<PAGE> 1
FORM 10-Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 character)
Delaware 51-0332317
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.
105 Westpark Drive, Suite 300, Brentwood, TN 37027
--------------------------------------------------
(Address and zip code of principal executive office)
(615) 373-3100
--------------
(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 3,524,311 shares of Common Stock outstanding as of November 6, 1997
<PAGE> 2
AMERICA SERVICE GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1997 and 3
December 31, 1996
Condensed Consolidated Statements of Operations for the nine months 4
and the quarters ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Signature Page 11
Item 6: Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,227,000 $ 12,550,000
Investments, at cost which approximates market 211,000 2,105,000
Accounts receivable:
Healthcare sites (net of allowance) 10,528,000 8,666,000
Advance billings and other 4,321,000 4,228,000
Assets held for sale -- 2,900,000
Prepaid expenses and other current assets 2,088,000 3,688,000
Current deferred taxes 2,152,000 2,152,000
------------ ------------
Total currents assets 25,527,000 36,289,000
Restricted investments 5,591,000 5,458,000
Property and equipment, net 2,615,000 3,036,000
Deferred taxes 1,056,000 1,056,000
Cost in excess of net assets of acquired company, net 422,000 453,000
Other assets 242,000 165,000
------------ ------------
$ 35,453,000 $ 46,457,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,391,000 $ 7,656,000
Accrued expenses 15,183,000 23,351,000
Deferred revenue 4,094,000 8,748,000
------------ ------------
Total current liabilities 25,668,000 39,755,000
Noncurrent portion of accrued expenses 3,379,000 2,318,000
Commitments and contingent liabilities
Redeemable common stock 1,842,000 1,916,000
Common stock 35,000 34,000
Additional paid-in-capital 7,859,000 7,546,000
Accumulated deficit (3,330,000) (4,904,000)
Treasury stock -- (208,000)
------------ ------------
Total liabilities and stockholders' equity $ 35,453,000 $ 46,457,000
============ ============
</TABLE>
3
<PAGE> 4
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Healthcare revenue $24,313,000 $37,472,000 $103,000,000 $ 115,407,000
Interest income 162,000 87,000 547,000 286,000
----------- ----------- ------------ -------------
Total revenue 24,475,000 37,559,000 103,547,000 115,693,000
Healthcare expenses 21,407,000 34,101,000 94,895,000 109,505,000
----------- ----------- ------------ -------------
Gross margin 3,068,000 3,458,000 8,652,000 6,188,000
Selling, general and administrative expenses 2,387,000 2,542,000 7,031,000 8,442,000
Nonrecurring charges -- -- -- 2,384,000
----------- ----------- ------------ -------------
Income (loss) from operations 681,000 916,000 1,621,000 (4,638,000)
Interest expense 3,000 5,000 3,000 41,000
----------- ----------- ------------ -------------
Income (loss) before taxes (benefits) 678,000 911,000 1,618,000 (4,679,000)
Provision for income taxes (benefits) 101,000 365,000 101,000 (1,874,000)
----------- ----------- ------------ -------------
Net income (loss) 577,000 546,000 1,517,000 (2,805,000)
Change in redeemable common stock -- 716,000 57,000 (812,000)
----------- ----------- ------------ -------------
Net income (loss) attributable to common shares $ 577,000 $ 1,262,000 $ 1,574,000 ($ 3,617,000)
=========== =========== ============ =============
Net income (loss) per common and common
equivalent shares $ 0.16 $ 0.36 $ 0.44 ($ 1.16)
=========== =========== ============ =============
Common and common equivalent shares outstanding
3,721,000 3,517,000 3,617,000 3,128,000
=========== =========== ============ =============
</TABLE>
4
<PAGE> 5
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 1,517,000 ($ 2,805,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 956,000 698,000
Non-cash and non-recurring compensation charges (16,000) 2,607,000
Deferred income tax provision -- (1,499,000)
(Increase) decrease in:
Accounts receivable (1,955,000) 1,351,000
Assets held for sale 2,900,000 --
Prepaid expenses and other current assets 1,600,000 (1,589,000)
Other assets (77,000) (12,000)
Increase (decrease) in:
Accounts payable (1,265,000) (1,302,000)
Accrued expenses (6,746,000) 4,033,000
Deferred revenue (4,654,000) (17,000)
Income taxes payable -- (234,000)
------------ ------------
Net cash provided by (used in) operating activities (7,740,000) 1,231,000
Investing Activities:
Change in short-term investments 1,894,000 --
Change in restricted investments (133,000) (181,000)
Capital expenditures (866,000) (3,448,000)
------------ ------------
Net cash provided by (used in) investing activities 895,000 (3,629,000)
Financing Activities:
Proceeds from notes payable borrowings -- 51,000
Exercise of stock options 522,000 1,417,000
Issuance of redeemable common stock -- 1,277,000
Purchase of treasury stock -- (875,000)
------------ ------------
Net cash provided by financing activities 522,000 1,870,000
============ ============
Net decrease in cash and cash equivalents (6,323,000) (528,000)
Cash and cash equivalents, beginning of period 12,550,000 12,050,000
------------ ------------
Cash and cash equivalents, end of period $ 6,227,000 $ 11,522,000
============ ============
</TABLE>
5
<PAGE> 6
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
America Service Group Inc. (the "Company") and its consolidated subsidiaries
provide managed healthcare services to correctional facilities under capitated
contracts (with certain adjustments) with state and local governments. The
interim consolidated financial statements as of September 30, 1997 and for the
nine months and 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
periods presented. The results of operations for the nine months presented are
not necessarily indicative of the results to be expected for the year ending
December 31, 1997. The interim consolidated financial statements should be read
in connection with the audited consolidated financial statements for the year
ended December 31, 1996.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share is based on the weighted average
number of common shares and dilutive common share equivalents outstanding for
the nine months and the quarters ended September 30, 1997 and 1996. The amount
of dilution is computed using the treasury stock method. For the nine months
ended September 30, 1996, common share equivalents were not included in the
calculation as they were anti-dilutive. Earnings per common and common
equivalent share, when calculated on a stand alone basis, will not necessarily
be equal to the year-to-date calculations as a result of significant changes in
the weighted number of shares outstanding.
3. NON-CASH, NON-RECURRING COMPENSATION CHARGE
On April 1, 1996 the Company signed an employment and other agreements with its
new President and Chief Executive Officer. Under the terms of the agreements,
the Company sold 146,000 shares of stock from treasury at a price of $8.75 per
share (the fair market value of the Company's common stock on April 1, 1996),
issued 40,000 shares and granted options to purchase 175,000 shares of stock at
$8.75 per share, with this option grant being subject to shareholder approval of
an amended stock option plan. The amended stock option plan was approved by the
stockholders at the May 23, 1996 Annual Meeting. Both the restricted stock award
and the options contained accelerated vesting provisions should the price of the
Company's stock achieve certain targeted price levels. The maximum targeted
market price was reached on April 30, 1996, and therefore all options and the
restricted stock became fully vested at that date. The Company recorded a
non-cash, non-recurring charge to earnings in the second quarter of 1996 equal
to the fair market value of
6
<PAGE> 7
the restricted stock on the date of the award ($350,000) and, with respect to
the stock options, the excess of the fair market value of the common stock at
the date of shareholder approval of the amended stock option plan over the
option price ($2,034,000). The agreement contained a redemption clause, whereby,
upon termination of employment, the employee can require the Company to purchase
and the Company can require the employee to sell to the Company, the 186,000
shares. The purchase price of the shares will be equal to the average closing
price of the shares for the thirty-day period prior to the date of notification
by either party of their intention to exercise this right. Changes in the
redemption value of the purchased and awarded shares had been recorded as
adjustments to equity and compensation expense. The Employment Agreement was
amended during the quarter ended June 1997, whereby the "put" price was fixed at
$9.90 per share.
4. AMENDED QUARTERLY FILING
The Company has amended its second and third quarter 10-Q filings for 1996 in
order to properly reflect the financial impact of adjusting the 146,000
redeemable common shares purchased and the 40,000 redeemable common shares
awarded to the President and Chief Executive Officer of the Company to market,
defined as the average closing price of the shares for the 30 day period prior
to the date of notification by either party of their intention to exercise this
right.
5. SUBSEQUENT EVENTS
The Company announced that it had entered into an agreement and plan of merger
dated October 1, 1997 with MedPartners, Inc. Under the agreement, America
Service Group stockholders will receive .71 shares of MedPartners stock in
exchange for one share of ASG stock.
On October 29, 1997, MedPartners, Inc., announced its approval of a definitive
agreement under which MedPartners, Inc., will be acquired by PhyCor, Inc.,
forming a nationwide physician management company with revenues in excess of
$8.4 billion. Under the terms of the agreement, holders of MedPartners common
stock will receive a fixed ratio of 1.18 shares of PhyCor stock for each
MedPartners share held. The transaction, which is expected to be accounted for
as a pooling-of-interests, is subject to the approval of shareholders of both
companies, various state and federal regulatory agencies, and other conditions.
The transaction is expected to close in the first quarter of 1998.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1997 VERSUS THIRD QUARTER 1996
Healthcare revenue for the third quarter 1997 decreased $13,159,000 to
$24,313,000 from $37,472,000 in the third quarter 1996. Contracts which
commenced subsequent to September 1996 contributed revenues of $3,235,000.
Contracts terminated subsequent to September 1996 or during 1997 resulted in a
net decrease in revenue of $18,543,000, including $14,087,000 from the state of
Georgia whose contract expired June 30, 1997. Repricing and renewals of
continuing contracts contributed the majority of the remaining $2,149,000
increase in revenue during the current quarter.
Healthcare expenses during the third quarter 1997 were $21,407,000 or 88% of
healthcare revenue. Healthcare expenses in the third quarter of 1996 were 91% of
revenue. The
7
<PAGE> 8
decrease in healthcare expenses, both in dollars and as a percentage to revenue,
can be attributed to termination of the contract with the state of Georgia.
Selling, general and administrative expenses for the third quarter 1997 and 1996
were $2,387,000 and $2,542,000 respectively. Third quarter 1996 includes a
reduction of $196,000 relating to the adjustment of certain redeemable common
shares to market. Accordingly, the actual decrease was $351,000 and is the
result of the corporate re-engineering and subsequent downsizing.
Interest income was $162,000 for the third quarter compared with $87,000 during
the 1996 third quarter. The increase is attributable to the performance of the
restricted investments.
The provision for income taxes was $101,000 for the third quarter 1997 compared
with a provision for income taxes of $365,000 in the third quarter of 1996. The
low effective tax rate which was approximately 15% in the third quarter of 1997
relates to state income taxes. The effective tax rate has decreased in 1997 from
1996 due to the utilization of income tax carryforwards.
The Company recognized a $716,000 gain for the third quarter 1996 relating to
the adjustment of the 146,000 redeemable common stock shares acquired by the
President and Chief Executive Officer to market.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
Healthcare revenues were $103,000,000 for the nine months ended September 30,
1997, versus $115,407,000 for the corresponding 1996 period. The contract with
the state of Georgia accounted for $30,854,000 and $41,856,000 of revenues
during the nine months ended September 30, 1997 and 1996, respectively.
Contracts which commenced subsequent to September 1996 contributed $3,396,000 in
revenue for the nine months ended September 30, 1997. Contracts terminated
subsequent to September 1996 or during 1997 resulted in a net decrease in
revenue of $18,044,000 when comparing 1997 revenue to 1996. Repricing and
renewals of continuing contracts and revenue associated with increased inmate
populations contributed the majority of the additional $2,241,000 in revenue
during the current nine months.
Healthcare expenses during the nine months ended September 30, 1997 and 1996
were $94,895,000 and $109,505,000 or 92.1% and 94.9% of revenue. The decrease in
healthcare expenses is attributable to the contract with the state of Georgia.
Excluding Georgia, healthcare expenses were 88.8% and 92.5% of healthcare
revenue for the nine months September 1997 and 1996.
Selling, general and administrative expenses for the nine-month period ended
September 30, 1997 were $7,031,000 versus $8,442,000 for the same period in
1996. The nine months
8
<PAGE> 9
ended September 30, 1996 include a $223,000 charge to adjust certain redeemable
common shares to market and $225,000 in legal and reserve adjustments. Excluding
these charges, selling, general and administrative expenses during the nine
months ended September 30, 1997, decreased $962,000 over the comparable 1996
period.
Interest income was $547,000 for the nine months ended September 30, 1997,
compared with $286,000 during the comparable 1996 period. Interest income has
increased as a result of higher investment levels during 1997.
Income taxes for 1997 were minimal due to the utilization of income tax loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments at September 30, 1997, were
$6,227,000 compared to $12,550,000 at December 31, 1996. Cash used in operating
activities during the nine months ended September 30, 1997 was $7,740,000
compared to cash provided by operating activities of $1,231,000 for the
comparable 1996 period.
The usages of cash during the period were due to significant decreases in
accounts payable, accrued expenses and deferred revenue as a result of the
elimination of the Georgia contract. The decrease in prepaid expenses and income
taxes is due mainly to the receipt of tax refunds relating to tax loss
carrybacks.
Management believes that the current levels of cash and investments, when
coupled with internally generated funds, are sufficient to meet the Company's
immediately foreseeable cash needs.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 -- Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated by reference to Exhibit 3.1
of the Registrant's Registration Statement on form S-1,
Registration No. 33-43306, as amended).
3.2 -- Amended and Restated By-Laws of America Service Group Inc.
(incorporated by reference to Exhibit 3.2 of Registrant's
Annual Report on form 10-K for the year ending
December 31, 1996).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of the Registrant's Registration Statement on
Form S-1, Registration No. 33-43306).
11.1 Statement re-computation of per share earnings.
27.1 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K
The Registrant filed a report on Form 8-K relating to Item 6 on
October 3, 1997.
<PAGE> 11
SIGNATURES
Pursuant 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.
AMERICA SERVICE GROUP INC.
Dated: November 13, 1997 /s/ MICHAEL CATALANO
----------------------------------------
Michael Catalano
Executive Vice President
& General Counsel
/s/ BRUCE A. TEAL
----------------------------------------
Bruce A. Teal
Vice President, Controller and Treasurer
(Acting Principal Financial Officer and
Principal Accounting Officer)
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
America Service Group Inc.
3.2 Laws of America Service Group Inc.
4.1 Specimen Common Stock Certificate
11.1 Statement re-computation of per share earnings
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 11.1
AMERICA SERVICE GROUP INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, QUARTER ENDED SEPTEMBER 30,
1997 1996 1997 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) attributable to
common shares $1,574,000 ($3,617,000) $ 577,000 $1,262,000
========== =========== ========== ==========
Weighted average shares outstanding 3,484,000 3,128,000 3,519,000 3,282,000
Common stock equivalents 133,000 -- 202,000 235,000
---------- ----------- ---------- ----------
Total weighted average common and
common equivalent shares 3,617,000 3,128,000 3,721,000 3,517,000
========== =========== ========== ==========
Net income (loss) per common and
common and equivalent share $ .44 ($ 1.16) $ 0.16 $ 0.36
========== =========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP, INC. FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,227,000
<SECURITIES> 211,000
<RECEIVABLES> 15,247,000
<ALLOWANCES> 398,000
<INVENTORY> 0
<CURRENT-ASSETS> 25,527,000
<PP&E> 6,685,000
<DEPRECIATION> (4,070,000)
<TOTAL-ASSETS> 35,453,000
<CURRENT-LIABILITIES> 25,668,000
<BONDS> 0
0
0
<COMMON> 35,000
<OTHER-SE> 4,529,000
<TOTAL-LIABILITY-AND-EQUITY> 35,453,000
<SALES> 103,000,000
<TOTAL-REVENUES> 103,547,000
<CGS> 94,895,000
<TOTAL-COSTS> 101,926,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> 1,618,000
<INCOME-TAX> 101,000
<INCOME-CONTINUING> 1,517,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,517,000
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
