FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----------
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--------
EXCHANGE ACT OF 1934
For the transition period from to .
----------------- -------------------
Commission file number 0-19673
AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0332317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PENNS WAY, NEW CASTLE, DELAWARE 19720
(Address and zip code of principal executive office)
(302) 322-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed under Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
There were 3,247,462 shares of Common Stock outstanding as of May 9, 1996.
<PAGE>
AMERICA SERVICE GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Unaudited)
Consolidated Balance Sheet at March 31, 1996
and December 31, 1995 3
Consolidated Statement of Operations for the quarters
ended March 31, 1996 and March 31, 1995 4
Consolidated Statement of Cash Flows for the quarters
ended March 31, 1996 and March 31, 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
FINANCIAL STATEMENTS
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, December 31,
-------------- -----------
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 7,932,728 $12,049,855
Investments, at cost which approximates market 700,000 700,000
Accounts receivable:
Health care sites (net of allowance) 13,135,741 11,669,007
Other 4,997,664 4,919,797
Inventory 433,063 454,434
Prepaid expenses and income taxes 1,606,203 1,098,211
Current deferred taxes 1,965,972 2,054,200
----------- -----------
Total current assets 30,771,371 32,945,504
Restricted investments 4,667,603 4,574,624
Property and equipment, net 4,366,527 3,239,004
Deferred taxes 1,572,000 1,153,800
Cost in excess of net assets of acquired
company, net 485,207 495,771
Other assets 104,042 92,635
---------- ----------
Total assets $41,966,750 $42,501,338
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,632,912 $ 7,015,264
Accrued expenses 12,685,066 13,845,039
Deferred revenue 9,127,076 9,109,469
Income taxes payable 613,559 284,093
Notes payable 664,695
----------- ----------
Total current liabilities 29,723,308 30,253,865
----------- ----------
Noncurrent portion of accrued expenses
and notes payable 3,581,000 3,581,000
Long term portion of notes payable 495,847
Commitments and contingent liabilities
Stockholders' equity:
Common stock 34,040 34,040
Additional paid-in-capital 6,886,721 6,886,721
Retained earnings 4,382,531 4,007,501
------------- -----------
11,303,292 10,928,262
Less: Treasury stock (3,136,697) (2,261,789)
------------- -----------
Total stockholders' equity 8,166,595 8,666,473
------------- -----------
Total liabilities and
stockholders' equity $ 41,966,750 $ 42,501,338
============= ===========
<PAGE>
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Quarter Ended March 31,
----------------------------
1996 1995
---- ----
Revenues $38,969,569 $25,232,273
Health care expenses 35,826,562 22,369,316
--------- ---------
Gross profit 3,143,007 2,862,957
Selling, general and administrative expenses 2,621,129 2,382,505
---------- --------
Income from operations 521,878 480,452
Other income (expense):
Interest income 112,821 31,035
Other income (expense) (8,669) (2,336)
--------- ---------
Total other income 104,152 28,699
Income before taxes 626,030 509,151
Provision for income taxes 251,000 201,000
--------- ---------
Net income $ 375,030 $ 308,151
========= =========
Earnings per common and common
equivalent share $ 0.12 $ 0.09
========= =========
Common and common equivalent shares
outstanding 3,151,003 3,304,249
========= =========
<PAGE>
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
--------------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $375,030 $308,151
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 299,262 159,864
(Increase) decrease in:
Accounts receivable (1,544,601) 1,097,015
Inventory 21,371 38,633
Prepaid expenses and income taxes (507,992) (220,475)
Deferred tax assets (329,972) (93,988)
Other assets (11,407) (11,371)
Increase (decrease) in:
Accounts payable (382,352) (1,811,415)
Accrued expenses (1,159,973) (2,883,467)
Deferred revenue 17,607
Income taxes payable 329,466 295,000
----------- ----------
Net cash used for operating activities (2,893,561) (3,122,053)
----------- ----------
Cash flows from investing activities:
Change in restricted investments, net (92,979) 380,898
Sales and maturities of investments 219,984
Capital expenditures (1,416,221) (152,727)
----------- ---------
Net cash provided by (used for) investing
activities (1,509,200) 448,155
----------- ----------
Cash flows from financing activities:
Proceeds from notes payable 1,160,542
Exercise of stock options 140,804
Purchase of treasury shares (874,908)
-------- ---------
Net cash provided by financing activities 285,634 140,804
-------- ---------
Net decrease in cash and cash equivalents (4,117,127) (2,533,094)
Cash and cash equivalents beginning of
period 12,049,855 3,829,888
--------- ---------
Cash and cash equivalents end of period $7,932,728 $1,296,794
========== ==========
<PAGE>
Notes to Consolidated Financial Statements
March 31, 1996
1. BASIS OF PRESENTATION
The interim consolidated financial statements as of March 31, 1996 and
for the quarter then ended, are unaudited, but in the opinion of management,
have been prepared in conformity with generally accepted accounting principles
applied on a basis consistent with those of the annual financial statements.
Such interim consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial position and the results of operations for the quarter
presented. The results of operations for the quarter presented are not
necessarily indicative of the results to be expected for the year ending
December 31, 1996. The interim consolidated financial statements should be
read in connection with the audited consolidated financial statements for the
year ended December 31, 1995.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share is based on the average
number of common shares and dilutive common share equivalents outstanding for
the quarters ended March 31, 1996 and 1995. The amount of dilution is
computed using the treasury stock method and the risk free rate of return
methodology for determining common stock equivalents in excess of 20% of
common stock outstanding.
3. SUBSEQUENT EVENTS
As previously announced, the Company signed an employment and other
agreements with its President and Chief Executive Officer, effective April 1,
1996. Under the agreements, the Company sold to the new employee 146,000
shares of stock from treasury for a cash payment of $8.75 per share (the fair
market value of the Company's common stock on April 1st) or $1,277,500, issued
40,000 restricted shares and granted 175,000 options to purchase shares of
stock at $8.75, such grant being contingent upon approval by the stockholders
of an amended stock option plan. Both the restricted stock award and the
stock options are scheduled to vest equally over a four year period with
accelerated vesting should the Company's common stock reach certain specified
market prices. Generally accepted accounting principles require that the
Company record a non-cash compensation charge to earnings over the vesting
period. In the case of the stock awards, the charge is equal to the market
value of the award shares on the date of the restricted stock award. In the
case of the stock options, the charge is equal to the excess of the market
value of the option shares on the date the amended stock option plan is
approved by the stockholders of the Company, over the grant price.
During April 1996, the Company's stock price reached the specified market
prices required for accelerated vesting of the new employee's stock awards and
<PAGE>
stock options. As a result of this accelerated vesting, the Company will
record a $350,000 pretax, non-cash charge to earnings in the second quarter
1996 relating to the restricted stock awards. The exact amount of the non-
cash compensation charge to be recorded in the second quarter as a result of
the vesting of stock options will depend on the closing price of the Company's
common stock on May 23, 1996, the date of the stockholders' meeting.
<PAGE>
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
First Quarter 1996 Versus First Quarter 1995
Revenues for the first quarter 1996 increased 54.4% to $38,970,000 from
$25,232,000 in the first quarter of 1995. This increase is primarily
attributed to the $13,821,000 in revenue from the new contract with the state
of Georgia. Other contracts that started subsequent to the first quarter of
1995 added $1,501,000 in revenues. Repricings and renewals of existing
contracts contributed an additional $1,824,000 in the first quarter of 1996.
This revenue was offset by the expiration of certain contracts which had
contributed approximately $3,778,000 in revenue during the first quarter of
1995.
Health care expenses were $35,827,000 for the first quarter of 1996 or
91.9% of revenue. Health care expenses increased by $13,458,000 (60.2%) from
the first quarter of 1995, primarily as a result of the addition of the
Georgia contract. Health care expenses of $22,369,000 during the first
quarter of 1995 were 88.7% of revenue for that period. The increase in health
care expenses as a percentage of revenue relates primarily to additional
start-up expenses incurred on the contract with Georgia as the Company
implements its managed care provisions with medical providers.
Selling, general and administrative expenses for the first quarter of
1996 were $2,621,000 or 6.7% of revenue compared with $2,383,000 or 9.4% of
revenue in the first quarter of 1995. The percentage decrease is due
primarily to leveraging our administrative cost structure over greater
revenues associated with the Georgia contract.
Other income, net, including interest income of $113,000, was $104,000 in
the first quarter of 1996 compared with $29,000 in the first quarter of 1995.
Interest income increased as a result of higher levels of investable cash
throughout the quarter, relating primarily to the prepayment provisions in the
Georgia contract.
The provision for income taxes was $251,000 for the first quarter of 1996
compared with $201,000 for the first quarter of 1995. The Company's effective
tax rate increased during 1996 from 39.5% to 40.1% as an increasing percentage
of the Company's pretax income was being generated in states with higher tax
rates.
<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments at March 31, 1996
were $8,633,000 compared with cash, cash equivalents and investments of
$12,750,000 at December 31, 1995. Cash used in operating activities of
$2,894,000 during the first quarter of 1996 compares with cash used in
operating activities of $3,122,000 in the first quarter of 1995. Receivables
from continuing contracts increased by approximately $1,545,000 over December
31, 1995 balances as certain large payments were not received until the second
quarter of 1996. In addition, accrued expenses and accounts payable relating
to the start-up of operations in Georgia began to be paid in the first quarter
of 1996.
The Company's notes payable at March 31, 1996 were $1,161,000, including
$648,000 borrowed against a line of credit with its primary bank and $513,000
related to its excess insurance contract which is to be paid in equal
installments through December 1996. The bank borrowings were used to finance
investments in computer equipment and related costs associated with the
Georgia contract. No bank borrowings were outstanding as of March 31, 1995.
During February 1996, the Company announced a series of agreements with a
new primary bank increasing the Company's available credit from $13.0 million
to $26.5 million. This available credit consists of the following: a $7.0
million working capital line of credit, an $8.0 million line of credit
available for collateral for the Company's performance bonds, a $7.0 million
revolving line of credit for acquisition purposes and a $4.5 million line of
credit available for equipment acquisitions and upgrades.
As previously announced, the Company's President and Chief Executive
Officer and its Senior Vice President and General Counsel resigned their
positions with the Company. A non-recurring charge of $1,225,000 relating to
severance and other related costs, including the surrender and cancellation of
146,000 stock options, was recorded in the fourth quarter of 1995. On April
1, 1996, the Company made a cash payment to these individuals aggregating
$487,000 representing the spread between the stated option price and the price
paid for the surrender and cancellation of the options. The balance of the
charge relates primarily to severance costs that will be paid out over the
next fifteen months.
As previously announced, the Company signed an employment and other
agreements with Mr. Scott L. Mercy to become its President and Chief Executive
Officer, effective April 1, 1996. Under the agreements, the Company sold to
Mr. Mercy 146,000 shares of stock from treasury for a cash payment of $8.75
per share (the fair market value of the Company's common stock on April 1st)
or $1,277,500, issued 40,000 restricted shares and granted 175,000 options to
purchase shares of stock at $8.75, such grant being contingent upon approval
by the stockholders of an amended stock option plan. Both the restricted
<PAGE>
stock award and the stock options are scheduled to vest equally over a four
year period with accelerated vesting should the Company's common stock reach
certain specified market prices. Generally accepted accounting principles
require that the Company record a non-cash compensation charge to earnings
over the vesting period. In the case of the stock awards, the charge is equal
to the market value of the award shares on the date of the restricted stock
award. In the case of the stock options, the charge is equal to the excess of
the market value of the option shares on the date the amended stock option
plan is approved by the stockholders of the Company, over the grant price.
During April 1996, the Company's stock price reached the specified market
prices required for accelerated vesting of Mr. Mercy's stock awards and stock
options. As a result of this accelerated vesting, the Company will record a
$350,000 pretax, non-cash charge to earnings in the second quarter 1996
relating to the restricted stock awards. If the amended stock option plan is
approved at the annual meeting of stockholders to be held May 23, 1996, and if
the closing price of the Company's common stock on May 23, 1996 is $17, an
additional pretax, non-cash compensation charge of $1,444,000 would be
recorded in the second quarter of 1996. The exact amount of the non-cash
compensation charge to be recorded in the second quarter as a result of the
vesting of stock options will depend on the closing price of the Company's
common stock on May 23, 1996.
Management believes that the current levels of cash, when coupled with
internally generated funds and the lines of credit, are sufficient to meet the
Company's immediately foreseeable cash needs. The Company also continues to
review financing alternatives for its investments in computerization and other
equipment which have historically been financed through operations.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.3* Agreement dated February 26, 1996 between Jeffrey A. Reasons
and America Service Group Inc.1
10.4* Agreement dated Febraury 26,1996 between Don C. Brown and
America Service Group Inc.1
10.16* Loan Agreement among America Service Group Inc., Prison Health
Services, Inc., UniSource, Inc. and Wilmington Trust dated
February 20, 1996.
11.1 Statement re computation of per share earnings.
* Filed as an exhibit under the indicated exhibit number) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. Each
such document is incorporated herein by reference.
1 Denotes management agreement or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuantant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly authorized this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: May 13, 1996 /s/ Margaret O. Harrison
-----------------------------------
Margaret O. Harrison
Sr. Vice President, Finance and
Administration, Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
/s/ Thomas J. Burns, Jr.
-----------------------------------
Thomas J. Burns, Jr.
Controller and Assistant Treasurer
(PRINCIPAL ACCOUNTING OFFICER)
Exhibit 11.1
AMERICA SERVICE GROUP INC.
Quarter Ended March 31,
------------------------------
1996 1995
---- ----
Net Income $ 375,029 $ 308,151
Adjust for intrest income under the
modified treasury calculation 4,903
----------
Net Income $ 379,932 $ 308,151
========== =========
Weighted average shares outstanding 2,885,651 3,018,744
Common stock equivalents 372,152 285,505
Adjust for 20% limit under the
modified treasury calculation (106,800)
----------
Total weighted average common and
common equivalent shares 3,151,003 3,304,249
========== =========
Earnings per common and common
equivalent share $ 0.12 $ 0.09
========== =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
America Service Group Inc.'s Form 10-Q and is qualified in its entirety
by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,932,728
<SECURITIES> 700,000
<RECEIVABLES> 18,133,405
<ALLOWANCES> 0
<INVENTORY> 433,063
<CURRENT-ASSETS> 30,771,371
<PP&E> 4,366,527
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,966,750
<CURRENT-LIABILITIES> 29,723,308
<BONDS> 0
0
0
<COMMON> 34,040
<OTHER-SE> 8,132,555
<TOTAL-LIABILITY-AND-EQUITY> 41,966,750
<SALES> 38,969,569
<TOTAL-REVENUES> 38,969,569
<CGS> 35,826,562
<TOTAL-COSTS> 35,826,562
<OTHER-EXPENSES> 2,621,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,669
<INCOME-PRETAX> 626,030
<INCOME-TAX> 251,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,030
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
