a
Key Employee's or Director's interest in such Stock becomes nonforfeitable under
this Plan, and the certificate representing such share shall be transferred to
the Key Employee or Director as soon as practicable thereafter. The Committee
acting in its absolute discretion
B-6
<PAGE> 53
shall have the power to authorize and direct ASG to pay a cash bonus (or to
provide in the terms of the Restricted Stock Certificate for ASG to make such
payment) to a Key Employee or Director to pay all, or any portion of, his or her
federal, state and local income tax liability which the Committee deems
attributable to his or her interest in his or her Restricted Stock grant
becoming nonforfeitable and, further, to pay any such tax liability attributable
to such cash bonus.
9.6 Section 162(m). The Committee shall use its best efforts (where the
Committee deems appropriate under the circumstances) to grant Restricted Stock
either (1) subject to at least one condition which seems likely to result in the
Restricted Stock qualifying as "performance-based compensation" under
sec. 162(m) of the Code or (2) under such other circumstances as the Committee
deems likely to result in an income tax deduction for ASG with respect to such
Restricted Stock Grant.
SEC. 10
SHARE PURCHASE PROGRAM
10.1 Share Purchases.
(a) In General. The Committee acting in its absolute discretion may
(subject to such terms and conditions as the Committee deems appropriate
under the circumstance) offer a Key Employee or Director the right to
purchase at Fair Market Value under this Plan on any date shares of Stock
having an aggregate Fair Market Value of no less than $7,500 and no more
than $150,000 for a Key Employee and no less than $7,500 and no more than
$37,500 for a Director. No share of Stock purchased by a Key Employee or a
Director under this sec. 10.1 shall be transferable unless such transfer is
made subject to all the terms and conditions set forth in sec. 10.1(b) of
this Plan, and ASG shall have the right to affix a legend on any related
stock certificate to this effect.
(b) Share Repurchase Right Upon Termination of Employment or
Service. Upon a Key Employee's voluntary termination of employment or a
termination of a Key Employee for "cause" or upon the voluntary termination
of a Director's service as such or the termination of a Director's service
as such for "cause" (all as determined by the Committee in its discretion),
ASG shall have the right (but not the obligation) to purchase from the Key
Employee or Director (or his or her transferee) at any time during the
period determined by the Committee acting in its absolute discretion that
starts on the date of such termination and that runs no longer than six (6)
months, and the Key Employee or Director (or his or her transferee) shall
have the obligation to sell to ASG, for a price equal to the purchase price
of the Stock plus, if a loan was extended to the Key Employee or Director
under sec. 10.3 of this Plan to permit the Key Employee or Director to
purchase such shares of Stock, the interest paid on the loan, the shares of
Stock purchased by the Key Employee or Director under sec. 10.1(a) of this
Plan plus any additional shares attributable to such shares of Stock.
10.2 Non-ISO Grants
(a) In General. The Committee acting in its absolute discretion may
grant to any Key Employee or Director who purchases shares of Stock under
sec. 10.1 of this Plan a Non-ISO under this sec. 10.2(a) to purchase a
number of shares of Stock that is determined by the Committee acting in its
absolute discretion and that is not less than two times the number of
shares of Stock purchased and not more than three times the number of
shares of Stock purchased.
(b) Option Price. The Option Price for any Non-ISO granted under
sec. 10.2(a) shall be no less than the greater of (i) the Fair Market Value
of a share of Stock on the date the Non-ISO is granted and (ii) $9.45 per
share.
(c) Terms. Except as expressly provided in this sec. 10.2, any
Non-ISO granted pursuant to this sec. 10.2 shall be granted subject to such
terms and conditions as the Committee acting in its absolute discretion
deems consistent with the terms of this Plan, and such terms and conditions
shall be set forth in an Option Certificate evidencing the grant of such
Non-ISO.
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<PAGE> 54
(d) Exercise of Non-ISOs Granted Under sec. 10.2(a). No Non-ISO
granted pursuant to sec. 10.2(a) shall (subject to sec. 15 of this Plan) be
exercisable on any date unless the Key Employee or the Director continues
to hold on such date 100% of the shares of Stock he or she purchased under
sec. 10.1 of this Plan in order to receive the grant of such Non-ISO, and
each Non-ISO granted pursuant to sec. 10.2(a) shall be forfeited in full if
the Key Employee's employment terminates or the Director's service as such
terminates before the fourth anniversary of the date the Non-ISO is granted
to such Key Employee or Director; provided, however, that if the Key
Employee's employment terminates involuntarily other than for "cause" or if
the Director's service as such terminates involuntarily other than for
"cause" (all as determined by the Committee acting in its absolute
discretion), then the Key Employee or the Director shall have the right to
exercise the Non-ISO with respect to:
(1) one-fourth of the shares of Stock underlying the grant of the
Non-ISO (rounding down to the nearest whole number) if he or she
remained a Key Employee or Director until the first anniversary of the
date the Non-ISO was granted;
(2) half of the shares of Stock underlying the grant of the Non-ISO
(rounding down to the nearest whole number) if he or she remained a Key
Employee or Director until the second anniversary of the date the
Non-ISO was granted; and
(3) three-fourths of the shares of Stock underlying the grant of
the Non-ISO (rounding down to the nearest whole number) if he or she
remained a Key Employee or Director until the third anniversary of the
date the Non-ISO was granted;
provided, further, that if the Key Employee's employment terminates
involuntarily other than for "cause" or if the Director's service as such
terminates involuntarily other than for "cause" (all as determined by the
Committee in its discretion) on any date before or after the fourth
anniversary of the date the Non-ISO was granted, the Key Employee or the
Director shall have the right to exercise the Non-ISO (to the extent
exercisable under this sec. 10.2(d) as of the date his or her employment or
service so terminates) until the earlier of (A) the expiration of the
six-month period immediately following the date his or her employment or
service so terminates or (B) the date described in sec. 7.5(3) of this
Plan.
10.3 Loans to Purchase Shares.
(a) In General. The Committee acting in its absolute discretion may
cause ASG to extend a loan to a Key Employee or a Director to permit the
Key Employee or Director to purchase shares of Stock under sec. 10.1 of
this Plan, and any such loan must have a principal amount that is no less
than $7,500 and no more than $150,000 for Key Employees and $37,500 for
Directors. The term of any such loan shall be fixed and shall be set by the
Committee acting in its absolute discretion, and any such loan shall bear
interest at the "applicable Federal rate" (as defined in Code Section 7872
and the regulations thereunder (including any final, proposed and temporary
regulations)) for a term loan. All of the terms and conditions of any such
loan (except as expressly provided in this sec. 10) shall be determined by
the Committee acting in its absolute discretion at the time of the loan.
The aggregate principal amount of all loans outstanding under this sec.
10.3 to all Key Employees and Directors on any date shall not exceed
$1,300,000.
(b) No Transfer. No share of Stock purchased with the proceeds of a
loan extended pursuant to this sec. 10.3 may be transferred by the Key
Employee or the Director until the principal amount of, and any accrued
interest on, such loan is repaid in full; provided, however, that such
shares may be sold to repay the loan, as determined by the Committee acting
in its discretion.
(c) Loan Repayment Upon Termination of Employment or Service. Upon
the termination of the Key Employee's employment for any reason or upon the
termination of the Director's service as such for any reason, the loan
described in this sec. 10.3 shall become due and payable in full within six
months following the date of his or her termination.
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SEC. 11
NONTRANSFERABILITY
No Option, Restricted Stock or Stock Appreciation Right shall (absent the
Committee's consent) be transferable by a Key Employee or an Director other than
by will or by the laws of descent and distribution, and any Option or Stock
Appreciation Right shall (absent the Committee's consent) be exercisable during
a Key Employee's or Director's lifetime only by the Key Employee or Director.
The person or persons to whom an Option or Restricted Stock or Stock
Appreciation Right is transferred by will or by the laws of descent and
distribution (or with the Committee's consent) thereafter shall be treated as
the Key Employee or Director. The transferability of shares of Stock purchased
under sec. 10 of this Plan shall be determined under sec. 10 of this Plan.
SEC. 12
SECURITIES REGISTRATION
As a condition to the receipt of shares of Stock under this Plan, the Key
Employee or Director shall, if so requested by ASG, agree to hold such shares of
Stock for investment and not with a view of resale or distribution to the public
and, if so requested by ASG, shall deliver to ASG a written statement
satisfactory to ASG to that effect. Each Option Certificate, Restricted Stock
Certificate and Stock Appreciation Right Certificate also shall provide that, if
so requested by ASG, the Key Employee or Director shall make a written
representation to ASG that he or she will not sell or offer for sale any of such
Stock unless a registration statement shall be in effect with respect to such
Stock under the 1933 Act and any applicable state securities law or he or she
shall have furnished to ASG an opinion in form and substance satisfactory to ASG
of legal counsel satisfactory to ASG that such registration is not required.
Certificates representing the Stock transferred upon the exercise of an Option
or Stock Appreciation Right or upon the lapse of the forfeiture conditions, if
any, on any Restricted Stock may at the discretion of ASG bear a legend to the
effect that such Stock has not been registered under the 1933 Act or any
applicable state securities law and that such Stock cannot be sold or offered
for sale in the absence of an effective registration statement as to such Stock
under the 1933 Act and any applicable state securities law or an opinion in form
and substance satisfactory to ASG of legal counsel satisfactory to ASG that such
registration is not required.
SEC. 13
LIFE OF PLAN
No Option, Restricted Stock or Stock Appreciation Right shall be granted
under this Plan, and no shares of Stock shall be purchased under this Plan on or
after the earlier of
(1) the tenth anniversary of the effective date of this Plan (as
determined under sec. 4 of this Plan), in which event this Plan otherwise
thereafter shall continue in effect until all outstanding Options and Stock
Appreciation Rights have been exercised in full or no longer are
exercisable and all Restricted Stock grants under this Plan have been
forfeited or the forfeiture conditions, if any, on such Stock have been
satisfied in full, or
(2) the date on which all of the Stock reserved under sec. 3 of this
Plan has (as a result of the purchase of shares of Stock or the exercise of
Options or Stock Appreciation Rights granted under this Plan or the
satisfaction of the forfeiture conditions, if any, on Restricted Stock)
been issued or no longer is available for use under this Plan, in which
event this Plan also shall terminate on such date.
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<PAGE> 56
SEC. 14
ADJUSTMENT
14.1 Capital Structure. The number, kind or class (or any combination
thereof) of shares of Stock reserved under sec. 3 of this Plan, the grant caps
described in sec. 6 of this Plan, the $9.45 floor on the Option Price in
sec. 10.2(b) of this Plan, the number, kind or class (or any combination
thereof) of shares of Stock subject to Options or Stock Appreciation Rights
granted under this Plan and the Option Price of such Options and the SAR Value
of such Stock Appreciation Rights as well as the number, kind or class of shares
of Restricted Stock granted under this Plan shall be adjusted by the Committee
in an equitable manner to reflect any change in the capitalization of ASG,
including, but not limited to, such changes as stock dividends or stock splits.
14.2 Mergers. The Committee as part of any corporate transaction described
in sec. 424(a) of the Code shall have the right to adjust (in any manner which
the Committee in its discretion deems consistent with sec. 424(a) of the Code
and without regard to the annual grant caps described in sec. 6 of this Plan)
the number, kind or class (or any combination thereof) of shares of Stock
reserved under sec. 3 of this Plan and the grant caps described in sec. 6 of
this Plan. Furthermore, the Committee as part of any corporate transaction
described in sec. 424(a) of the Code shall have the right to adjust (in any
manner which the Committee in its discretion deems consistent with sec. 424(a)
of the Code) the number, kind or class (or any combination thereof) of shares of
Stock underlying any purchases of shares of Stock under this Plan or any
Restricted Stock grants previously made under this Plan and any related grant
conditions and forfeiture conditions, and the number, kind or class (or any
combination thereof) of shares subject to Option and Stock Appreciation Right
grants previously made under this Plan and the related Option Price and SAR
Value for each such Option and Stock Appreciation Right, and, further, shall
have the right (in any manner which the Committee in its discretion deems
consistent with sec. 424(a) of the Code) to make Restricted Stock, Option and
Stock Appreciation Right grants to effect the assumption of, or the substitution
for, restricted stock, option and stock appreciation right grants previously
made by any other corporation to the extent that such corporate transaction
calls for such substitution or assumption of such restricted stock, option or
appreciation right grants.
14.3 Fractional Shares. If any adjustment under this sec. 14 would create
a fractional share of Stock or a right to acquire a fractional share of Stock,
such fractional share shall be disregarded and the number of shares of Stock
reserved under this Plan and the number subject to any Options or Stock
Appreciation Right grants and Restricted Stock grants or purchases of shares of
Stock shall be the next lower number of shares of Stock, rounding all fractions
downward. An adjustment made under this sec. 14 by the Committee shall be
conclusive and binding on all affected persons and, further, shall not
constitute an increase in "the number of shares reserved under sec. 3" within
the meaning of sec. 16 of this Plan.
SEC. 15
SALE, MERGER OR CHANGE IN CONTROL
If on any date ASG agrees (whether or not such agreement is subject to the
approval of ASG's shareholders) to sell all or substantially all of its assets
or agrees to any merger, consolidation, reorganization, division or other
corporate transaction in which Stock is converted into another security or into
the right to receive securities or property or if a tender offer is made on any
date which could lead to a Change in Control (other than a tender offer by ASG
or an employee benefit plan established and maintained by ASG), or if there
otherwise is a Change in Control of ASG on any date, any and all conditions to
the exercise of all outstanding Options and Stock Appreciation Rights and any
and all outstanding issuance and forfeiture conditions on any Restricted Stock
on such date automatically shall be deemed satisfied in full, ASG's repurchase
right under sec.10 shall immediately expire and the Board shall have the right
(to the extent required as part of such transaction) to cancel such Options,
Stock Appreciation Rights and Restricted Stock grants after providing each Key
Employee and Director a reasonable opportunity to exercise his or her Options
and
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<PAGE> 57
Stock Appreciation Rights and to take such other action as necessary or
appropriate to receive the Stock subject to any Restricted Stock grants.
SEC. 16
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent that
the Board deems necessary or appropriate; provided, however, no such amendment
shall be made absent the approval of the shareholders of ASG required under
sec. 422 of the Code (1) to increase the number of shares of Stock reserved
under sec. 3 which can be used for ISO grants, or (2) to change the class of
employees eligible for Options which are ISOs. The Board also may suspend the
granting of Options or Stock Appreciation Rights or Restricted Stock and the
purchase of shares of stock under this Plan at any time and may terminate this
Plan at any time; provided, however, the Board shall not have the right
unilaterally to modify, amend or cancel any Option, Stock Appreciation Right or
Restricted Stock granted or shares of Stock purchased before such suspension or
termination unless (1) the Key Employee or Director consents in writing to such
modification, amendment or cancellation or (2) there is a dissolution or
liquidation of ASG or a transaction described in sec. 14 or sec. 15 of this
Plan.
SEC. 17
MISCELLANEOUS
17.1 Shareholder Rights. No Key Employee or Director shall have any rights
as a shareholder of ASG as a result of the grant of an Option or a Stock
Appreciation Right granted to him or her under this Plan or his or her exercise
of such Option or Stock Appreciation Right pending the actual delivery of the
Stock subject to such Option to such Key Employee or Director. Subject to
sec. 9.4, a Key Employee's rights as a shareholder in the shares of Stock
underlying a Restricted Stock grant which is effective shall be set forth in the
related Restricted Stock Certificate.
17.2 No Contract of Employment. The grant of an Option or a Stock
Appreciation Right or Restricted Stock to a Key Employee or Director under this
Plan shall not constitute a contract of employment or a right to continue to
serve on the Board and shall not confer on a Key Employee or Director any rights
upon his or her termination of employment or service in addition to those
rights, if any, expressly set forth in the related Option Certificate, Stock
Appreciation Right Certificate, or Restricted Stock Certificate.
17.3 Withholding. Each Option, Stock Appreciation Right and Restricted
Stock grant shall be made subject to the condition that the Key Employee or
Director consents to whatever action the Committee directs to satisfy the
federal and state tax withholding requirements, if any, which the Committee in
its discretion deems applicable to the exercise of such Option or Stock
Appreciation Right or the satisfaction of any forfeiture conditions with respect
to Restricted Stock issued in the name of the Key Employee or Director. The
Committee also shall have the right to provide in an Option Certificate, Stock
Appreciation Right Certificate or a Restricted Stock Certificate that a Key
Employee or Director may elect to satisfy federal and state tax withholding
requirements through a reduction in the cash or the number of shares of Stock
actually transferred to him or to her under this Plan.
17.4 Construction. All references to sections (sec.) are to sections
(sec.) of this Plan unless otherwise indicated. This Plan shall be construed
under the laws of the State of Delaware. Finally, each term set forth in sec. 2
shall have the meaning set forth opposite such term for purposes of this Plan
and, for purposes of such definitions, the singular shall include the plural and
the plural shall include the singular.
17.5 Other Conditions. Each Option Certificate, Stock Appreciation Right
Certificate or Restricted Stock Certificate may require that a Key Employee or
Director (as a condition to the exercise of an Option or a Stock Appreciation
Right or a Restricted Stock grant) enter into any agreement or make such
representa-
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<PAGE> 58
tions prepared by ASG, including (without limitation) any agreement which
restricts the transfer of Stock acquired pursuant to the exercise of an Option
or a Stock Appreciation Right or Restricted Stock grant or provides for the
repurchase of such Stock by ASG under certain circumstances.
17.6 Rule 16b-3. The Committee shall have the right to amend any Option,
Restricted Stock or Stock Appreciation Right grant or to withhold or otherwise
restrict the transfer of any Stock or cash under this Plan to a Key Employee or
Director as the Committee deems appropriate in order to satisfy any condition or
requirement under Rule 16b-3 to the extent Rule 16 of the 1934 Act might be
applicable to such grant or transfer.
17.7 Loans. If approved by the Committee, ASG may lend money to, or
guarantee loans made by a third party to, any Key Employee to finance the
exercise of any Option granted under this Plan, and the exercise of an Option
with the proceeds of any such loan shall be treated as an exercise for cash
under this Plan.
IN WITNESS WHEREOF, America Service Group Inc. has caused its duly
authorized officer to execute this Plan to evidence its adoption of this Plan.
AMERICA SERVICE GROUP INC.
By: /s/ MICHAEL CATALANO
------------------------------------
President and Chief Executive
Officer
Date: April 16, 1999
-----------------------------------
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<PAGE> 59
AMERICA SERVICE GROUP INC.
PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON AUGUST 30, 1999
The undersigned hereby appoints MICHAEL CATALANO and JEAN L. BYASSEE and
each of them, proxies, with full power of substitution and resubstitution, for
and in the name of the undersigned, to vote all shares of stock of America
Service Group Inc. (the "Company"), which the undersigned would be entitled to
vote if personally present at the Annual Meeting of Stockholders to be held on
Monday, August 30, 1999, at 10:00 a.m., Central Daylight Time, at NationsBank
Plaza, 414 Union Street, 3rd Floor, Nashville, Tennessee 37219, and at any
adjournment thereof, upon the matters described in the accompanying Notice of
Annual Meeting of Stockholders and Proxy Statement, receipt of which is hereby
acknowledged, and upon any other business that may properly come before the
meeting or any adjournment thereof. Said proxies are directed to vote on matters
described in the Notice of Annual Meeting and Proxy Statement as follows, and
otherwise in their discretion upon such other business as may properly come
before the meeting or any adjournment thereof.
(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)
<PAGE> 60
- FOLD AND DETACH -
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSALS.
Please mark your votes as [X] indicated in this example
<TABLE>
<C> <S> <C> <C> <C> <C>
1. TO ELECT NINE (9) DIRECTORS TO TERMS EXPIRING AT THE 2000 ANNUAL MEETING OF STOCKHOLDERS:
Michael Catalano Carol R. Goldberg Richard M. Mastaler
William D. Eberle David A. Freeman Scott L. Mercy
John W. Gildea Jeffrey L. McWaters Richard D. Wright
[ ] FOR ALL NOMINEES LISTED (EXCEPT AS [ ] WITHHOLD AUTHORITY TO VOTE FOR ALL
MARKED TO THE CONTRARY BELOW) NOMINEES LISTED
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
ABOVE.)
2. TO RATIFY THE PRIVATE PLACEMENT (TO BE VOTED ON BY HOLDERS OF COMMON STOCK ONLY):
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. TO APPROVE THE STOCK ISSUANCE (TO BE VOTED ON BY HOLDERS OF COMMON STOCK ONLY):
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. TO APPROVE AND ADOPT THE 1999 INCENTIVE STOCK PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
(Continued on reverse side)
(continued from other side)
<TABLE>
<C> <S> <C> <C> <C> <C>
5. IN THE DISCRETION OF THE PROXIES, ON ANY MATTER THAT MAY PROPERLY COME BEFORE THE MEETING.
</TABLE>
Dated: , 1999
----------------------
--------------------------------
Signature(s) of Shareholder(s)
Please sign exactly as your name
or names appears hereon. Where
more than one owner is shown
above, each should sign. When
signing in a fiduciary or
representative capacity, please
give full title. If this proxy
is submitted by a corporation,
it should be executed in the
full corporate name by a duly
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND
THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
