<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------------- ------------------
Commission file number 0-23340
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.)
105 Westpark Drive, Suite 300 37027
Brentwood, Tennessee 37027 (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 373-3100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1996 (based on the last reported closing price per
share of Common Stock as reported on The Nasdaq National Market on such date)
was approximately $32,036,917. As of March 17, 1996, the registrant had
3,381,712 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on April 22, 1997 are incorporated by reference in Parts III and IV.
<PAGE>
PART I
ITEM 1. BUSINESS.
This Form 10-K contains statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Those statements include statements regarding the intent, belief or
current expectations of America Service Group Inc. and members of its
management team. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements are set
forth in the Safe Harbor Compliance Statement included as Exhibit 99.1 to
this Form 10-K, and are hereby incorporated herein by reference. America
Service Group Inc. undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
GENERAL
America Service Group Inc. ("ASG"), primarily through its subsidiary Prison
Health Services, Inc. ("PHS"), contracts to provide managed healthcare services
to correctional facilities throughout the United States. Through its subsidiary,
UniSource, Inc. ("UniSource"), ASG sells pharmaceuticals and related products to
institutions where PHS delivers healthcare services and to others. ASG was
incorporated in 1990 as a holding company for PHS and ASG's former subsidiary,
ASG Management Company, Inc., which was sold effective as of June 30, 1994.
Unless the context otherwise requires, the term "Company" refers to ASG and to
its direct and indirect subsidiaries. ASG's executive offices are located at
105 Westpark Drive, Suite 300 Brentwood, Tennessee, 37027. Its telephone number
is (615) 373-3100.
CORRECTIONAL HEALTHCARE SERVICES
ASG, through PHS, contracts with state, county and local governmental
agencies to provide comprehensive healthcare services to inmates of prison and
jails, with a focus on those facilities that maintain an average daily
population of over 300 inmates. ASG believes it is the second largest private
provider of correctional healthcare services, based upon revenue.
ASG generally enters into fixed fee contracts to provide comprehensive
healthcare to inmates from their admission to the facility through their
release. All of ASG's revenues from correctional healthcare services are
generated by payments from governmental agencies, none of which are dependent on
third party payment systems. Services provided by ASG include a wide range of
on-site healthcare programs, as well as off-site hospitalization and specialty
outpatient care. See "--Services Provided." Hospitalization and most outpatient
care is performed through subcontract arrangements with independent doctors and
local hospitals.
-2-
<PAGE>
The following table sets forth information regarding ASG's correctional
contracts.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
Number of correctional contracts (1)............................. 41 41 35 35 34
Average number of inmates in all facilities covered by
correctional contracts (2)..................................... 34,449 46,509 51,939 82,310 83,288
</TABLE>
- ------------------------
(1) Indicates the number of contracts in force at the end of the period
specified.
(2) Based on an average number of inmates during the last month of each period
specified, as used by ASG for billing purposes.
ASG's target correctional market consists of state prisons and county and
local jails. A prison is a facility in which an inmate is incarcerated for an
extended period of time (typically one year or longer). A jail is a facility in
which the inmate is held for a shorter period of time, often while awaiting
trial or sentencing. The higher inmate turnover in jails requires that
healthcare be provided to a much larger number of individual inmates over time.
Conversely, the costs of long-term healthcare requirements are greater with
respect to state prison contracts. State prison contracts often cover a larger
number of facilities and often have longer terms than jail contracts.
SERVICES PROVIDED
Generally, ASG's obligation to provide services to a particular inmate
begins upon the inmate's admission into the correctional facility and ends upon
the inmate's release. Emphasis is placed upon early identification of serious
injuries or illnesses so that prompt and cost-effective treatment is commenced.
Medical services provided on-site include physical and mental health
screening upon intake. Screening includes the compilation of the inmate's health
history and the identification of any current, chronic or acute healthcare
needs. After initial screening, services provided may include regular physical
and dental screening and care, psychiatric care, OB-GYN screening and care and
diagnostic testing. Sick call is held on a regular basis and infirmary bed care
is provided in some facilities. Nursing rounds are regularly conducted and
physicians, nurse practitioners, physicians' assistants and others are also
involved in the delivery of care on a regular basis. Appropriate medications are
administered by nursing staff, as needed.
Medical services provided off-site include specialty out-patient diagnostic
testing and care, emergency room care, surgery and hospitalization. In addition,
ASG provides administrative support services both on-site and at ASG's
headquarters and regional offices. Administrative programs include on-site
medical records and management and employee education and licensing. Central and
regional offices provide quality assurance, medical audits, credentialing,
continuing education, and clinical program development activities. ASG maintains
a utilization review system to monitor the extent and duration of most
healthcare services required by inmates on an inpatient and outpatient basis.
See "--Administrative Systems."
ASG staffs most facilities it serves with nurses 24 hours a day. Doctors at
the facilities have regular hours and are generally available on call. In
addition, dentists, psychiatrists and other specialists are often available on a
routine basis. ASG enters into contractual arrangements with independent doctors
and local hospitals with respect to more significant off-site procedures and
hospitalization. ASG is responsible for all of the costs of such arrangements,
unless the relevant contract contains a limit on ASG's obligations in
connection with the treatment costs. See "--Contract Provisions."
-3-
<PAGE>
The National Commission on Correctional Health Care (the "NCCHC") sets
standards for the correctional healthcare industry and offers accreditation to
facilities that meet its standards. These standards provide specific guidance
related to a service provider's operations including administration, personnel,
support services such as hospital care, regular services such as sick call,
records management and medical and legal issues. Although accreditation is
voluntary, many contracts require compliance with NCCHC standards.
CONTRACT PROVISIONS
ASG's correctional contracts generally provide for a fixed annual fee,
payable monthly, often in advance. In addition to the fixed annual fee, the
majority of ASG's contracts provide for per diem price adjustments based upon
fluctuations in the size of inmate populations beyond a specified range. Certain
contracts also provide for annual increases in the fixed fee based upon the
regional medical care component of the Consumer Price Index. In all other
contracts that extend beyond one year, ASG utilizes a projection of the future
inflation rate when bidding and negotiating the fixed fee for future years. ASG
bears the risk of increased or unexpected costs, which could reduce its profits
or cause it to sustain losses, and benefits when costs are lower than projected.
Certain contracts also contain financial penalties when performance criteria are
not achieved.
Contracts accounting for approximately 21% of revenues for the year ended
December 31, 1996, including ASG's contracts with the Kansas Department of
Corrections, and Alameda County, California, contain no limits on ASG's
exposure for treatment costs related to catastrophic illnesses of or injuries
to inmates. Although the specific terms of the limits vary, typically a
dollar limit is placed on ASG's responsibility for costs related to illness
of or injury to an individual inmate, injuries to more than one inmate
resulting from an accident, or contagious illnesses, such as hepatitis,
affecting more than one inmate. When preparing bid proposals, ASG estimates
the extent of its exposure to cost increases, severe individual cases and
catastrophic events and attempts to compensate for its exposure in the
pricing of its bids. ASG's management has experience in evaluating these
risks for bidding purposes and maintains an extensive database of historical
experience. Nonetheless, increased or unexpected costs against which ASG is
not protected could render a contract unprofitable.
Beginning in September 1996, in an effort to manage risk of catastrophic
illness or injury of inmates under contracts that do not limit ASG's exposure to
such risk, ASG procured insurance from an unaffiliated insurer covering
hospitalization for amounts in excess of $125,000 per inmate. ASG believes this
insurance mitigates its exposure to unanticipated expenses of catastrophic
hospitalization.
In general, contracts may be terminated by the governmental agency, and
often by ASG as well, without cause at any time upon proper notice (typically
between 30 and 180 days). Governmental agencies may be subject to political
influences that could lead to termination of a contract with no fault of the
contractor. As with other governmental contracts, ASG's contracts are subject to
adequate budgeting and appropriation of funds by the governing legislature or
administrative body.
All five of ASG's largest contracts for the year ended December 31,
1996--the Maryland Department of Corrections, Kansas Department of Corrections,
Georgia Department of Corrections, Alameda County, California, and City of
Philadelphia, Pennsylvania--provide for per diem price adjustments based upon
fluctuations in the size of inmate populations beyond a specified range. The
fixed fees under all five contracts take into account projected levels of
inflation, but none of the five contains an adjustment based on actual inflation
rates. Of the five, only the contracts with the City of Philadelphia and Georgia
Department of Corrections significantly limit ASG's obligations for treatment
costs for catastrophic illnesses and injuries. ASG has been notified that its
contract with the Georgia Department of Corrections (the "Georgia Contract")
expires on June 30, 1997 and will not be renewed, because the
-4-
<PAGE>
Department of Corrections decided to enter into an inter-governmental
partnership with the Medical College of Georgia. The Georgia Contract accounted
for 37.2% of ASG's 1996 revenues. See "--Major Contracts."
ADMINISTRATIVE SYSTEMS
ASG has centralized its administrative systems in order to enhance economies
of scale and to provide management with accurate, up-to-date field data for
forecasting purposes. These systems also enable ASG to bid more accurately and
help ASG reduce the costs associated with the delivery of consistent healthcare.
ASG maintains a utilization review system to monitor the extent and duration
of healthcare services required by inmates on an inpatient and outpatient basis.
The current automated utilization review program is an integralpart of the
services provided at each facility. The system is designed to ensure that the
medical care rendered is medically necessary and is provided safely inthe least
costly setting while maintaining traditional standards of quality ofcare. The
program provides for determinations of medical necessity by medical
professionals through a process of pre-authorization and concurrent review of
the appropriateness of any hospital stay. The program seeks to identify the
maximum capability of on-site healthcare units so as to allow for a more timely
discharge from the hospital back to the correctional facility. The utilization
review staff consists of nurses who are supported by a medical director at the
corporate level and a panel of medical specialists who are consultants to ASG.
ASG has developed a variety of customized databases to facilitate and
improve operational review including (i) a claims management tracking system
that monitors current incidents, claims and litigation against ASG and tracks
the types of claims historically brought against ASG, (ii) a comprehensive cost
review system that analyzes ASG's average costs per inmate at each facility and
(iii) an inventory control system that tracks medical supply usage.
BID PROCESS
Contracts with governmental agencies are obtained primarily through the
competitive bidding process, which is governed by applicable state and local
statutes and ordinances. Although practices vary, typically a formal request
for proposal ("RFP") is issued stating the scope of work to be performed,
length of contract, performance bonding requirements, minimum qualifications
of bidders, selection criteria and the format to be followed in the bid or
proposal. Usually, a committee appointed by the governmental agency reviews
bids and makes an award determination. The committee may award the contract
to a particular bidder or decide not to award the contract to the private
sector.
The award of a contract may be subject to formal or informal protest,
through a governmental appeals process, by unsuccessful bidders. There can be no
assurance that future protests will not have a material effect on the Company.
Nearly all RFPs require the bidder to post a bid bond. Performance bonding
requirements are for the length of the contract and at December 31, 1996,
generally ranged between 4% and 60% (and in one case, 100%) of the 1996 contract
fee. ASG is required to collateralize 10% to 15% of the amount of its
performance bonds.
A successful bidder must often agree to comply with numerous additional
requirements regarding record-keeping and accounting, non-discrimination in the
hiring of personnel, safety, safeguarding classified information, management
qualifications, professional licensing requirements and other matters. Upon a
violation of the terms of an applicable contractual or statutory provision, a
contractor may be debarred or suspended from obtaining future contracts for
specified periods of time in the applicable location. ASG has never been
debarred or suspended in any jurisdiction.
MARKETING
ASG gathers and analyzes information on prisons and jails around the country
in order to identify the ones that best meet its marketing criteria. Relevant
factors include the quality and costs of healthcare in the region, the
management and operations of the correctional facility, the financial stability
of the governmental agency and the
-5-
<PAGE>
composition of the inmate population. ASG then devotes a substantial portion of
its marketing resources to such potential customers. State prison systems,
because of their more stable inmate populations and, in many cases, larger
number of facilities and longer contract terms, are an important focal point of
ASG's marketing plans. Also, ASG will continue to identify those county and
local jails that fit its market profile and will pursue those contracts
aggressively.
ASG maintains a staff of sales and marketing representatives assigned to
specific geographic areas of the United States. In addition, ASG uses
consultants to help identify marketing opportunities, to determine the needs
of specific potential customers and to engage customers on ASG's behalf. ASG
uses paid advertising and promotion to reach prospective clients as well as to
reinforce its image with existing clients.
RISK MANAGEMENT
In March 1988, ASG formed Harbour Insurance, Inc. ("Harbour") as a wholly
owned subsidiary of PHS. Harbour is a captive insurance company organized and
regulated under the laws of the State of Delaware. Harbour has issued annual
policies of insurance covering PHS' medical professional and general liability
arising out of its provision of healthcare services on a claims-made basis with
limits of $1,000,000 per medical incident for the periods listed below, except
for the period from January 1, 1997 to January 1, 1998, when an annual policy
was issued with limits of $500,000 per medical incident and expanded coverage
from a non-affiliated insurer was obtained. Harbour's coverage has the following
aggregate limits during the specified policy periods:
<TABLE>
<S> <C>
July 30, 1990 to July 30, 1991............................... not applicable
July 30, 1991 to July 30, 1992............................... $ 2,000,000
July 30, 1992 to July 30, 1993............................... $ 2,000,000
July 30, 1993 to July 30, 1994............................... $ 2,250,000
July 30, 1994 to July 30, 1995............................... $ 2,450,000
July 30, 1995 to January 1, 1996............................. $ 1,100,000
January 1, 1996 to January 1, 1997........................... $ 3,250,000
January 1, 1997 to January 1, 1998........................... $ 3,500,000
</TABLE>
For the policy year July 30, 1990 to July 30, 1991, PHS has third party
commercial excess insurance in the amount of $4 million, excess over a
self-insured retention of $2 million per medical incident/$2 million
aggregate. For each policy period commencing July 30, 1991 or thereafter, PHS
has third party commercial excess insurance, excess over a self-insured
retention in the amount of the respective Harbour limits. For two of those
policy periods (from July 30, 1993 to July 30, 1994 and from July 30, 1994 to
July 30, 1995), PHS quota-shared part of the commercial excess insurance,
effectively retaining 30% of the uppermost $3 million exposure within the $5
million commercial excess insurance. For the policy year January 1, 1997 to
January 1, 1998, PHS has third party commercial excess insurance of $15
million per medical incident and $15 million in the aggregate, excess over a
self-insured retention of $500,000 per medical incident or per occurrence
(exclusive of loss adjustment expenses and attorneys' fees)/$3.5 million
annual aggregate (including loss adjustment expenses and attorneys' fees).
Effective October 1995, ASG commenced operations under the Georgia Contract.
PHS has third party commercial excess insurance with respect to the Georgia
Contract for $2 million per occurrence excess over a self-insured retention of
$1 million per occurrence. Harbour provides coverage to PHS for the self-insured
retention limits. Both the Harbour and the commercial excess coverages are on an
occurrence-basis without aggregate.
With respect to the insurance provided by Harbour, only the premiums paid
and Harbour's initial capitalization (which was contributed by ASG) are
available to pay claims. The funding and premiums for Harbour are determined
annually by an independent actuary based upon PHS' prior experience, current
business, and industry data.
Beginning in September 1996, for contracts where ASG's exposure to the risk
of inmates' catastrophic illness or injury is not limited, ASG procured
insurance from an unaffiliated insurer with respect to
-6-
<PAGE>
hospitalization for amounts in excess of $125,000 per inmate. ASG believes this
insurance mitigates its exposure to unanticipated expenses of catastrophic
hospitalization.
Because of the limited availability of suitable coverage in the marketplace,
the costs of obtaining insurance have increased. There can be no assurance that
third-party commercial insurance will continue to be available in the future or
will be available at reasonable prices. ASG believes its insurance coverage is
maintained at reasonable levels, but there can be no assurance that it will
cover all claims that may be asserted against ASG and its employees and agents.
MEDICAL SUPPLIES, PHARMACY AND PRESCRIPTION SERVICES
In September 1992, through its newly formed subsidiary UniSource, ASG
acquired the assets and assumed certain liabilities of Omega Laboratories, Inc.,
a packager of pharmaceuticals and related products. Since the acquisition,
UniSource has been a source of medical supplies and over-the-counter
pharmaceuticals consumed or utilized in ASG's correctional facilities. For the
year ended December 31, 1996, approximately 10% of the PHS correctional
facilities were receiving their prescription drugs from UniSource. Management
continues to explore various methods to lower its overall medical supply and
pharmacy expenses.
1996 CORPORATION REORGANIZATION
In 1996, at the direction of the Board of Directors, ASG significantly
modified its business by (i) replacing executive management with newly
recruited, seasoned professionals, (ii) relocating the corporate headquarters,
(iii) reorganizing roles and responsibilities, (iv) refining basic business
processes to ensure consistency and cost-effectiveness, (v) identifying and
reporting to management key operational data, and (vi) adopting the Employee
Stock Purchase Plan. Management believes that these changes will improve
operating performance and improve client satisfaction.
EMPLOYEES AND INDEPENDENT CONTRACTORS
The services provided by ASG require an experienced staff of healthcare
professionals and facilities administrators. In particular, a nursing staff with
experience in correctional healthcare and specialized skills in all necessary
areas contributes significantly to ASG's ability to provide efficient service.
In addition, ASG maintains a small pool of employees, primarily nurses, who are
available to fill short-term staffing vacancies at any facility serviced by ASG.
In addition to nurses, ASG's staff of employees or independent contractors
includes physicians, dentists, psychologists and other healthcare professionals,
some of whom are independent contractors.
As of December 31, 1996, ASG had approximately 1,825 full-time equivalent
employees, including 1,500 medical personnel. ASG also had under contract 325
independent contractors, most of whom are part-time, including physicians,
dentists, psychiatrists and psychologists. ASG's employees at its Alameda
County, California, City of Philadelphia and Delaware facilities, are
represented by labor unions. ASG believes that its employee relations are good.
COMPETITION
The business of providing correctional healthcare services to
governmental agencies is highly competitive. During the past two years,
pressure on bidding prices has intensified to a significant extent, which has
adversely affected ASG's margins. ASG expects the current trend in price
competition to continue. ASG is in direct competition with local, regional
and national correctional healthcare providers, some of which are public
entities. ASG believes that it is currently the second largest national,
private provider of correctional healthcare services based upon revenues. ASG
believes that some of its competitors may have larger staffs and greater
resources than ASG. As the private market for providing correctional
healthcare matures, ASG's competitors may gain additional
-7-
<PAGE>
experience in bidding and administering correctional healthcare contracts.
In addition, new competitors, some of whom may have extensive experience in
related fields or greater financial resources than ASG, may enter the market.
MAJOR CONTRACTS
ASG's operating revenue is derived exclusively from contracts with state,
county and local governmental agencies. ASG's contract with the State of Georgia
Department of Corrections accounted for approximately 37.2% of ASG's revenues
during the year ended December 31, 1996. This contract will expire on June 30,
1997 and the Georgia Department of Corrections has stated its intent thereafter
to enter into a relationship with the Medical College of Georgia to provide
healthcare services. In addition, ASG's contracts with the State of Kansas, the
City of Philadelphia and the State of Maryland accounted for approximately
11.2%, 10.5% and 10.2% respectively, of its revenues during the year ended
December 31, 1996. Generally, contracts may be terminated by the governmental
agency at will and without cause upon proper notice (typically between 30 and
180 days). Governmental agencies may be subject to political influences that
could lead to termination of a contract with no fault of the contractor.
Although ASG generally attempts to renew or renegotiate contracts at or prior to
their termination, contracts that are put out for bid are subject to intense
competition. The loss of one or more of the major contracts could have a
material adverse effect on ASG's business.
ITEM 2. PROPERTIES.
By January 31, 1997, the Company had substantially completed the relocation
of its headquarters and principal administrative operations to Brentwood,
Tennessee, where it occupies approximately 12,500 square feet of leased office
space. The Company's lease on its current headquarters expires in October 2003.
The Company leases additional office facilities in Alameda, California; Orlando,
Florida; Topeka, Kansas; Smithtown, New York; Atlanta, Georgia; and Columbia,
Maryland. The Company owns land and the warehouse and office building of
approximately 30,000 square feet in Mobile, Alabama that houses the operations
of UniSource, Inc. While the Company may open additional offices to meet the
local needs of future contracts awarded in new areas, management believes that
its current facilities are adequate for its existing contracts for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, such currently pending legal proceedings
and claims against the Company will not, in the aggregate, have a material
adverse effect on the Company.
The Company periodically becomes involved in medical malpractice claims with
the attendant risk of substantial damage awards. The most significant source of
potential liability in this regard is the risk of suits brought by inmates
alleging lack of timely or adequate healthcare services. The Company may be
liable, as employer, for the negligence of nurses or other healthcare
professionals who are employees of the Company. The Company may also have
potential liability for the negligence of healthcare professionals engaged by
the Company as independent contractors. The Company's contracts generally
provide for the Company to indemnify the governmental agency for losses incurred
related to healthcare provided by the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
-8-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
America Service Group Inc. common stock is traded on The Nasdaq Stock
Market's National Market System under the symbol ASGR. As of March 25, 1997,
there were approximately 2600 beneficial stockholders. The high and low
prices of the Company's common stock as reported on The Nasdaq Stock Market
during each quarter from January 1, 1995 through December 31, 1996 are shown
below:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------ --------- ---------
<S> <C> <C> <C>
March 31, 1995.................................................... $ 5.88 $ 4.13
June 30, 1995..................................................... 6.38 4.88
September 30, 1995................................................ 6.38 5.25
December 31, 1995................................................. 9.75 5.88
March 31, 1996.................................................... 9.00 6.88
June 30, 1996..................................................... 21.25 9.75
September 30, 1996................................................ 17.50 10.75
December 31, 1996................................................. 15.75 9.13
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues.............................................. $152,282 $115,238 $109,983 $108,932 $77,530
Income(loss) before taxes (benefits) and extraordinary
item................................................ (9,933) 1,146 1,646 363 2,806
Income (loss) before extraordinary items.............. (8,686) 687 996 225 1,776
Extraordinary charge (1).............................. -- -- -- -- (1,710)
Net income (loss)..................................... (8,686) 687 996 225 66
Net income (loss) attributable to common shares....... (8,912) 687 996 225 66
Net income (loss) per common and common equivalent
shares.............................................. (2.81) 0.21 0.31 0.07 0.49
Weighted average common and common equivalent
outstanding shares.................................. 3,171 3,335 3,219 3,254 3,608
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working capital (deficit)..................................... $(3,466) $ 2,692 $ 2,302 $ (399) $ 3,128
Total assets.................................................. 46,457 42,501 32,108 34,634 25,012
Redeemable common stock, common stock, additional
paid-in-capital, retained earnings (deficit) and treasury
stock....................................................... 4,384 8,666 8,188 7,151 6,926
</TABLE>
- ------------------------
(1) Consists of the costs of litigation settlement.
-9-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to revenues of certain items in the Consolidated Statements of
Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES 1996 1995 1994
- ----------------------------------------------------------------------------------------- --------- --------- ---------
Revenues................................................................................. 100.0% 100.0% 100.0%
Healthcare expenses...................................................................... 95.6 89.5 90.0
--------- --------- ---------
Gross margin............................................................................. 4.4 10.5 10.0
Selling, general and administrative expenses............................................. 7.3 8.6 8.7
Non-recurring charges.................................................................... 4.1 1.1
--------- --------- ---------
Income (loss) from operations............................................................ (7.0) .8 1.3
Other income, net........................................................................ .5 .2 .2
--------- --------- ---------
Income (loss) before taxes (benefits).................................................... (6.5) 1.0 1.5
Provision for income taxes (benefits).................................................... (.8) .4 .6
--------- --------- ---------
Net income (loss)........................................................................ (5.7) .6 .9
--------- --------- ---------
Increase in redeemable common stock...................................................... .2
--------- --------- ---------
Net Income (loss) attributable to common shares.......................................... (5.9)% .6% .9%
--------- --------- ---------
</TABLE>
1996 COMPARED TO 1995
Revenues increased $37.1 million from $115.2 million in 1995 to $152.3
million in 1996, representing a 32% increase. The growth in revenues resulted
primarily from the Georgia Contract, which generated $56.7 million in the year
ended December 31, 1996, compared to $13.5 million recognized under the Georgia
Contract in 1995. The Company added five new contracts in 1996 which generated
$6.0 million in new revenues and experienced $6.9 million of revenue growth
under existing contracts through contract renegotiation, automatic price
adjustments and from being in effect a full year. Revenues were negatively
impacted by the loss of four contracts during 1996, which generated $9.2 million
of revenues in 1996 compared to $18.3 million of revenues in 1995. Contract
revenues for 1995 include $9.4 million ofrevenues from contracts that were
terminated in that year.
The cost of healthcare increased $42.5 million or 42% to $145.6 million in
1996. Healthcare expenses as a percentage of revenues were 95.6% in 1996 versus
89.5% in 1995. Healthcare expenses exclusive of the Georgia Contract were 89.2%
and 88.5% in 1996 and 1995, respectively. Excluding the Georgia Contract,
contracts in effect December 31,1996 reflected healthcare expenses of 90.5% of
revenues. Personnel costs and fringe benefits related to inmate care were 63.7%
of revenues in 1996 versus 63.8% of revenues in 1995. Costs related to outside
services (defined as hospitalization, emergency room and ambulance and
outpatient surgeries and visits) were 17.2% and 16.3% of revenues in 1996 and
1995, respectively. Under the Georgia Contract, the Company incurred costs
related to outside services of 20% and 19.8% of revenues in 1996 and 1995,
respectively.
Selling general and administrative expenses were $11.1 million in 1996
compared to $9.9 million in 1995. The increase was attributable to additional
corporate personnel and services required by the Georgia Contract and the
relocation of the Company's headquarters to Brentwood, Tennessee from Newcastle,
Delaware.
The Company recognized a non-recurring, non-cash compensation charge of
(i) $2.4 million relating to the appointment of the Company's new Chief
Executive Officer and his receipt of 40,000 shares of redeemable common stock
and options to purchase 175,000 shares of common stock,
-10-
<PAGE>
(ii) $1.1 million resulting from reengineering and downsizing of the Company's
administrative processes, and (iii) $2.8 million of estimated reserves with
respect to the Georgia Contract that expires in June 1997.
Other income of $.7 million and $.2 million in 1996 and 1995, respectively,
represents interest income.
The provision for income taxes was $1.2 million of benefit in 1996 compared
to $.5 million of expense in 1995. Although the Company experienced a $9.9
million pretax loss in 1996, the recognition of the associated tax benefit is
limited to income tax expense recorded in the last three fiscal years.
1995 COMPARED TO 1994
Consolidated revenues increased modestly in 1995 to $115.2 million from
$110.0 million in 1994, or 4.8%. This growth was the result of six new contracts
which generated $18.4 million (including $13.5 million from the Georgia
Contract) in 1995 revenue, the loss of $16.4 million of revenues from 11
contracts that were either terminated in 1995 or generated revenues in 1994
prior to their termination, an increase of $4.1 million in revenues from a full
year's operation of contracts commenced in 1994 and additional revenues on
existing contracts through contract renegotiations and automatic price
adjustments. ASG Management Company, Inc. (ASGM) which was sold effective June
30, 1994, had revenues of $6.6 million prior to its sale.
The cost of providing healthcare services increased 4.2%, or $4.2 million to
$103.2 million for 1995 from $99.0 million for the prior year. Increased efforts
throughout all levels of the company to emphasize "managed quality care"
resulted in the number of hospital days and other outside services at
"comparable sites" continuing to decrease from 1994 and 1993 levels. In
addition, ongoing negotiations with providers to manage costs through per diem
and fixed price contracts has helped to maintain these expenses.
Personnel and fringe costs of providing the services to the inmates in the
correctional facilities, including employee nurses and physicians and the
independent contractors and outside physicians, increased slightly from 63.3% of
revenues in 1994 to 63.8% in 1995. A corporate wide wage and salary freeze that
was in effect in 1994 was discontinued in 1995 leading to the slight
increase in overall labor and professional fees.
Selling, general and administrative expenses of $9.9 million increased from
$9.6 million in 1994. The increase in these expenses is attributable to
additional corporate staff and services associated with the commencement of the
contract with the Georgia Department of Corrections.
In 1995, a charge for non-recurring severance costs of $1,225,000 was
recorded in the fourth quarter relating to the resignation of the Chief
Executive Officer and the Executive Vice President, General Counsel of the
Company.
Other income of $0.2 million, represents primarily net interest income in
1995. The 1994 amount of $0.3 included a one-time gain on the sale of ASGM of
$0.1 million.
The provision for income taxes decreased to $0.5 million in 1995 from $0.7
million in 1994 as the result of the decreased level of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
-11-
<PAGE>
The Company's cash and cash equivalents as of December 31, 1996 were $12.6
million compared to $12.0 million as of December 31, 1995. The growth is
attributable to cash provided from operations of $5.0 million and financing
activities of $2.0 million offset by $6.5 million of investing activities,
including $4.3 million in capital expenditures, of which $3.5 million related to
the Georgia Contract. During 1996, the Company received $2.8 million in cash
from the issuance of redeemable common stock and common stock. Additionally,
approximately 130,000 shares of its common stock were acquired by the Company
for $0.9 million during 1996.
Accrued expenses of the Company increased $8.6 million from 1995 to $25.7
million. The growth is primarily attributable to medical claims and liability
claims as result of increasing inmate population, the accrued loss of the
Georgia Contract and salaries and employee benefits.
Investments of Harbour, the Company's captive insurance company, are
restricted from general corporate uses. The settlement of professional and
medical liability claims has been satisfied through Harbour's general working
capital. Future settlement of cases in excess of available working capital
will be satisfied through planned maturities of the restricted investments.
At December 31, 1996, the Company had a $26.5 million credit facility
available with its primary bank consisting of a $6.5 million line of credit for
periodic working capital needs, a $15.0 million line of credit for letters of
credit to support bonding needs and a $5.0 million revolving line of credit for
acquisition purposes. The letter of credit facility is used to secure letters of
credit which are collateral to support performance bonds for the Company's
contracts. There were no borrowings under the line of credit for working capital
as of December 31, 1996. At December 31, 1996, approximately $10.9 million in
letters of credit were issued to support performance bonds. Interest under the
credit facility was at the bank's prime rate less 0.25%. Letters of credit bear
a .50% annual fee under the credit facility.
On March 28, 1997, the Company received an approval and confirmation for a
new debt agreement, subject to the terms and conditions of the term sheet,
including preparation of definitive agreements. The agreement is for a $20
million line of credit facility for general corporate purposes, including
working capital, the issuance of letters of credit for performance bonds, and
the funding of acquisitions. Under the line, which matures in September 2000,
the Company is limited to $5 million in working capital needs through March
1998. The interest rate is based upon LIBOR or prime rate, subject to the
quarterly operating performance of the Company, as defined in the agreement. The
line of credit is subject to certain quarterly covenants.
Management believes that the current levels of cash, cash equivalents and
investments, when coupled with the internally generated funds and available
credit, are sufficient to meet the Company's immediate foreseeable future cash
needs and anticipated contract renewal activity.
INFLATION
The increase in the healthcare costs in December 1996 over December 1995 was
3.0% nationally compared to an overall increase in the Consumer Price Index of
3.3% for all costs for the same period. The increase in Consumer Price Index for
Healthcare costs in December 1995 over December 1994 was 3.9% compared to an
increase in the Consumer Price Index for all costs of 2.5% in the same period.
Some of the Company's contracts provide for annual increases in the fixed
base fee upon changes in the regional medical care component of the Consumer
Price Index. In all other contracts that extend beyond one year, the Company
utilizes a projection of the future inflation rate when bidding and negotiating
the fixed fee for future years. If the rate of inflation exceeds the levels
projected, such excess will be absorbed by the Company. Conversely, the Company
will benefit should the actual rate of inflation fall below the estimate used in
the bidding and negotiation process.
-12-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements, together with the report
thereon of Ernst & Young LLP, dated March 28, 1997, and Price Waterhouse LLP,
dated March 11, 1996 except as to Note 15, which is as of March 28, 1996, begin
on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The information contained under this heading "Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure" in the Company Current
Report on Form 8-K dated October 4, 1996 contained under the heading "Changes in
Registration Certifying Accountants" is incorporated herein by reference.
There are no disagreements with accountants on accounting and financial
disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Information as to Directors and
Executive Officers" in the Company's definitive proxy statement for its annual
meeting of stockholders to be held on April 22, 1997 (the "1997 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in the
1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the headings "Information as to Directors
and Executive Officers" and "Principal Stockholders" in the 1997 Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Executive Compensation--Certain
Transactions" in the 1997 Proxy Statement is incorporated herein by reference.
-13-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Listed on the Index to the Consolidated Financial Statements and
Schedules on page F-1 of this Report.
(2) Financial Statement Schedules
Listed on the Index to the Consolidated Financial Statements and
Schedules on page F-1 of this Report.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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.
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, as amended).
10.1 --Prison Health Services, Inc. 1986 Employees' Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Registrant's Registration Statement on Form S-1, Registration No. 33-43306, as amended).
10.2 --America Service Group Inc. Amended Incentive Stock Plan (as adopted by the Board of Directors on March
19, 1996) (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the three month period ending June 30, 1996), as subsequently amended by resolution of the Board of
Directors on September 16, 1996 to increase the number of shares reserved for issuance thereunder from
1,075,000 to 1,182,500.
10.3 --America Service Group Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.9 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.4 --Prison Health Services, Inc. Medical Services Agreement for the Georgia Department of Corrections,
dated June 30, 1995 (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K the year ended December 31, 1995).
10.5 --Settlement Agreement among Prison Health Services, Inc., Georgia Department of Corrections and The
Georgia Department of Administrative Services dated January 6, 1997.
10.6 --Prison Health Services, Inc. Medical Services Agreement for Alameda County, California, dated July 1,
1992 (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.7 --Prison Health Services, Inc. Agreement for the Department of Corrections of the State of Kansas, dated
February 22, 1991, and Amendment thereto, dated August 27, 1991 (incorporated by reference to Exhibit
10.7 of the Registrant's Registration Statement on Form S-1, Registration No. 33-43306, as amended).
10.8 --Prison Health Services, Inc. Health Services Contract for State of Maryland, Department of Public
Safety and Correctional Services dated November 30, 1992 (incorporated by reference to Exhibit 10.14 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
10.9 --Prison Health Services, Inc. Health Services Contract for the City of Philadelphia Department of Public
Health (incorporated by reference to Exhibit 10.13 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993).
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.10 --Healthcare Services Contract with the State of Delaware, dated June 3, 1996 (incorporated by reference
to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for the three month period ending
June 30, 1996).
10.11 --Loan Agreement among America Service Group Inc., Prison Health Services, Inc., UniSource, Inc. and
Wilmington Trust dated February 20, 1996 (incorporated by reference to Exhibit 10.16 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.12 --Agreement dated February 26, 1996 between Jeffrey A. Reasons and America Service Group Inc.
(incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K the year
ended December 31, 1995).
10.13 --Agreement dated February 26, 1996 between Don C. Brown and America Service Group Inc. (incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K the year ended December 31,
1995).
10.14 --Employment Agreement dated April 1, 1996 between Scott L. Mercy and America Service Group Inc.
(incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the
three month period ending June 30, 1996).
10.15 --Employment Agreement dated April 1, 1996 between Margaret O. Harrison and America Service Group Inc.
(incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the
three month period ending June 30, 1996).
10.16 --Employment Agreement dated April 1, 1996 between Stuart H. Shapiro and America Service Group Inc.
(incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the
three month period ending June 30, 1996).
10.17 --Employment Agreement dated November 1, 1996 between Jeffrey J. Bairstow and America Service Group Inc.
10.18 --Nonqualified Stock Option by America Service Group Inc. and Jeffrey J. Bairstow dated December 18,
1996.
10.19 --Employment Agreement dated July 12, 1996 between Michael Catalano and America Service Group Inc.
(incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the
three month period ending September 31, 1996).
10.20 --Nonqualified Stock Option between America Service Group Inc. and Michael Catalano dated July 12, 1996.
10.21 --Nonqualified Stock Option between America Service Group Inc. and Bruce A. Teal dated December 18,
1996.
10.22 --Lease Agreement for office located at Two Penns Way, Suite 200, New Castle, Delaware 19720, and
amendments thereto (incorporated by reference to Exhibit 10.8 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).
10.23 --Lease by and between Principal Mutual Life Insurance Company and America Service Group Inc. dated
September 6, 1996.
11.1 --Statement regarding computation of per share earnings.
16 --Letter regarding change in Certifying Accountants (incorporated by reference to Exhibit 16 of the
Registrant's Current Report on Form 8-K dated October 4, 1996).
21.1 --Subsidiaries of the Registrant.
23.1 --Consent of Ernst & Young LLP, Independent Auditors.
23.2 --Consent of Price Waterhouse LLP.
27.1 --Financial Data Schedule.
99.1 --Safe Harbor Compliance Statement.
</TABLE>
(b) Reports on Form 8-K.
-15-
<PAGE>
The Company filed a Report on Form 8-K dated October 4, 1996 in which it
reported under "Changes in Registrant's Certifying Accountant's" that Price
Waterhouse LLP were dismissed as the Company's independent accountants and the
Company engaged Ernst & Young LLP as its new independent accountants.
The Company filed a Report on Form 8-K dated October 15, 1996 in which it
reported under "Other Events" that its contract with the Georgia Department of
Corrections would not be renewed upon its termination on June 30, 1997.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registration has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized, on April 1, 1997.
AMERICA SERVICE GROUP INC.
BY: /s/ SCOTT L. MERCY
-----------------------------------------
Scott L. Mercy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the Requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on April 1, 1997.
SIGNATURES
/s/ SCOTT L. MERCY Title: President and Chief
- ------------------------------ Executive Officer and
SCOTT L. MERCY Director
/s/ MICHAEL CATALANO Title: Executive Vice
- ------------------------------ President and General
MICHAEL CATALANO Counsel
/s/ BRUCE A. TEAL Title: Vice President,
- ------------------------------ Controller and Treasurer
BRUCE A. TEAL
/s/ WILLIAM EBERLE Title: Director, Chairman
- ------------------------------ of the Board
WILLIAM EBERLE
/s/ THOMAS BOGAN Title: Director
- ------------------------------
THOMAS BOGAN
/s/ JACK O. BOVENDER, JR. Title: Director
- ------------------------------
JACK O. BOVENDER, JR.
/s/ JOHN GILDEA Title: Director
- ------------------------------
JOHN GILDEA
/s/ CAROL R. GOLDBERG Title: Director
- ------------------------------
CAROL R. GOLDBERG
/s/ DOUGLAS L. JACKSON Title: Director
- ------------------------------
DOUGLAS L. JACKSON
-17-
<PAGE>
AMERICA SERVICE GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements Page
- -------------------- ----
Number
------
Report of Ernst and Young LLP, Independent Auditors................. F-2
Report of Independent Accountant.................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1995........... F-4
Consolidated Statements of Operations for the three years
ended December 31, 1996............................................. F-5
Consolidated Statements of Changes in Common Stock, Additional
Paid-In Capital, Retained Earnings (Deficit) and Treasury Stock for
the three years ended December 31, 1996............................. F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996................................................... F-7
Notes to Consolidated Financial Statements......................F-8 - F-22
Financial Statement Schedules
- -----------------------------
Report of Ernst & Young LLP, Independent Auditors................... F-2
Report of Independent Accountants on Financial Statement
Schedules........................................................... F-23
Valuation and Qualifying Accounts and Reserves (Schedule II) for
the three years ended December 31, 1996...............................F-24
All other schedules are omitted as the required information is inapplicable
or is presented in the Company's Consolidated Financial Statements or the
Notes thereto.
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
America Service Group Inc.
We have audited the accompanying consolidated balance sheet of America
Service Group Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in common stock, additional
paid-in capital, retained earnings (deficit) and treasury stock, and cash
flows for the year then ended. Our audit also included the financial
statement schedule for 1996 listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America
Service Group Inc. and subsidiaries at December 31, 1996, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Nashville, Tennessee
March 28, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
America Service Group Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of America Service Group Inc., and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1995
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
March 11, 1996, except as to Note 15, which
is as of March 28, 1996
F-3
<PAGE>
America Service Group Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,550,000 $ 12,050,000
Short-term investments 2,105,000 700,000
Accounts receivable:
Healthcare sites, less allowance
for doubtful accounts of $2,016,000
and $840,000, respectively 8,666,000 11,669,000
Advance billings and other 4,228,000 4,920,000
Assets held for sale 2,900,000 --
Prepaid expenses and other current assets 3,688,000 1,552,000
Current deferred taxes 2,152,000 2,054,000
------------ ------------
Total current assets 36,289,000 32,945,000
Restricted investments 5,458,000 4,574,000
Property and equipment, net 3,036,000 3,239,000
Deferred taxes 1,056,000 1,154,000
Cost in excess of net assets acquired, net 453,000 496,000
Other assets 165,000 93,000
------------ ------------
Total assets $ 46,457,000 $ 42,501,000
------------ ------------
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,656,000 $ 7,413,000
Accrued expenses 23,351,000 13,447,000
Deferred revenue 8,748,000 9,109,000
Income taxes payable -- 284,000
------------ ------------
Total current liabilities 39,755,000 30,253,000
Noncurrent portion of accrued expenses 2,318,000 3,581,000
Commitments and contingencies
Redeemable common stock, $.01 par value,
186,000 shares issued and outstanding
at December 31, 1996 1,916,000 --
Preferred stock, $.01 par value, 2,000,000
shares authorized; none outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 3,404,000 shares issued
and outstanding at December 31, 1996 and 1995 34,000 34,000
Additional paid-in capital 7,546,000 6,887,000
Retained earnings (deficit) (4,904,000) 4,008,000
Less: Treasury stock, at cost, 31,000 and
420,000 shares at December 31, 1996 and
1995, respectively (208,000) (2,262,000)
------------ ------------
Total liabilities and stockholders' equity $ 46,457,000 $ 42,501,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
America Service Group Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Healthcare revenue $ 151,743,000 $ 114,927,000 $ 109,664,000
Other revenue 539,000 311,000 319,000
------------- ------------- -------------
Total revenue $ 152,282,000 115,238,000 109,983,000
Healthcare expenses 145,618,000 103,150,000 99,000,000
------------- ------------- -------------
Gross margin 6,664,000 12,088,000 10,983,000
Selling, general and
administrative expenses 11,065,000 9,921,000 9,610,000
Nonrecurring charges 6,241,000 1,225,000 --
------------- ------------- -------------
Income (loss) from operations (10,642,000) 942,000 1,373,000
Other income (expense):
Interest income 751,000 223,000 176,000
Interest expense (42,000) (19,000) (15,000)
Gain on sale of subsidiary -- -- 112,000
------------- ------------- -------------
709,000 204,000 273,000
------------- ------------- -------------
Income (loss) before income
taxes (benefits) (9,933,000) 1,146,000 1,646,000
Provision for income taxes
(benefits) (1,247,000) 459,000 650,000
------------- ------------- -------------
Net income (loss) (8,686,000) 687,000 996,000
Less increase in redeemable
common stock (226,000) -- --
------------- ------------- -------------
Net income (loss)
attributable to common shares $ (8,912,000) $ 687,000 $ 996,000
------------- ------------- -------------
Net income (loss) per common
and common equivalent shares $ (2.81) $ .21 $ .31
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and
common equivalent shares
outstanding 3,171,000 3,335,000 3,219,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
America Service Group Inc.
Consolidated Statements of Changes in Common Stock,
Additional Paid-In Capital, Retained Earnings (Deficit) and Treasury Stock
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------- Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 3,389,000 $34,000 $7,056,000 $ 2,325,000 $(2,263,000)
Exercise of
options 15,000 -- 40,000 -- --
Net income -- -- -- 996,000 --
--------- ------- ---------- ----------- -----------
Balance at
December 31, 1994 3,404,000 34,000 7,096,000 3,321,000 (2,263,000)
Purchase of treasury
stock (100,000
shares) -- -- -- -- (525,000)
Exercise of options -- -- (209,000) -- 526,000
Net income -- -- -- 687,000 --
--------- ------- ---------- ----------- -----------
Balance at
December 31, 1995 3,404,000 34,000 6,887,000 4,008,000 (2,262,000)
Purchase of treasury
stock (130,000
shares) -- -- -- -- (875,000)
Issuance of redeemable
common stock -- -- -- -- 1,004,000
Issuance of common
stock under employee
stock plan -- -- 67,000 -- 50,000
Exercise of options -- -- (1,442,000) -- 1,875,000
Increase in redemption
value of common stock -- -- -- (226,000) --
Compensation for stock
options -- -- 2,034,000 -- --
Net loss -- -- -- (8,686,000) --
--------- ------- ---------- ----------- -----------
Balance at
December 31, 1996 3,404,000 $34,000 $7,546,000 $(4,904,000) $ (208,000)
--------- ------- ---------- ----------- -----------
--------- ------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
America Service Group Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(8,686,000) $ 687,000 $ 996,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,533,000 738,000 800,000
Noncash compensation charge 2,384,000 -- --
Noncash redeemable common stock
charge 62,000 -- --
Provision for contract cancellation 3,802,000 -- --
Provision for doubtful accounts 1,822,000 421,000 122,000
Deferred income tax provision -- (588,000) (228,000)
Gain on sale of subsidiary -- -- (112,000)
Changes in operating assets and
liabilities:
Accounts receivable 1,873,000 (1,904,000) (46,000)
Prepaid expenses and other
current assets (2,136,000) 153,000 1,006,000
Other assets (72,000) 186,000 (11,000)
Accounts payable 243,000 1,970,000 (1,969,000)
Accrued expenses 4,839,000 3,021,000 1,531,000
Deferred revenue (361,000) 4,766,000 (1,731,000)
Income taxes payable (284,000) 156,000 128,000
----------- ----------- -----------
Net cash provided by operating
activities 5,019,000 9,606,000 486,000
Investing activities
Proceeds (purchases) of short-term
investments (1,405,000) 63,000 434,000
Proceeds from sale/maturity of
restricted investments 1,392,000 1,520,000 963,000
Purchases of restricted investments (2,276,000) (1,356,000) (651,000)
Capital expenditures (4,268,000) (1,405,000) (1,022,000)
Proceeds from sale of property
and equipment 81,000 -- --
Proceeds from sale of subsidiary -- -- 2,694,000
----------- ----------- -----------
Net cash provided by (used in)
investing activities (6,476,000) (1,178,000) 2,418,000
Financing activities
Purchase of treasury stock (875,000) (525,000) --
Issuance of redeemable common stock 1,278,000 -- --
Issuance of common stock 67,000 -- --
Exercise of stock options 1,487,000 317,000 40,000
Repayment of line of credit -- -- -- (100,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,957,000 (208,000) (60,000)
Net increase in cash and cash
equivalents 500,000 8,220,000 2,844,000
Cash and cash equivalents at
beginning of year 12,050,000 3,830,000 986,000
----------- ----------- -----------
Cash and cash equivalents at
end of year $12,550,000 $12,050,000 $ 3,830,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental Cash Flow Information
Cash paid for interest $ 43,000 $ 19,000 $ 15,000
----------- ----------- -----------
----------- ----------- -----------
Cash paid for income taxes $ 326,000 $ 835,000 $ 450,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. Description of Business
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 Company also provides mail order pharmaceuticals, medical
supplies and institutional pharmacy services to certain of its contract sites
as well as private sector customers. The health status of inmates may impact
results of operations under such contractual arrangements.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Prison Health Services, Inc. (PHS) and its
wholly-owned captive insurance subsidiary Harbour Insurance, Inc. (Harbour),
Southern Health Partners, Inc. (SHP) and UniSource, Inc. (UniSource). The
Company disposed of 90% of its interest in SHP in July 1996 and its remaining
10% investment is accounted for using the cost method. All significant
intercompany transactions and account balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Estimates are used primarily in the
recording of the accruals of unbilled medical services and professional and
general liability claims. Additional estimates in 1996 were used in the
recording of estimated losses on the Georgia Department of Corrections
contract, sublease receipts and employee severance.
Financial Instruments
The carrying amounts of the Company's financial instruments which consist of
cash and cash equivalents, short-term investments, accounts receivable,
restricted investments, accounts payable, accrued expenses and deferred
revenue, approximate their fair values.
F-8
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue and Cost Recognition
The Company engages principally in fixed price contracts with correctional
institutions adjusted for census fluctuations. Revenues earned under
contracts with correctional institutions are recognized in the period that
services are obligated to be rendered. Certain contracts allow the Company
to bill in advance for services and, accordingly, such revenue is deferred
and recognized when services are obligated to be rendered. Revenues on
pharmaceutical and related products are recorded when shipped.
Healthcare expenses include the compensation of physicians, nurses and other
healthcare professionals including any related benefits and all other direct
costs of providing the managed care. The cost of healthcare services
provided or contracted for are recognized in the period in which they are
provided based in part on estimates, including an accrual for unbilled
medical services rendered through the balance sheet date. Additionally,
reserves have been recorded for certain reported and unreported professional
and general liability claims associated with the delivery of medical services.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, money market
funds and investments with original maturities of three months or less.
Short-Term Investments
Short-term investments consist of temporary investments in certificates of
deposit and money market funds with brokers. Investments are available for
sale and by their nature are stated at fair value.
Depreciation
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the assets.
F-9
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Assets Held for Sale
Assets held for sale at December 31, 1996 consist primarily of computer
hardware and software acquired or developed by the Company under the terms of
the Georgia Department of Corrections' contract. The assets will be purchased
by the State of Georgia upon expiration of the contract on June 30, 1997.
Accordingly, the assets are recorded at their net realizable value.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired represents the unamortized excess of
the acquisition cost over the fair value of the net assets received at the
date of acquisition. Recoverability is assessed annually or whenever adverse
events and changes in circumstances indicate that undiscounted cash flows
previously anticipated warrant reassessment. Amortization expense of
$43,000, $42,000 and $75,000 for 1996, 1995 and 1994, respectively, was
computed using the straight-line method over 15 years, the estimated useful
life of the intangible assets acquired. Accumulated amortization as of
December 31, 1996 and 1995 was $281,000 and $238,000, respectively.
Treasury Stock
Prior to December 1996, the Board of Directors had authorized the Company to
purchase treasury stock to be available for issuance under stock options and
other benefits under the Company's Incentive Stock Plan. Upon exercise of
the stock options, the difference between the cost of the treasury shares, on
a first-in, first-out basis, and the price of options exercised is reflected
in additional paid-in capital. Treasury stock includes 31,000, 420,000 and
400,000 common shares at December 31, 1996, 1995 and 1994, respectively.
F-10
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Differences between taxable income and
income for financial statement purposes result from the recognition of
certain income and expense items for tax purposes in periods which differ
from those used for financial statement purposes.
Earnings Per Share
Earnings per share are computed using the weighted average number of common
shares and dilutive common share equivalents outstanding. The amount of
dilution is computed by application of the treasury stock method.
Adoption of New Accounting Standards
The Company adopted Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, as of January 1, 1996. This statement requires impairment
losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also requires that long-lived assets to be disposed of be
carried at the lower of carrying amount or fair value less cost to sell. The
adoption of Statement 121 did not have a significant impact on the Company's
operations or financial position.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation,
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, compensation expense is
recognized as the difference between the exercise price of the Company's
employee stock options and the market price of the underlying stock on the
date of grant.
F-11
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation.
3. Nonrecurring Charges and Sale of Subsidiaries
The Company increased its second quarter $1,000,000 loss estimate relating to
the State of Georgia Department of Corrections contract by $2,802,000 in the
fourth quarter, upon notification from the state in October 1996 of its
intention not to renew the contract expiring June 30, 1997. The estimate
includes an approximate $500,000 write-down of equipment which the state of
Georgia has agreed to purchase for $2,900,000.
During the fourth quarter of 1996, the Company commenced the move of its
corporate headquarters from New Castle, Delaware to Brentwood, Tennessee.
Related costs accrued were $1,055,000 for reengineering and downsizing of the
Company's administrative processes.
In April 1996, the Company entered into an agreement to grant the Chief
Executive Officer 175,000 stock options at the fair market value of the
shares on March 28, 1996. The options were granted in May 1996 upon approval
by the Shareholders, pursuant to an amendment to the Incentive Stock
Plan in May 1996. The options contained accelerated vesting provisions,
based upon the Company's stock achieving certain targeted price levels.
During the year, these price levels were obtained and a $2,034,000 noncash
compensation charge was recognized, based upon the difference
between the exercise price agreed upon in March 1996 and the fair market
value on the date of grant. The Chief Executive Officer was also awarded
40,000 redeemable common shares which resulted in a $350,000 compensation
charge based upon the fair market value of the shares on the date of award.
In 1995, a severance charge of $1,225,000 was recorded relating to the
resignation of the former President and Chief Executive Officer, and the Vice
President and General Counsel of the Company.
During 1994, the Company sold substantially all of the noncash assets of its
wholly-owned subsidiary, ASG Management Company, Inc., for a cash price of
approximately $2,693,000 and an unsecured note receivable of $88,000,
resulting in a pretax gain of approximately $112,000.
F-12
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
4. Restricted Investments
Restricted investments represent required funding for Harbour, the captive
insurance subsidiary, and accordingly, are intended to be held to maturity.
All restricted investments are stated at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income. The amortized cost and approximate market value of
restricted investments are as follows:
<TABLE>
<CAPTION>
December 31
Amortized Cost Market Value
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and
governmental agency
obligations $ 1,722,000 $ 1,104,000 $ 1,721,000 $ 1,133,000
Corporate bonds 2,921,000 2,638,000 2,929,000 2,693,000
Mortgage backed securities 815,000 832,000 808,000 839,000
----------- ----------- ----------- -----------
$ 5,458,000 $ 4,574,000 $ 5,458,000 $ 4,665,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The amortized cost of restricted investments at December 31, 1996 by
contractual maturity are as follows: due less than one year--$631,000; due
after one year through five years--$2,937,000; and due after five
years--$1,890,000.
5. Property and Equipment
Property and equipment is stated at cost and comprised of the following:
<TABLE>
<CAPTION>
December 31 Estimated
1996 1995 Useful Lives
------------ ------------ ---------------
<S> <C> <C> <C>
Building and improvements $ 617,000 $ 548,000 10 - 31.5 years
Equipment and furniture 5,004,000 5,110,000 5 - 10 years
Medical equipment 341,000 707,000 5 - 7 years
Automobiles 14,000 36,000 3 - 5 years
------------ ------------
5,976,000 6,401,000
Less: Accumulated depreciation (2,940,000) (3,162,000)
------------ ------------
$ 3,036,000 $ 3,239,000
------------ ------------
------------ ------------
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
$1,490,000, $696,000 and $725,000, respectively.
F-13
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
6. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
------------ ------------
<S> <C> <C>
Salaries and employee benefits $ 7,387,000 $ 6,393,000
Liability claims 5,992,000 5,055,000
Medical claims 5,471,000 2,316,000
Accrued loss on Georgia contract 2,883,000 --
Severance 1,055,000 1,225,000
Legal 1,535,000 1,318,000
Other 1,346,000 721,000
------------ ------------
25,669,000 17,028,000
Less: Noncurrent portion of liability claims (2,318,000) (3,581,000)
------------ ------------
$ 23,351,000 $ 13,447,000
------------ ------------
------------ ------------
</TABLE>
7. Banking Arrangements
The Company has a $26,500,000 line of credit facility expiring in July 1997,
which consists of $6,500,000 for working capital, $5,000,000 for acquisitions
and $15,000,000 to support performance bonding needs (see note 16). Assets
collateralized under the credit facility are accounts receivable, inventory,
machinery and equipment and intangible assets. No borrowings were
outstanding under credit lines at December 31, 1996 and 1995.
PHS had open letters of credit of $10,865,000 and $5,400,000 at December 31,
1996 and 1995, respectively, supporting performance guaranteed on specific
contracts. At December 31, 1996, $6,000,000 related to the Georgia
Department of Corrections' contract. In addition, Harbour had unused letters
of credit of $700,000 at December 31, 1996 and 1995.
F-14
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The Company's provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Current income taxes:
Federal $ (1,110,000) $ 838,000 $ 668,000
State (137,000) 209,000 210,000
------------ ----------- ---------
(1,247,000) 1,047,000 878,000
Deferred taxes:
Federal -- (438,000) (210,000)
State -- (150,000) (18,000)
------------ ----------- ---------
-- (588,000) (228,000)
------------ ----------- ---------
Income taxes (benefits) $ (1,247,000) $ 459,000 $ 650,000
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Self-insurance reserves $ 2,351,000 $ 1,973,000
Accrued vacation 804,000 462,000
Executive stock options 773,000 --
Bad debt allowance 769,000 77,000
Accrued loss on Georgia contract 675,000 --
Accrued severance 348,000 502,000
Accrued legal 410,000 434,000
Depreciation (266,000) (178,000)
Net Operating Cost Carryforward 347,000 --
Other 6,000 (62,000)
------------ -----------
6,217,000 3,208,000
Valuation allowance (3,009,000) --
------------ -----------
$ 3,208,000 $ 3,208,000
------------ -----------
------------ -----------
</TABLE>
As of December 31, 1996, the Company had federal and state net operating loss
carryforwards of $913,000 expiring in 2005. A valuation allowance has been
established for deferred tax assets which are not expected to be realized.
The Company believes it is more likely than not that the remaining deferred
tax assets will be realized through the future reversal of existing taxable
temporary differences and the generation of future taxable income.
F-15
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
A reconciliation of the federal statutory rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal tax (34.0)% 34.0% 34.0%
State income taxes (1.4) 5.2 4.4
Other -- 0.8 1.1
Increase in valuation allowance 22.8 -- --
------ ----- -----
(12.6)% 40.0% 39.5%
------ ----- -----
------ ----- -----
</TABLE>
9. Redeemable Common Stock
During 1996, the Company sold 146,000 shares of common stock (purchased
shares) and issued a stock award of 40,000 shares (awarded shares) of common
stock to its newly appointed Chief Executive Officer. The 146,000 shares
were sold at the then current fair market value of $8.75 per share. The
vesting of the awarded shares was accelerated under the terms of the award
and a compensation charge of $8.75 per share was recorded representing the
fair market value of the shares on the date of issuance. Both the purchased
and awarded shares are redeemable under the terms of the officer's employment
agreement upon termination of employment. The redemption value of the shares
is calculated as the average closing market value of the Company's common
stock for the 30 trading days immediately preceding notification of intent to
redeem the shares. Changes in the redemption value of the purchased and
awarded shares are recorded as adjustments to retained earnings and
compensation expense, respectively. During 1996, the Company increased the
redemption value of the purchased and awarded shares by $226,000 and
$62,000, respectively.
10. Stock Option Plan
The Company has an Incentive Stock Plan, which provides for the granting of
options, stock awards and stock appreciation rights to officers, key
employees and non-employee directors for up to 1,182,500 shares of ASG common
stock. Awards and vesting periods under the plan are discretionary and are
administered by a committee of the Board of Directors. The exercise price of
the options shall not be less than the fair market value at
F-16
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plan (continued)
the date of grant. Options and other benefits expire at such times as the
committee shall determine at the time of grant, but no later than ten years
from the grant date.
The following is a summary of stock option activity under the plan:
<TABLE>
<CAPTION>
Options Price Range
--------- -----------
<S> <C> <C>
Outstanding, January 1, 1994 810,400 $2.33-11.19
Exercised (15,000) 2.67
Canceled (19,000) 6.50
-------- -----------
Outstanding, December 31, 1994 776,400 2.33 -11.19
Granted 140,800 4.50 -6.31
Exercised (80,500) 2.33 -6.50
Canceled (168,500) 4.50 -6.50
-------- -----------
Outstanding, December 31, 1995 668,200 2.33-11.19
Granted 402,350 6.93 -13.12
Exercised (324,950) 2.33 -6.50
Stock award vested (40,000) 8.75 -8.75
Canceled (18,800) 4.50-13.12
-------- -----------
Outstanding, December 31, 1996 686,800 $2.67-13.12
-------- -----------
-------- -----------
</TABLE>
Total options available for future grants at December 31, 1996 and 1995, were
131,000 and 47,300, respectively. Under a separate plan and as part of the
recruitment of the Chief Operating Officer, the Company granted 75,000
options at fair market value during 1996.
In April 1996, the Company granted the Chief Executive Officer 175,000
stock options pursuant to an amendment to the Incentive Stock Plan in May
1996 which resulted in a $2,034,000 noncash compensation charge.
As of December 31, 1996, 490,000 options were exercisable. The Company has
reserved 818,000 shares of common stock for options outstanding and for
options which may be granted in the future.
F-17
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plan (continued)
Pro forma information regarding net income (loss) and earnings per share is
required by Statement 123 (see Note 2), which also requires that the
information be determined as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rate of 8.5%; volatility factors of the expected market
price of the Company's common stock of 1.04 and 0.78; and a weighted-average
expected life of the option of 3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
------------ ---------
<S> <C> <C>
Pro forma net income (loss) attributable to
common shares $ (7,190,000) $ 506,000
------------ ---------
Pro forma net income (loss) per common and
common equivalent shares $ (2.15) $ .16
------------ ---------
------------ ---------
</TABLE>
The weighted average fair value of 262,000 for options granted at fair value
and 215,000 options granted at less than fair value during 1996 was $7.23 and
$1.81, respectively. The estimated remaining contractual life of options
outstanding is 8.5. The weighted average exercise prices of outstanding and
exercisable options at December 31, 1996 range as follows:
<TABLE>
<CAPTION>
Options Weighted-Average Price
-------------------------------- --------------------------------
Outstanding Exercisable Outstanding Exercisable
<S> <C> <C> <C>
112,400 112,400 $ 2.82 $ 2.82
108,750 82,417 $ 5.63 $ 5.73
540,650 295,000 $ 10.67 $ 9.68
</TABLE>
F-18
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
11. Employee Benefit Plan
The Company has a 401(k) Retirement Savings Plan (the Plan) covering
substantially all employees who have completed one year and 1,000 hours of
service. The Plan permits eligible employees to defer and contribute to the
Plan a portion of their compensation. The Company matches such employee
contributions to the Plan ranging from 1% to 3% depending on their years of
participation. The Company recorded an expense of $299,000, $338,000 and
$300,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
related to the matching contributions of the Plan.
The Company instituted an Employee Stock Purchase Plan during 1996.
Employees who have completed one year of service are eligible to contribute
up to 10% of their annual salaries whereby common shares will be purchased at
85% of the Company's fair market value as defined within the agreement.
12. Professional and General Liability Insurance
Harbour Insurance, Inc., a PHS wholly-owned captive insurance company
incorporated under the laws of the state of Delaware, currently provides
professional and general liability coverage to PHS with limits of $1,000,000
per claim and various aggregate limits per policy year. The aggregate limit
for policy years ending 1996, 1995 and 1994 was $3,250,000, $2,450,000 and
$2,450,000, respectively. Possible claims in excess of the individual and
aggregate claims per policy year up to a maximum of $5,000,000 are covered by
third-party insurance policies on a claims-made basis. During the 1994-1995
and 1993-1994 policy years, the Company retained 30% of this excess coverage
on a risk-sharing basis. Any liabilities in excess of the third-party
insurance limits are assumed by the Company. The Harbour policy relative to
the contract with the Georgia Department of Corrections is an occurrence
based policy with similar levels of self-insured retention.
In prior years, PHS has contributed approximately $1,100,000 for
capitalization of Harbour. Amounts contributed are adequate to meet legal
capitalization requirements and are restricted from general use by PHS.
The Company records a liability for reported and unreported professional and
general liability claims based upon an actuarial estimate of the cost of
settling losses and loss adjustment expenses discounted at 6% in 1996 and 7%
in 1995 and 1994. Amounts accrued were $5,992,000 and $5,055,000 at
F-19
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
12. Professional and General Liability Insurance (continued)
December 31, 1996 and 1995, respectively, and are included in accrued
expenses and non-current portion of accrued expenses. Changes in estimates
of losses resulting from the continuous review process and differences
between estimates and loss payments are recognized in the period in which the
estimates are changed or payments are made.
13. Commitments and Contingencies
Operating Leases
The Company leases office space and equipment through October 2003 under
certain noncancelable operating leases.
The Company is negotiating a sublease agreement with a third party for its
former corporate office space in New Castle, Delaware. The sublease is for
the period May 1, 1997 through April 30, 1999, with two six month renewal
options through April 30, 2000. The original lease term expires July 31,
2000. Based upon the anticipated consummation of the sublease, no lease
termination expense has been recorded by the Company.
Future minimum annual lease payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 702,000
1998 607,000
1999 612,000
2000 421,000
2001 211,000
Thereafter 388,000
-----------
2,941,000
Sublease receipts (669,000)
-----------
$ 2,272,000
-----------
-----------
</TABLE>
Rental expense under operating leases was $564,000, $457,000 and $337,000 for
the years ended December 1996, 1995 and 1994, respectively.
F-20
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
13. Commitments and Contingencies (continued)
Catastrophic Limits
Many of the Company's contracts require reimbursement to the Company for all
treatment costs or, in some cases, only out-of-pocket treatment costs related
to certain catastrophic events, and/or for AIDS or AIDS-related illnesses.
Certain contracts do not contain such limits. The Company attempts to
compensate for the increased financial risk when pricing contracts that do
not contain individual, catastrophic or AIDS-related limits. However, the
occurrence of severe individual cases, AIDS-related illnesses or a
catastrophic event in a facility governed by a contract without such
limitations could render the contract unprofitable and could have a material
adverse effect on the Company's operations. Beginning in September 1996, the
Company procured insurance from an unaffiliated insurer for contracts which
do not contain catastrophic protection for hospitalization amounts in excess
of $125,000 per inmate. The Company believes this insurance significantly
mitigates its exposure to unanticipated expenses of catastrophic
hospitalization.
Litigation and Claims
The Company is a party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company. An
estimate of the amounts payable on existing claims for which the liability of
the Company is probable is included in accrued expenses. The Company is not
aware of any material unasserted claims and, based on its past experience,
would not anticipate that potential future claims would have a material
adverse effect on its financial position or results of operations.
14. Major Customers and Geographical Concentrations
The following is a summary of revenues from major customers:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
--------------- --------------- ---------------
(In thousands) Revenue Percent Revenue Percent Revenue Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
State of Georgia $56,662 37.2% $13,530 11.8% $ -- --%
State of Kansas 17,096 11.2 15,476 13.5 15,217 13.9
City of Philadelphia 16,034 10.5 14,713 12.8 13,642 12.4
State of Maryland 15,479 10.2 18,747 16.3 17,535 16.0
</TABLE>
F-21
<PAGE>
America Service Group Inc.
Notes to Consolidated Financial Statements (continued)
14. Major Customers and Geographical Concentrations (continued)
Contracts with the states of Maryland, Delaware, and Georgia, which
potentially expose the Company to concentrations of credit risk, constituted
12%, 11% and 6%, respectively, of total accounts receivable at December 31,
1996. Estimated credit losses associated with the receivables are provided
for in the consolidated financial statements.
The Company was notified in October 1996 of the State of Georgia's intention
not to renew its contract expiring June 1997 (see Note 3).
15. Subsequent Events
In December 1996, the Company announced that it had entered into a letter of
intent to merge with Wexford Health Sources, Inc. During final stages of the
Company's due diligence review, issues have arisen which warrant
re-evaluation of the proposed transaction. Accordingly, the letter of intent
has been extended to allow adequate time for reassessment. There can be no
assurance that the transaction will be consummated.
On March 28, 1997, the Company received approval and confirmation for a
new debt agreement, subject to the terms and conditions of the term sheet.
The agreement is for a $20,000,000 line of credit facility for general
corporate purposes including working capital, the issuance of letters of
credit for performance bonds and the funding of acquisitions. Under the
line, which matures September 2000, the Company is limited to $5,000,000 for
working capital needs through March 1998. The interest rate is based upon
LIBOR or prime rates subject to the quarterly operating performance of the
Company, as defined in the agreement. The line of credit is also subject to
certain quarterly financial covenants.
F-22
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors of
America Service Group Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 11, 1996, except as to Note 15, which is as of March 28, 1996,
appearing on page F-2 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, also included an audit of the Financial
Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PRICE WATERHOUSE LLP
Baltimore, Maryland
March 11, 1996
F-23
<PAGE>
Schedule II
America Service Group Inc.
Valuation and Qualifying Accounts and Reserves
December 31, 1996
<TABLE>
<CAPTION>
Additions
--------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Period Expenses Accounts Deductions of Period
--------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Allowance for
doubtful accounts $ 840,000 $ 1,822,000 $ -- $ 646,000 $ 2,016,000
Valuation allowance for
deferred tax asset -- 2,662,000 -- -- 2,662,000
--------- ----------- -------- --------- -----------
$ 840,000 $ 4,484,000 -- $ 646,000 $ 4,678,000
--------- ----------- -------- --------- -----------
--------- ----------- -------- --------- -----------
December 31, 1995
Allowance for
doubtful accounts $ 419,000 $ 421,000 $ -- $ -- $ 840,000
--------- ----------- -------- --------- -----------
--------- ----------- -------- --------- -----------
December 31, 1994
Allowance for
doubtful accounts $ 297,000 $ 122,000 $ -- $ -- $ 419,000
--------- ----------- -------- --------- -----------
--------- ----------- -------- --------- -----------
</TABLE>
F-24
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
AMERICA SERVICE GROUP INC.
ARTICLE 1
OFFICES
Section 1.1. Registered Office. The registered office of the
corporation shall be maintained in the City of New Castle, State of Delaware,
and the corporation is the Registered Agent at such address.
Section 1.2. Other Offices. The corporation may also have an office
or offices at such other places as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE 2
STOCKHOLDERS' MEETINGS
Section 2.1. Annual Meetings. The annual meeting of the
stockholders, commencing with the year 1992, shall be held at such place, date
and hour as the Board of Directors shall determine and designate in the notice
or waiver of notice thereof, at which they shall elect by ballot, by plurality
vote, a Board of Directors and transact such other business as may properly be
brought before the meeting.
Section 2.2. Stockholders' List. At least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
said meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder,
shall be prepared by the Secretary or through a transfer agent or transfer clerk
appointed by the Board of Directors. Such list shall be open to the examination
of any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 2.3. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or the Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning at least
a majority of shares of the corporation issued and outstanding and entitled to
<PAGE>
vote, by presenting a written request for such meeting to the Secretary of the
corporation. Such request shall state the purpose or purposes of the proposed
meeting.
Section 2.4. Notice of Meetings. Written notice of stockholder
meetings, stating the place, date and hour of the meeting and in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. Such notices shall
be deemed given when personally delivered or when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears
on the records of the corporation.
Section 2.5. Quorum. The holders of a majority of the shares issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall be requisite and shall constitute a quorum at all meetings of
the stockholders for the transaction of business except as otherwise provided by
statute, by the Certificate of Incorporation or by these By-Laws. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, or the President, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, of the place, date and hour of the adjourned meeting, until a quorum
shall again be present or represented by proxy. At the adjourned meeting at
which a quorum shall be present or represented by proxy, the corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than thirty days, or if after the adjournment, a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 2.6. Voting. When a quorum is present at any meeting, and
subject to the provisions of the General Corporation Law of the State of
Delaware, the Certificate of Incorporation and these By-Laws in respect of the
vote that shall be required for a specified action, the vote of the holders of a
majority of the shares having voting power, present in person or represented by
proxy, shall decide any question brought before such meeting. Each stockholder
shall have one vote for each share of stock having voting power registered in
his name on the books of the corporation, except as otherwise provided in the
Certificate of Incorporation.
Section 2.7. Proxies. Each stockholder entitled to vote at a meeting
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
Section 2.8. Written Consent in Lieu of Meeting. Whenever the vote
of stockholders at a meeting thereof is required or permitted to be taken for or
in connection with any corporate action by any provisions of the General
Corporation Law of the State of Delaware
-2-
<PAGE>
or of the Certificate of Incorporation or these By-Laws, the meeting, notice of
the meeting, and vote of stockholders may be dispensed with if stockholders
owning stock having not less than the minimum number of votes which, by statute,
the Certificate of Incorporation or these By-Laws, is required to authorize such
action at a meeting at which all shares entitled to vote thereon were present
and voted shall consent in writing to such corporate action being taken; and
such written consents shall be delivered to the corporation by delivery to its
principal place of business or to the Secretary of the corporation. Delivery to
the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested; provided that prompt notice of the
taking of such action must be given to those stockholders who have not consented
in writing.
ARTICLE 3
DIRECTORS
Section 3.1. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
which may exercise all such powers of the corporation and do all such acts and
things as are not by the General Corporation Law of the State of Delaware nor by
the Certificate of Incorporation nor by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 3.2. Number of Directors. The number of directors which
shall constitute the whole Board shall be as determined from time to time by the
Board of Directors. The directors shall be elected at the annual meeting of the
stockholders, and each director shall hold office until his successor is elected
and qualified or until his earlier resignation or removal.
Section 3.3. Vacancies. If the office of any director or directors
becomes vacant by reason of death, resignation, retirement, disqualification,
removal from office, or otherwise, or a new directorship is created, a majority
of the directors, though less than a quorum, or the holders of a plurality of
shares issued and outstanding and entitled to vote in elections of directors,
shall choose a successor or successors, or a director to fill the vacancy or
newly created directorship, who shall hold office for the unexpired term or
until the next election of directors.
Section 3.4. Place of Meetings. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board of Directors may from time to time determine, or as may be specified or
fixed in the respective notices or waivers of notice of such meetings.
Section 3.5. Committee of Directors. The Board of Directors may
designate 1 or more committees, each committee to consist of 1 or more of the
directors of the corporation. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to
the extent provided in the resolution of the Board of Directors, or in the
By-laws of the corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to
-3-
<PAGE>
be affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to the following matter: (i) approving
or adopting, or recommending to the stockholders, any action or matter
expressly required by the General Corporation Law of Delaware to be submitted
to stockholders for approval or (ii) adopting, amending or repealing any
By-law of the corporation. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors. The committees shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
Section 3.6. Compensation of Directors. Directors, as such, may
receive such stated salary for their services and/or such fixed sums and
expenses of attendance for attendance at each regular or special meeting of the
Board of Directors as may be established by resolution of the Board; provided
that nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 3.7. Annual Meeting. The annual meeting of the Board of
Directors shall be held immediately following the annual meeting of stockholders
each year, or at such other time as the Board of Directors shall from time to
time determine or as may be specified or fixed in the notice or waiver of notice
of such meeting.
Section 3.8. Special Meetings. Special meetings of the Board of
Directors may be held at any time on the call of the President or at the request
in writing of any two directors then in office. Any such meeting may be held at
such place as the Board may fix from time to time or as may be specified or
fixed in the notice or waiver of notice of such meeting.
Section 3.9. Notice of Meetings. Written notice of meetings of the
Board of Directors, stating the place, date and hour of the meeting shall be
given to each director at his address as it appears on the records of the
corporation, or in the absence of such address, at his residence or usual place
of business. If the Secretary shall fail to give notice, then the notice may be
given by the president or by any one of the directors who requested the meeting.
Notice shall be given at least 10 days prior to an annual meeting and at least
one day prior to a special meeting (unless given by United States mail, in which
case it shall be given at least five days prior to such meeting). Such notice
shall be deemed given when personally delivered, when
-4-
<PAGE>
transmitted by telegram or facsimile or when deposited in the United States
mail, postage prepaid, addressed to the director as set forth above. Any meeting
of the Board of Directors shall be a legal meeting without any notice thereof
having been given, if all the directors shall be present thereat, and no notice
of a meeting shall be required to be given to any director who shall attend such
meeting, except when the director attends the meeting for the express purpose of
objecting at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 3.10. Action Without Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or any committee
thereof may be taken without a meeting, if a written consent to such action is
signed by all members of the Board or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board of
Directors.
Section 3.11. Participation in Meeting by Means of Communication
Equipment. Members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
Section 3.12. Quorum and Manner of Acting. Except as otherwise
provided in these By-Laws, a majority of the total number of directors then
constituting the whole Board shall constitute a quorum at any regular or special
meeting of the Board of Directors. Except as otherwise provided by statute, by
the Certificate of Incorporation or by these By-Laws, the vote of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors. In the absence of a quorum, a majority of the
directors present may adjourn the meeting from time to time until a quorum shall
be present. Notice of any adjourned meeting need not be given, except that
notice shall be given to all directors if the adjournment is for more than
thirty days.
Section 3.13. Chairman of the Board. At each annual meeting of the
Board of Directors, or at such other times as the Board of Directors may
determine (which may be more or less frequently than annually) the Board of
Directors shall elect a director to serve as Chairman of the Board. The Chairman
of the Board shall preside over all meetings of the Board of Directors and shall
perform such other duties as the Board of Directors may from time to time
determine.
-5-
<PAGE>
ARTICLE 4
OFFICERS
Section 4.1. Executive Officers. The executive officers of the
corporation shall be a President, such number of Senior Vice Presidents and Vice
Presidents, if any, as the Board of Directors may determine, a Secretary, a
Treasurer and such other officers as may be determined from time to time by the
Board. One person may hold any number of said offices.
Section 4.2. Election, Term of Office and Eligibility. The executive
officers of the corporation shall be elected annually by the Board of Directors
at its annual meeting or at a special meeting held in lieu thereof. Each
officer, except such officers as may be appointed in accordance with the
provisions of Section 4.3, shall hold office until his successor shall have been
duly chosen and qualified or until his earlier resignation or removal. None of
the officers need be members of the Board.
Section 4.3. Subordinate Officers. The Board of Directors may
appoint such Assistant Secretaries, Assistant Treasurers, Controller and other
officers, and such agents as the Board may determine, to hold office for such
period and with such authority and to perform such duties as the Board may from
time to time determine. The Board may, by specific resolution, empower the chief
executive officer of the corporation to appoint any such subordinate officers or
agents.
Section 4.4. Removal. The President, any Senior Vice President or
Vice President, the Secretary and/or the Treasurer may be removed at any time,
either with or without cause, by resolution adopted by a vote of the majority of
the total number of directors then constituting the whole Board. Any subordinate
officer appointed pursuant to Section 4.3 may be removed at any time, either
with or without cause, by the majority vote of the directors present at any
meeting of the Board or by any committee or officer empowered to appoint such
subordinate officers.
Section 4.5. Vacancies. A vacancy in any office due to death,
resignation, removal, disqualification, disability or any other cause shall be
filled for the unexpired portion of the term in the manner prescribed by these
By-laws for the regular appointment or election to such office.
Section 4.6. The President. The President shall be the chief
executive officer of the corporation. He shall have executive authority to see
that all orders and resolutions of the Board of Directors are carried into
effect, and, subject to the control vested in the Board of Directors by statute,
by the Certificate of Incorporation or by these By-Laws, shall administer and be
responsible for the management of the business and affairs of the corporation.
He shall preside at all meetings of the stockholders; and in general he shall
perform all duties incident to the office of the President and such other duties
as from time to time may be assigned to him by the Board of Directors.
-6-
<PAGE>
Section 4.7. Senior Vice Presidents and Vice Presidents. In the
event of the absence or disability of the President, each Senior Vice President
and Vice President, in the order designated, or in the absence of any
designation, then in the order of their election, shall perform the duties of
the President. The Senior Vice Presidents and Vice Presidents shall also perform
such other duties as from time to time may be assigned to them by the Board of
Directors or by the chief executive officer of the corporation.
Section 4.8. The Secretary. The Secretary shall:
(a) Keep the minutes of the meetings of the stockholders and of the
Board of Directors and record all votes;
(b) See that all notices are duly given in accordance with the
provisions of these By-Laws or as required by law;
(c) Be custodian of the records and of the seal of the corporation
and see that the seal or a facsimile or equivalent thereof is affixed to
or reproduced on all documents, the execution of which on behalf of the
corporation under its seal is duly authorized;
(d) Have charge of the stock record books of the corporation;
(e) In general, perform all duties incident to the office of
Secretary, and such other duties as are provided by these By-Laws and as
from time to time are assigned to him by the Board of Directors or by the
chief executive officer of the corporation.
Section 4.9. Assistant Secretaries. If one or more Assistant
Secretaries shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Secretary, or in
his absence or disability, the Assistant Secretary designated by the Secretary
(or in the absence of such designations, then any one of such Assistant
Secretaries) shall perform the duties of the Secretary and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
Secretary.
Section 4.10. The Treasurer. The Treasurer shall:
(a) Receive and be responsible for all funds of and securities owned
or held by the corporation and, in connection therewith, among other
things: keep or cause to be kept full and accurate records and accounts
for the corporation; deposit or cause to be deposited to the credit of the
corporation all moneys, funds and securities so received in such bank or
other depositary as the Board of Directors or an officer designated by the
Board may from time to time establish;
-7-
<PAGE>
and disburse or supervise the disbursement of the funds of the corporation
as may be properly authorized.
(b) Render to the Board of Directors at any meeting thereof, or from
time to time when ever the Board of Directors or the chief executive
officer of the corporation may require, financial and other appropriate
reports on the condition of the corporation;
(c) In general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to
him by the Board of Directors or by the chief executive officer of the
corporation.
Section 4.11. Assistant Treasurers. If one or more Assistant
Treasurers shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Treasurer, or in
his absence or disability, the Assistant Treasurer designated by the Treasurer
(or in the absence of such designation, then any one of such Assistant
Treasurers) shall perform all the duties of the Treasurer and when so acting
shall have all the powers of and be subject to all the restrictions upon, the
Treasurer.
Section 4.12. Bonds. If the Board of Directors or the chief
executive officer shall so require, any officer or agent of the corporation
shall give bond to the corporation in such amount and with such surety as the
Board of Directors or the chief executive officer, as the case may be, may deem
sufficient, conditioned upon the faithful performance of their respective duties
and offices.
Section 4.13. Delegation of Duties. In case of the absence of any
officer of the corporation or for any other reason which may seem sufficient to
the Board of Directors, the Board of Directors may, for the time being, delegate
his powers and duties, or any of them, to any other officer or to any director.
ARTICLE 5
SHARES OF STOCK
Section 5.1. Regulation. Subject to the terms of any contract of the
corporation, the Board of Directors may make such rules and regulations as it
may deem expedient concerning the issue, transfer, and registration of
certificates for shares of the stock of the corporation, including the issue of
new certificates for lost, stolen or destroyed certificates, and including the
appointment of transfer agents and registrars.
-8-
<PAGE>
Section 5.2. Stock Certificates. Certificates for shares of the
stock of the corporation shall be respectively numbered serially for each class
of stock, or series thereof, as they are issued, shall be impressed with the
corporate seal or a facsimile thereof, and shall be signed by the President, a
Senior Vice President or a Vice President, and by the Secretary or Treasurer, or
an Assistant Secretary or an Assistant Treasurer, provided that such signatures
may be facsimiles on any certificate countersigned by a transfer agent other
than the corporation or its employee. Each certificate shall exhibit the name of
the corporation, the class (or series of any class) and number of shares
represented thereby, and the name of the holder. Each certificate shall be
otherwise in such form as may be prescribed by the Board of Directors.
Section 5.3. Transfer of Shares. Shares of the capital stock of the
corporation shall be transferable on the books of the corporation by the holder
thereof in person or by his duly authorized attorney, upon the surrender or
cancellation of a certificate or certificates for a like number of shares. As
against the corporation, a transfer of shares can be made only on the books of
the corporation and in the manner hereinabove provided, and the corporation
shall be entitled to treat the registered holder of any share as the owner
thereof and shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the statutes
of the State of Delaware.
Section 5.4. Fixing Date for Determination of Stockholders of
Record.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
is fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; providing, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by the General Corporation Law of the State of Delaware, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the
-9-
<PAGE>
corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the corporation having
custody of the book in which proceedings of meetings by stockholders are
recorded. Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by the General Corporation Law of the State of Delaware, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board of Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
Section 5.5. Lost, Stolen and Destroyed Certificate. Any stockholder
claiming that a certificate representing shares of stock has been lost, stolen
or destroyed may make an affidavit or affirmation of the fact and, if the Board
of Directors so requires, advertise the same in a manner designated by the
Board, and give the corporation a bond of indemnity in form and with security
for an amount satisfactory to the Board (or an officer or officers designated by
the Board), whereupon a new certificate may be issued of the same tenor and
representing the same number, class and/or series of shares as were represented
by the certificate alleged to have been lost, stolen or destroyed.
ARTICLE 6
BOOKS AND RECORDS
Section 6.1. Location. The books, accounts and records of the
corporation may be kept at such place or places within or without the State of
Delaware as the Board of Directors may from time to time determine.
Section 6.2. Inspection. The books, accounts, and records of the
corporation shall be open to inspection by any member of the Board of Directors
at all times; and open to inspection by the stockholders at such times, and
subject to such regulations as the Board of Directors may prescribe, except as
otherwise provided by statute.
-10-
<PAGE>
Section 6.3. Corporate Seal. The corporate seal shall contain two
concentric circles between which shall be the name of the corporation and the
word "Delaware" and in the center shall be inscribed the words "Corporate Seal."
ARTICLE 7
DIVIDENDS AND RESERVES
Section 7.1. Dividends. The Board of Directors of the corporation,
subject to any restrictions contained in the Certificate of Incorporation and
other lawful commitments of the corporation, may declare and pay dividends upon
the shares of its capital stock either out of the surplus of the corporation, as
defined in and computed in accordance with the General Corporation Law of the
State of Delaware, or in case there shall be no such surplus, out of the net
profits of the corporation for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. If the capital of the corporation, computed in
accordance with the General Corporation Law of the State of Delaware, shall have
been diminished by depreciation in the value of its property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, the Board of Directors of the
corporation shall not declare and pay out of such net profits any dividends upon
any shares of any classes of its capital stock until the deficiency in the
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets shall have been repaired.
Section 7.2. Reserves. The Board of Directors of the corporation may
set apart, out of any of the funds of the corporation available for dividends, a
reserve or reserves for any proper purpose and may abolish any such reserve.
ARTICLE 8
MISCELLANEOUS PROVISIONS
Section 8.1. Fiscal Year. The fiscal year of the corporation shall
end on the 31st day of December of each year.
Section 8.2. Depositories. The Board of Directors or an officer
designated by the Board shall appoint banks, trust companies, or other
depositories in which shall be deposited from time to time the money or
securities of the corporation.
-11-
<PAGE>
Section 8.3. Checks, Drafts and Notes. All checks, drafts, or other
orders for the payment of money and all notes or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers or agent or agents as shall from time to time be designated by
resolution of the Board of Directors or by an officer appointed by the Board.
Section 8.4. Contracts and Other Instruments. The Board of Directors
may authorize any officer, agent or agents to enter into any contract or execute
and deliver any instrument in the name and on behalf of the corporation and such
authority may be general or confined to specific instances.
Section 8.5. Waivers of Notice. Whenever any notice is required to
be given under the provisions of the General Corporation Law of the State of
Delaware or the Certificate of Incorporation or of these By-Laws, a waiver
thereof in writing signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, directors or members of a committee of directors need be
specified in any written waiver of notice.
Section 8.6. Stock in Other Corporations. Any shares of stock in any
other corporation which may from time to time be held by this corporation may be
represented and voted at any meeting of shareholders of such corporation by the
President or a Vice President, or by any other person or persons thereunto
authorized by the Board of Directors, or by any proxy designated by written
instrument of appointment executed in the name of this corporation by its
President or a Vice President. Shares of stock belonging to the corporation need
not stand in the name of the corporation, but may be held for the benefit of the
corporation in the individual name of the Treasurer or of any other nominee
designated for the purpose by the Board of Directors. Certificates for shares so
held for the benefit of the corporation shall be endorsed in blank or have
proper stock powers attached so that said certificates are at all times in due
form for transfer, and shall be held for safekeeping in such manner as shall be
determined from time to time by the Board of Directors.
Section 8.7. Indemnification.
(a) Each person who was or is a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he, or a person for whom he is the legal representative,
is or was a director, officer of the corporation or is or was serving at the
request of the corporation as a director, officer of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans,
-12-
<PAGE>
shall be indemnified and held harmless by the corporation to the fullest extent
authorized by the laws of Delaware as the same now or may hereafter exist (but,
in the case of any change, only to the extent that such change authorizes the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such change) against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his heirs, executors and
administrators. The right to indemnification conferred in this Section shall be
a contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition upon receipt by the corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that the director or officer is not entitled to be
indemnified under this Section or otherwise. The corporation may, by action of
its Board of Directors, provide indemnification to employees and agents of the
corporation with the same scope and effect as the foregoing indemnification of
directors and officers.
(b) If a claim under subsection (a) of this Section is not paid in
full by the corporation within thirty days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim. It shall be a defense to any action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking has been tendered to the corporation) that the claimant has failed
to meet a standard of conduct which makes it permissible under Delaware law for
the corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he has met such standard of conduct, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such standard of conduct, nor the
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall be a defense to the action or
create a presumption that the claimant has failed to meet the required standard
of conduct.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Law, agreement, vote of stockholders or disinterested
directors or otherwise.
-13-
<PAGE>
(d) The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under Delaware law.
(e) To the extent that any director, officer, employee or agent of
the corporation is by reason of such position, or a position with another entity
at the request of indemnified against all costs and expenses actually and
reasonably incurred by him or on his behalf in connection therewith.
(f) Any amendment, repeal or modification of any provision of this
Section by the stockholders or the directors of the corporation shall not
adversely affect any right or protection of a director or officer of the
corporation existing at the time of such amendment, repeal or modification.
Section 8.8. Amendment of By-Laws. The stockholders, by the
affirmative vote of the holders of a majority of the stock issued and
outstanding and having voting power may, at any annual or special meeting if
notice of such alteration or amendment of the By-Laws is contained in the notice
of such meeting, adopt, amend, or repeal these By-Laws, and alterations or
amendments of By-Laws made by the stockholders shall not be altered or amended
by the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the
whole Board, may adopt, amend, or repeal these By-Laws at any meeting, except as
provided in the above paragraph. By-Laws made by the Board of Directors may be
altered or repealed by the stockholders.
-14-
<PAGE>
SETTLEMENT AGREEMENT
THIS AGREEMENT is made this ____ day of January, 1997, by and among PRISON
HEALTH SERVICES, INC., ("PHS") and THE GEORGIA DEPARTMENT OF CORRECTIONS (the
"GDC") and THE GEORGIA DEPARTMENT OF ADMINISTRATIVE SERVICES ("DOAS")
(collectively the "Department").
WHEREAS, on February 2, 1995, the DOAS, acting on behalf of the GDC,
issued Invitation to Bid 467-019-953427 (the "ITB") requesting bids for the
provision of comprehensive medical services to Georgia's prison population; and
WHEREAS, the Department selected PHS's bid; and
WHEREAS, on October 1, 1995, PHS and the Department (the "Parties")
entered into a contract for PHS to provide comprehensive medical services for a
term to expire on June 30, 1996, with an option to renew for four (4) successive
one-year terms (the "Agreement"); and
WHEREAS, on June 26, 1996, the parties agreed to extend the term of the
Agreement through June 30, 1997; and
WHEREAS, on October 15, 1996, the GDC informed PHS that it was exercising
its right not to renew the Agreement and to allow it to expire as of midnight on
June 30, 1997 because it desired to enter into an inter-governmental
relationship with the Medical College of Georgia ("MCG") beginning July 1, 1997;
and
WHEREAS, a number of disputes have arisen based on the parties' differing
interpretations of the Agreement and the extension thereof; and
WHEREAS, the parties desire to settle and resolve all outstanding disputes
and claims.
<PAGE>
NOW, THEREFORE, the parties agree as follows:
1. Liquidated Damages, Penalties, and Fines. In consideration of PHS's
payment of $300,000.00, receipt and sufficiency of which is acknowledged, and
the Department's retention of amounts previously withheld for liquidated
damages, penalties, and fines, the Department releases PHS from any further past
or future liability for liquidated damages, penalties, and fines under the
Agreement, PHS's bid, or the ITB. Compromise and settlement of this issue shall
not be deemed an admission of liability and PHS expressly denies any liability
whatsoever for liquidated damages, penalties, and fines.
2. Performance Bond. The Department agrees to release the $30,000,000.00
performance bond PHS was required to obtain and maintain under the Agreement
immediately upon termination of the Agreement for any reason and, under any
circumstances, no later than July 1, 1997. Nothing in this Settlement Agreement
shall be construed to waive the Department's rights in the performance bond
prior to the termination of the Agreement or July 1, 1997, whichever first
occurs.
3. Non-competition Provisions. PHS agrees to waive any and all
non-competition and non-solicitation provisions in any and all agreements or
contracts PHS had, has, or might have in the future with any health care
provider for services PHS is required to provide under the Agreement, including
but not limited to the Physician Independent Contractor Agreement between it and
MCG dated October 25, 1995.
4. HIV Protocol. The Department agrees to reimburse PHS for any and all
actual and reasonable costs PHS incurs in providing viral load testing,
crixivan, and dual drug or poly-drug therapy (to the extent that the cost of
providing dual drug or poly-drug therapy exceeds the
2
<PAGE>
cost of providing AZT alone within the parameters of the catastrophic limits of
the Agreement as amended by this Settlement Agreement). Absent the prior written
approval and agreement as to reimbursement from the Department, PHS shall not be
required to provide any such therapy or testing and the Department shall not be
required to reimburse any amount associated with such therapy or testing to the
extent the provision of such therapy or testing brings the total cost of the
amount to be reimbursed under this paragraph above $2,000,000.00.
5. MIS Equipment. The Department agrees to pay a sum equal to the
unamortized cost of the "MIS Hardware and Software Development Costs" as
described in the inventory and schedule attached as Exhibit A immediately upon
termination of the Agreement for any reason and, under any circumstances, no
later than July 15, 1997. The sum will be determined by reference to the
schedule of "Georgia MIS Assets" attached as Exhibit B. PHS agrees to convey
title and ownership of the MIS system and all related equipment and to convey
whatever and whichever transferable rights it might have in any warranties
relating to the MIS system and all related equipment and the Department agrees
to take same "As Is" and hereby releases PHS for any liability related to MIS
services and equipment to be provided by PHS under the Agreement. PHS further
agrees that the Department shall have a non-exclusive, royalty-free software
license to be valid in perpetuity. PHS shall use its best efforts for the
duration of the Agreement to provide such MIS services and equipment although
PHS shall not purchase any additional MIS equipment, software, or development
services without prior written approval and agreement as to reimbursement from
the Department.
6. ASMP Sundown Bed Count. The Department agrees to reimburse PHS
$209,191.00, which is equal to the amount that PHS has been denied through
September 1996
3
<PAGE>
because it was prohibited from using four (4) beds at ASMP. The Department
agrees that for the duration of the Agreement (starting as of October 1, 1996),
PHS shall be credited for those four beds and will be credited for additional
beds that are in rooms that do not have functioning locks or toilets or that PHS
is not permitted to use for any other reason. Effective as of October 1996 all
sundown counts at ASMP will be made on the last day of the month.
7. "Mental Health Hospitalization". The Department agrees to reimburse PHS
$165,000.00 which represents PHS's mental health hospitalization costs through
October 31, 1996. The parties agree that for the duration of the Agreement
(starting as of November 1, 1996), the Department will be responsible for all
costs of inpatient hospitalizations relating to patients who are listed on the
mental health case load or who are later placed on the mental health case load
to the extent that the costs of such hospitalization are associated with the
condition(s) for which the patient was placed on or remained on the mental
health case load. This provision is intended to clarify the responsibilities of
the parties under Paragraph III(B)(7) of the ITB, titled "Mental Health
Services." Absent the prior written approval and agreement as to reimbursement
from the Department, PHS shall not be required to pay for any mental health
hospitalizations and the Department shall not be required to reimburse any
amount associated with such mental health hospitalizations to the extent that
the related total cost of the amount to be reimbursed under this paragraph (not
including the above initial $165,000.00) exceeds $500,000.00.
8. Transition and Diversion Centers. The Department acknowledges that it
is impractical for it to provide the names and current status of all maintenance
workers and other residents at all transition and diversion centers or to verify
that all invoices submitted to PHS for
4
<PAGE>
payment are beyond the subject resident's ability to pay as is required under
the Agreement and therefore agrees to reimburse PHS for all actual and
reasonable costs associated with health care services already provided or that
PHS provides during the duration of the Agreement to maintenance workers and
other residents of transition and diversion centers less any amounts already
paid to PHS under the Agreement relating to the provision of such services.
Absent the prior written approval and agreement as to reimbursement from the
Department, PHS shall not be required to provide any such health care services
and the Department shall not be required to reimburse any amount associated with
such health care services to the extent the provision of such health care
services brings the total cost of the amount to be reimbursed under this
paragraph above $1,000,000.00.
9. Catastrophic Care. With regard to the allocation of costs to be borne
by the parties in connection with certain defined catastrophic costs as set
forth in Paragraph VII(A) at page 34 of the ITB, PHS, effective as to cases
commencing from the date hereof, agrees to increase the cap on the range for
which it will pay 25% of individual prisoner care from $99,000.00 to
$199,999.00, and the Department will pay 100% of such individual prisoner care
exceeding $199,999.00.
10. Transition. PHS agrees to cooperate with the Department and MCG
(including allowing MCG to immediately begin recruiting and hiring employees for
newly-opened or vacant positions and to extend offers of employment to PHS
employees with the understanding that employment of PHS employees shall not
commence until after the termination of the Agreement) as MCG assumes many of
the duties and responsibilities that PHS had been performing under the
Agreement. PHS further agrees that it will deliver within five business days of
this Agreement a
5
<PAGE>
listing of all PHS staff employed under the Agreement by facility with
corresponding salary and benefit structure, copies of all agreements or
contracts PHS has with any health care provider for services PHS has agreed to
provide under the Agreement, and a listing by facility of all computer equipment
utilized under the Agreement. PHS agrees to use its best efforts to continue to
fill necessary staffing positions.
11. Physical Exams. PHS agrees to provide up to 575 Cardiovascular Risk
Screening examinations to GDC employees who are Rehabilitation Training
Instructor Course ("RTIC") candidates.
12. Reduction of Staff. The parties agree to work together regarding
reductions in necessary staff resulting from GDC's new policy requiring inmates
to make "co-payments" for sick call, provided that the GDC shall have final
approval of any such reduction in staff.
13. Indemnity. PHS agrees to release the Department, and its officers and
employees, from any loss or liability that PHS may suffer arising out of the
execution, defense, or performance of this Settlement Agreement or the
Department's decision not to renew the Agreement or to enter into a relationship
with MCG. PHS agrees to indemnify the Department, and its officers and
employees, for any loss or liability incurred arising out of the execution,
defense, or performance of this Settlement Agreement. The Department, and its
officers and employees, agree that PHS's obligation to indemnify under this
paragraph is limited to the amount of actual monetary damages finally awarded by
a judge or jury to CMS following a trial on the merits and for which all appeals
have been finally resolved or the time to file an appeal has expired and does
not include legal fees, costs, or expenses nor any amount the Department, or any
of its officers and employees, may agree to pay in settlement of any claims. The
6
<PAGE>
Department agrees that PHS will have the right to advise in the defense of any
claim or to intervene as a defendant and that if the Department abandons or
waives any right to appeal without the express written agreement of PHS then
this indemnity shall not be of any force or effect. The Department also agrees
that PHS's obligation to indemnify it under this Agreement is limited to damages
awarded as a proximate cause or result of the Department's decision to enter
into this Settlement Agreement, and does not include damages awarded as a
proximate cause or result of the Department's decisions to award the contract to
PHS, to enter into the Agreement and the extension thereof, or to enter into a
new agreement with MCG without submitting the new contract to competitive
bidding. The Department, and its officers and employees further agree that PHS's
obligation to indemnify under this Settlement Agreement does not include any
amounts awarded based on claims of fraud, collusion, or intentional or negligent
misrepresentation on the part of the Department or its officers and employees.
The indemnity provided for in this paragraph is in addition to and is not
intended to replace any indemnity provided for under the Agreement.
14. No Admission. The parties agree that this "Settlement Agreement" does
not constitute an admission by any party of any liability and acknowledge that
both parties contend they have fully complied with their obligations under the
Agreement.
15. Miscellaneous Provisions. This Settlement Agreement shall be
interpreted and enforced in accordance with the laws of the State of Georgia.
This Settlement Agreement represents the sole and entire agreement between
the parties solely with respect to these disputes and supersedes any and all
prior agreements, negotiations, and discussions between the parties and/or their
respective counsel with respect to the subject
7
<PAGE>
matters covered in this Settlement Agreement. The parties acknowledge, however,
that except as expressly modified herein, the terms of the Agreement shall
continue in full force and effect.
If one or more paragraph(s) of this Settlement Agreement are ruled invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Settlement Agreement, which shall remain in full force and
effect.
This Settlement Agreement may not be modified orally but only by a writing
signed by all parties to this Settlement Agreement.
This Settlement Agreement shall be binding on the Parties, their
successors, and assigns.
PRISON HEALTH SERVICES, INC.
By: __________________________________
Title: _________________________________
THE GEORGIA DEPARTMENT OF CORRECTIONS
By: __________________________________
Title: _________________________________
THE GEORGIA DEPARTMENT OF
ADMINISTRATIVE SERVICES
By: __________________________________
Title: _________________________________
8
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated the 1st day of November, 1996 between Jeffrey J. Bairstow
("Employee") and America Service Group Inc., a Delaware Corporation (the
"Company").
WHEREAS, the Company seeks to employ the Employee in various executive
capacities at the Company;
WHEREAS, the Employee accepts the positions contemplated herein;
NOW, THEREFORE, the parties hereby agree as follows:
1. Employment and Duties. The Company hereby employs the Employee as
executive vice president and chief operating officer of the Company and/or such
other offices and duties as the Company's chief executive officer shall
reasonably determine from time to time, consistent with Employee's
responsibilities. Employee shall perform the duties and services of the offices
and titles for which he is employed from time to time hereunder.
2. Performance. Employee agrees to actively devote all of his time and
effort during normal business hours to the performance of his duties hereunder
and to use his reasonable best efforts and endeavors to promote the interests
and welfare of the Company.
3. Term. The term of Employee's employment hereunder shall commence as of
the date hereof and shall continue until December 31, 1996 (the "Term End").
Upon the Term End, the Agreement shall automatically continue as an employment
at will unless terminated by written notice from either party to the other at
least thirty (30) days prior to termination.
4. Compensation. For all services rendered by Employee, the Company agrees
to pay Employee from and after the date hereof; (i) a salary (the "Base Salary")
at an annual rate of not less than $170,000.00, payable in such installments as
the parties shall mutually agree; plus (ii) such additional compensation as the
Compensation Committee of the Board (the "Committee") shall from time to time
determine.
5. Employee Benefits. During the period of his employment under this
Agreement, Employee shall be entitled to vacation, insurance, and other
employment benefits customarily provided by the Company to its executives,
including increased or changed benefits as are from time to time provided to the
Company's executives generally.
6. Expenses. The Company shall promptly pay or reimburse Employee for all
reasonable expenses incurred by him in connection with the performance of his
duties and responsibilities hereunder, including, but not limited to, payment or
reimbursement of reasonable expenses paid or incurred for travel and
entertainment relating to the business of the Company.
<PAGE>
7. Termination.
(a) Termination for Cause. Employee may be terminated from his
employment hereunder, either before Term End or thereafter, and without advance
notice, by the Company for "cause". For purposes hereof, "cause" shall mean: (i)
violation of the material terms of this Agreement, (ii) intentional commission
of an act, or failure to act, in a manner which constitutes dishonesty or fraud
or which has a direct material adverse effect on the Company or its business;
(iii) Employee's conviction of or a plea of guilty to an felony or crime
involving moral turpitude; (iv) continued incompetence, as determined by the
chief executive officer of the Company, using reasonable standards; (v) drug
and/or alcohol abuse which impairs Employee's performance of his duties or
employment; (vi) breach of loyalty to the Company, whether or not involving
personal profit, as determined by the chief executive officer of the Company
using reasonable standards; or (vii) failure to follow the directions of the
chief executive officer of the Company within 20 days after notice to Employee
of such failure provided that the directions are not inconsistent with
Employee's duties and further provided that Employee is not directed to violate
any law or take any action that he reasonably deems to be immoral or unethical.
(b) Disability, Death. If Employee shall fail to or be unable to
perform the duties required hereunder because of any physical or mental
infirmity, and such failure or inability shall continue for any six (6)
consecutive months while Employee is employed hereunder, the Company shall have
the right to terminate this Agreement. Except as otherwise provided herein, this
Agreement shall terminate upon the death of Employee, and the estate of Employee
shall be entitled to receive all unpaid amounts due Employee hereunder to such
date of death.
(c) Termination Without Cause. The Company shall have the right to
terminate the employment of Employee at any time, without cause, cause being
determined under Section 7(a), upon thirty (30) days advance written notice.
(d) Change in Control. Employee may terminate his employment
hereunder in the event of a change in control of the Company within ninety (90)
days after such change in control. For purposes of this Agreement, a "change in
control of the Company" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act");
provided however, that without limitation, such a change in control shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) other than Employee or any other person
currently the beneficial owner of 10% or more of the outstanding common stock of
the Company, becomes the beneficial owner, directly or indirectly, of securities
of the Company representing 30% or more of the combined voting power of the
Company's then outstanding securities; (ii) during any period of tow consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof (unless the
-2-
<PAGE>
election of each director, who was not a director at the beginning of the period
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period); or (iii) approval by
the stockholders of the Company of (A) a complete liquidation of the Company;
(B) an agreement for the sale or other disposition of all or substantially all
of the assets of the Company to any "person", or (C) a merger, consolidation or
reorganization involving the Company unless (1) the stockholders of the Company
immediately before such merger, consolidation or reorganization, own, directly
or indirectly immediately following such merger, consolidation or
reorganization, at least two-thirds of the combined voting power of the
outstanding voting securities of the corporation resulting from such merger or
consolidation or reorganization or its parent company (the "Surviving
Corporation ") in substantially the same proportion as their ownership of the
voting shares immediately before such merger, consolidation ro reorganization,
or (2) the individuals who were members of the Board immediately prior to the
execution of the agreement for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board of directors of the
Surviving Corporation.
(e) Voluntary Termination. Employee may voluntarily terminate his
employment hereunder at any time, for any reason or for no reason.
(f) Termination Compensation. If Employee's employment hereunder is
terminated pursuant to Sections 7(a) or 7(e) of this Agreement, the Company
shall pay the Employee his full base salary through the Termination Date, plus,
within five (5) business days of the Termination Date, any bonuses, incentive
compensation, or other payments due which pursuant to the terms of any
compensation or benefit plan have been earned or vested at the Termination Date.
If Employee's employment is terminated by the Company under Section 7(c) without
cause, or if there is a change in control of the Company as defined in Section
7(d), all unexercised options granted to Employee under the Company's Incentive
Stock Plan or Amended Incentive Stock Plan shall accelerate and shall
immediately vest. If Employee's employment is terminated pursuant to Section
7(b), 7(c) or 7(d) of this Agreement, the Company shall pay the Employee the
following:
(i) within five (5) business days of the termination, his full
base salary through the Termination Date, plus any bonuses,
incentive compensation, or other payments due which pursuant to the
terms of any compensation or benefit plan have been earned or vested
as of the Termination Date;
(ii) within five (5) business days of the termination, to
compensate for all accrued but unpaid leave such as holidays,
vacation and sick pay under the Company's paid leave plan, an amount
equal to the Employee's then current base salary multiplied by the
product of (A) the total number of leave days accrued, divided by
(B) the total number of work days in the fiscal year in which the
Termination Date occurs;
-3-
<PAGE>
(iii) within five (5) business days of a termination pursuant
to Section 7(b) or 7(d), a lump sum severance payment equal to the
Employee's annual base salary as of the Termination Date, less, in
the case of a termination for disability under Section 7(b), any
payments to be received by the Employee under any disability plan or
policy maintained by the Company;
(iv) in the event of a termination pursuant to Section 7(c),
Employee's annual base salary as of the Termination Date shall be
continued for one year following the Termination Date.
If the Employee's employment is terminated pursuant to Sections
7(b), 7(c) or 7(d) of this Agreement, the Company shall maintain, for eighteen
(18) months following the Termination Date, in full force and effect for the
benefit of the Employee and Employee's dependents and beneficiaries, at the
Company's expense, all medical insurance under plans and programs in which the
Employee and/or the Employee's dependents and beneficiaries participated
immediately prior to the Termination Date, provided that continued participation
is possible under the general terms and provisions of such plans and programs.
If continued participation in any such plan or program is barred, the Company
shall arrange at its own expense to provide the Employee with benefits
substantially similar to those which he was entitled to receive under such plans
and programs.
8. Covenant Not to Compete, Nonemployment, Noninducement.
(a) Employee acknowledges that in the course of his employment he
will become familiar with the Company and its affiliates' confidential
information concerning the Company and its affiliates and that his services are
of special, unique and extraordinary value to the Company and its affiliates.
Therefore, Employee agrees that, during his employment with the Company, and for
one year after Employee ceases to perform duties hereunder, neither Employee nor
any company with which Employee is affiliated as an employee, consultant or
independent contractor, will directly or indirectly (A) engage in any business
similar to the Business of the Company, as described below, anywhere in the
United States of America, or have interest directly or indirectly in any
Business; provided, however, that nothing herein shall prohibit Employee from
(i) owning in the aggregate not more than 5% of the outstanding stock of any
class of stock of a corporation so long as Employee has no active participation
in the business of such corporation; (ii) affiliating with any company which may
participate in the Business, so long as that participation at the time of
affiliation aggregates less than 10% of such company's revenue; or (iii)
directly or through an affiliate, acquiring , merging or otherwise gaining
control, or purchasing an interest in an organization as long as the Business
represents less than 10% of the acquiree's revenue at the tie of the
transaction, (B) employ or retain as an independent contractor any employee of
the Company, or (C) recruit, solicit or otherwise induce any employee of the
Company to discontinue such employment relationship. For purposes hereof, the
"Business" shall consist of (A) delivery of contract health care to correctional
facilities, and
-4-
<PAGE>
(B) any other business in which the Company is significantly engaged as of the
date that Employee ceases to perform duties hereunder.
(b) If, at the time of enforcement of this Section 8 a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope and area.
(c) In the event of the breach by Employee of any of the provisions
of this Section 8, the Company, in addition and supplementary to other rights
and remedies existing in its favor, may apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violations of the provisions hereof.
9. Notices. All notices hereunder, to be effective, shall be in writing
and shall be deemed delivered when delivered by and or when sent by first-class,
certified mail, postage and fees prepaid, to the following addresses or as
otherwise indicated in writing by the parties:
(i) If to the Company:
America Service Group, Inc.
105 Westpark Drive
Suite 300
Brentwood, Tennessee 37027
Attention: Chief Executive Officer
(ii) If to the Employee:
Jeffrey J. Bairstow
1206 Natchez Road
Franklin, Tennessee 37069
10. Assignment. This Agreement is based upon the personal services of
Employee and the rights and obligations of Employee hereunder shall not be
assignable except as herein expressly provided. This Agreement shall inure to
the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, and distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to him hereunder if he would have continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Employee's devisee, legatee or other designee and
if there is no such devisee, legatee or designee, to the Employee's estate.
-5-
<PAGE>
11. Entire Agreement. This Agreement supersedes all prior understandings
and agreements with respect to the provisions hereof and contains the entire
agreement of the parties and may be amended only in writing, signed by the
parties hereto.
12. Severability. The provisions of this Agreement are severable, and the
invalidity of any provision shall not affect the validity of any other
provision. In the event that any arbitrator or court of competent jurisdiction
shall determine that any provision of this Agreement or the application thereof
is unenforceable because of the duration or scope thereof, the parties hereto
agree that said arbitrator or court in making such determination shall have the
power to reduce the duration and scope of each provision to the extent necessary
to make it enforceable, and that the Agreement in is reduced form shall be valid
and enforceable to the full extent permitted by law.
13. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company (except for any
severance or termination policies, plans, programs or practices) and for which
the Employee may qualify, nor shall anything herein limit or reduce such rights
as the Employee may have under any other Agreement with the Company. Amounts
which are vested benefits or which the Employee is otherwise entitled to receive
under any plan or program of the Company shall be payable in accordance with
such plan or program, except as explicitly modified by this Agreement.
14. Governing Law. This Agreement shall be construed under the governed by
the internal laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as a binding contract as of the day and year first above written.
AMERICA SERVICE GROUP, INC.
By: ____________________________
Scott L. Mercy
Chief Executive Officer
EMPLOYEE:
By: ____________________________
Jeffrey J. Bairstow
-6-
<PAGE>
NONQUALIFIED STOCK OPTION
THIS NONQUALIFIED STOCK OPTION, granted this 18th day of December, 1996 by
AMERICA SERVICE GROUP INC., a Delaware corporation (the "Company"), to Jeffrey
J. Bairstow (the "Optionee").
W I T N E S S E T H:
WHEREAS, as an inducement to the Optionee to enter into an Employment
Agreement, the Company agreed to grant this option to the Optionee; and
WHEREAS, the Board of Directors of the Company is of the opinion that the
interests of the Company will be advanced by encouraging and enabling those
individuals upon whose judgment, initiative and efforts the Company is largely
dependent for the successful conduct of the business of the Company, to acquire
or increase their proprietary interest in the Company, thus providing them with
a more direct stake in its welfare and assuring a close identification of their
interests with those of the Company; and
WHEREAS, the Board believes that the acquisition of such an interest in
the Company will stimulate such individuals and strengthen their desire to
remain with the Company.
NOW, THEREFORE, in consideration of the premises and of the services to be
performed by the Optionee under paragraph 2 hereunder, the Company hereby grants
this nonqualified stock option to the Optionee on the terms hereinafter
expressed.
1. Option Grant. The Company hereby grants to the Optionee an option to
purchase a total of 75,000 shares of Common Stock of the Company at an option
exercise price of $9.3125 per share, being not less than 100% of the Fair Market
Value of the Common Stock on the date of grant hereof. This option is not
intended to qualify as an incentive stop option within the meaning of Section
422 of the Internal Revenue Code of 1986.
2. Time of Exercise. This option may be exercised (in the manner provided
in paragraph 3 hereof) in whole or in part, and from time to time after the date
hereof, subject to the following limitations:
a. This option may be exercised to a maximum extent of 33 1/3% of
the total shares covered by the option after one year from the
date hereof, 66 2/3% of the total shares after two years from
the date hereof, and 100% of the total shares after three
years from the date hereof.
b. This option may not be exercised:
<PAGE>
i. more than 10 days following the termination of the
Optionee's employment with the Company under Section
7(a) or 7(e) of his employment agreement; or
ii. more than one year after the termination of the
Optionee's employment with the Company for any other
reason (and then only to the extent the Optionee could
have exercised this option on the date of such
termination); or
iii. more than 10 years from the date hereof;
whichever shall first occur.
c. This option may not be exercised to the extent such exercise
would result in the nondeductibility of any portion of the
Optionee's compensation under Section 162 (m) of the Internal
Revenue Code of 1986, except for exercise in the event of a
change in control (as defined in Section 7(d) of Optionee's
Employment Agreement).
d. This option shall be accelerated and become fully exercisable
in the event of a change in control (as defined in Section
7(d) of Optionee's Employment Agreement) or following
termination of the Optionee's employment with the Company for
any reason other than pursuant to Section 7(a) or 7(e) of his
Employment Agreement.
3. Method of Exercise. This option may be exercised only by notice in
writing delivered to the Treasurer of the Company and accompanied by:
a. The full purchase price of the shares purchased payable by a
certified or cashier's check payable to the order of the
Company and/or certificates of Common Stock of the Company
equal in value (based on their Fair Market Value on the date
of surrender) to such purchase price or the portion thereof so
paid; provided, however, that payment of the exercise price by
delivery of Common Stock of the Company then owned by the
Optionee may be made only if such payment does not result in a
charge to earnings for financial accounting purposes as
determined by the Company; and
b. Such other documents or representations as the Company may
reasonably request in order to comply with securities, tax or
other laws then applicable to the exercise of the option.
In the discretion of the Company, payment may also be made by delivering a
properly executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to
2
<PAGE>
promptly deliver to the Company the amount of sale or loan proceeds to pay the
exercise price. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
4. Non-Transferability, Death. This option is not transferable by the
Optionee otherwise then by will or the laws of descent and distribution and is
exercisable only by him. If the Optionee dies while an employee of the Company,
this option may be exercised during the period described in paragraph 2(b)(ii)
(but not later than 10 years from the date hereof) by his estate or the person
to whom the option passes by will or the laws of descent and distribution, but
only to the extent that the Optionee could have exercised this option on the
date of his death.
5. Registration. The company shall not be required to issue or deliver any
certificate for its Common Stock purchased upon the exercise of this option
prior to the admission of such shares to listing on any stock exchange on which
shares may at that time be listed. In the event of the exercise of this option
with respect to any shares subject hereto the Company shall make prompt
application for such listing. If at any time during the option period the
Company shall be advised by its counsel that shares deliverable upon exercise of
the option are required to be registered under the Federal Securities Act of
1933, as amended, or that delivery of the shares must be accompanied or preceded
by a prospectus meeting the requirements of the Act, the Company will use its
best efforts to effect such registration or provide such prospectus not later
than a reasonable time following each exercise of this option, but delivery of
shares by the Company may be deferred until registration is effected or a
prospectus available. This Optionee shall have no interest in shares covered by
this option until certificates for the shares are issued.
6. Adjustments. In the event that there is any increase in the number of
issued shares of the Common Stock of the Company without new consideration to
the Company therefore, by reason of stock dividends, stock split-ups or like
recapitalizations, the number of shares which may thereafter be purchased under
this option shall be increased in the same proportion as said increase in issued
shares of Common stock. In such event, the per share purchased price specified
in paragraph 1 above shall be reduced so that the total consideration payable to
the Company for the increased number of issued shares of Common Stock remaining
subject to this option shall not be changed by reason of such increase in number
of shares.
In case of any sale of assets, merger consolidation, combination or other
corporate reorganization or restructuring of the Company with or into another
corporation which results in the outstanding Common Stock being converted into
or exchanged for different securities, cash or other property, or any
combination thereof (an "Acquisition"), the Optionee shall have the right
thereafter and during the term of this option, to receive upon exercise thereof
the Acquisition Consideration (as defined below) receivable upon the Acquisition
by a holder of the number of shares of Common Stock which might have been
obtained upon exercise of the option or portion thereof, as the case may be
immediately prior to the Acquisition.
3
<PAGE>
The term "Acquisition Consideration" shall mean the kind and amount of
securities, cash or other property or any combination thereof receivable in
respect of Common Stock, upon consummation of an Acquisition.
If during the term of this option the Common Stock of the company shall be
combined or be changed into the same or another kind of stock of the Company or
into securities of another corporation, whether through recapitalization,
reorganization, sale, merger, consolidation, etc., the Company shall cause
adequate provision to be made whereby the Optionee shall thereafter be entitled
to receive, upon the due exercise of any then unexercised portion of this
option, the securities which he would have been entitled to receive for Common
Stock acquired through exercise of such portion of the option (regardless of
whether or to what extent the option would then have been exercisable)
immediately prior to the effective date of such recapitalization,
reorganization, sale, merger, consolidation, etc.
7. Withholdings. The Company may require the Optionee or other person
exercising this option to remit to it an amount sufficient to satisfy any
federal, state and local tax withholding requirements prior to the delivery of
any certificates for Common Stock issuable on exercise hereof. The Board may, in
its discretion and subject to such rules as it may adopt, permit the Optionee or
other person exercising this option to pay all or a portion of the federal,
state and local withholding taxes arising in connection with the exercise of
this option by electing to have the Company withhold shares of Common Sock
having a fair market value equal to the amount to be withheld.
8. Tenure. The Optionee's right, if any, to continue to serve the Company
as an officer or employee, or otherwise, shall not be enlarged or otherwise
affected by the award of this option.
9. Not Subject to Plan. This option is granted independently of an not
under or pursuant to the Company's Amended Incentive Stock Plan.
IN WITNESS WHEREOF, the Company has caused this nonqualified stock option
to be executed on the date first above written.
AMERICA SERVICE GROUP, INC.
By:______________________________
4
<PAGE>
NONQUALIFIED STOCK OPTION
THIS NONQUALIFIED STOCK OPTION, granted this 12th day of July, 1996, by
AMERICA SERVICE GROUP INC., a Delaware corporation (the "Company"), to Michael
Catalano (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee is an employee of the Company and the Company and the
employee are parties to an Employment Agreement dated July 12, 1996; and
WHEREAS, the Compensation Committee of the Board of Directors of the Company
is of the opinion that the interests of the Company will be advanced by
encouraging and enabling those individuals upon whose judgement, initiative and
efforts of the Company is largely dependent for the successful conduct of the
business of the Company, to acquire or increase their proprietary interest in
the Company, thus providing them with a more direct stake in its welfare and
assuring a closer identification of their interests with those of the Company;
and
WHEREAS, the Committee believes that the acquisition of such an interest in
the Company will stimulate such individuals and strengthen their desire to
remain with the Company;
NOW, THEREFORE, in consideration of the premises and of the service to be
performed by the Optionee under paragraph 2 hereunder, the Company hereby grants
this nonqualified stock option to the Optionee on the terms hereinafter
expressed.
1. Option Grant. The Company hereby grants to the Optionee an option to
purchase a total of 60,000 shares of Common Stock of the Company at an option
exercise price of $13.125 per share, being not less than 100% of the Fair Market
Value of the Common Stock on the date of grant hereof. This option is not
intended to qualify as an incentive stock option within the meaning of Section
422 of the Internal Revenue Code of 1986.
2. Time of Exercise. This option may be exercised (in the manner provided in
paragraph 3 hereof) in whole or in part, and from time to time after the date
hereof, subject to the following limitations:
(a) This option may be exercised to a maximum extent of one-third of the
total shares covered by the option after one year from the date hereof,
two-thirds of the total shares after two years from the date hereof, and all
of the total shares after three years from the date hereof.
-1-
<PAGE>
(b) This option may not be exercised:
(i) More than one year after the termination of the Optionee's
employment with the Company for any reason (and then only to the extent
the Optionee could have exercised this option on the date of such
termination); or
(ii) more than 10 years from the date hereof, whichever shall
first occur.
(c) This option shall be accelerated and become fully exercisable in the
event of a change in control (as defined in Section 7(d) of Optionee's
Employment Agreement) or following the termination of the Optionee's
employment with the Company without cause pursuant to Section 7(c) of his
Employment Agreement.
3. Method of Exercise. This option may be exercised only by notice in
writing delivered to the Treasurer of the Company and accompanied by:
(a) The full purchase price of the shares purchased payable by a
certified or cashier's check payable to the order of the Company and/or
certificates of Common Stock of the Company equal in value (based on
their Fair Market Value on the date of surrender) to such purchase price
or the portion thereof so paid; provided, however, that payment of the
exercise price by delivery of Common Stock of the Company then owned by
the Optionee may be made only if such payment does not result in a
charge to earnings for financial accounting purposes as determined by
the Company; and
(b) Such other documents or representations as the Company may
reasonably (request in order to comply with securities, tax or other laws
then applicable to the exercise of the option.
In the discretion of the Company, payment may also be made by delivering a
properly executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to promptly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price. To facilitate the
foregoing, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
4. Non-Transferability; Death. This option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and is
exercisable only by him. If the Optionee dies while an employee of the Company,
this option may be exercised during the period described in paragraph 2(b) (ii)
(but not later than 10 years from the date hereof) by his estate or the person
to whom the option passes by will or the laws of descent and distribution, but
only to the extent that the Optionee could have exercised this option on the
date of his death.
-2-
<PAGE>
5. Registration. The Company shall not be required to issue or deliver
any certificate for its Common Stock purchased upon the exercise of this
option prior to the admission of such shares to listing on any stock exchange
on which shares may at that time be listed. In the event of the exercise of
this option with respect to any shares subject hereto, the Company shall make
prompt application for such listing. If at any time during the option period
the Company shall be advised by its counsel that shares deliverable upon
exercise of the option are required to be or that delivery of the shares must
be accompanied or preceded by a prospectus meeting the requirements of the
Act, the Company will use its best efforts to effect such registration or
provide such prospectus not later than a reasonable time following each
exercise of this option, but delivery of shares by the Company may be
deferred until registration is effected or a prospectus available. The
Optionee shall have no interest in shares covered by this option until
certificates for the shares are issued.
6. Adjustments.
In the event that there is any increase in the number of issued shares of
Common Stock of the Company without new consideration to the Company therefore,
by reason of stock dividends, stock split-ups or like recapitalization, the
number of shares which may thereafter be purchased under this option shall be
increased in the same proportion as said increase in issued shares of Common
Stock. In such event, the per share purchase price specified in paragraph 1
above shall be reduced so that the total consideration payable to the Company
for the increased number of issued shares of Common Stock remaining subject to
this option shall not be changed by reason of such increase in number of shares.
In the case of any sale of assets, merger consolidation, combination or
other corporate reorganization or restructuring of the Company with or into
another corporation which results in the outstanding Common Stock being
converted into or exchanged for different securities, cash or other property, or
any combination thereof (an "Acquisition"), the Optionee shall have the right
thereafter and during the term of this option, to receive upon exercise thereof
the Acquisition Consideration (as defined below) receivable upon the Acquisition
by a holder of the number of shares of Common Stock which might have been
obtained upon exercise of the option or portion thereof, as the case may be
immediately prior to the Acquisition.
The term "Acquisition Consideration" shall mean the kind and amount of
securities, cash or other property or any combination thereof receivable in
respect of Common Stock, upon consummation of an Acquisition.
If during the term of this option the Common Stock of the Company shall be
combined or be changed into the same or another kind of stock of the Company or
into securities of another corporation, whether through recapitalization,
reorganization, sale, merger, consolidation, etc., the Company shall cause
adequate provision to be made whereby the Optionee shall thereafter be entitled
-3-
<PAGE>
to receive, upon the due exercise of any then unexercised portion of this
option, the securities which he would have been entitled to receive for
Common Stock acquired through exercise of such portion of the option
(regardless of whether or to what extent the option would then have been
exercisable) immediately prior to the effective date of such
recapitalization, reorganization, sale, merger, consolidation, etc.
7. Subject to Plan. This option is subject to all of the terms and
conditions set forth in the Company's Amended Incentive Stock Plan (the "Plan").
Any capitalized terms not defined herein shall be subject to the definitions set
forth in the Plan.
IN WITNESS WHEREOF, the Company has caused this nonqualified stock option to
be executed on the date first above written.
AMERICA SERVICE GROUP INC.
By:------------------------
4
<PAGE>
AMERICA SERVICE GROUP INC.
NON-QUALIFIED STOCK OPTION
THIS NON-QUALIFIED STOCK OPTION, is granted this 18th day of December,
1996, by America Service Group Inc., a Delaware corporation (the "Company"), to
Bruce A. Teal (the "Optionee").
WITNESSETH:
WHEREAS, the Board of Directors of the Company is of the opinion that the
interests of the Company and its subsidiaries will be advanced by encouraging
and enabling those employees of the Company and its subsidiaries, upon whose
judgment, initiative and efforts the Company is largely dependent for successful
conduct of the business of the Company and its subsidiaries, to acquire or
increase their proprietary interest in the Company, thus providing them with a
more direct stake in its welfare and therefore assuring a closer identification
of their interests with those of the Company; and
WHEREAS, the Board believes that the acquisition of such an interest in
the Company will stimulate such employees and strengthen their desire to remain
with the Company or one of its subsidiaries;
NOW, THEREFORE, in consideration of the premises and of the services to be
performed by the Optionee under paragraph 2 hereunder, the Company hereby grants
this non-qualified stock option to the Optionee on the terms hereinafter
expressed.
1. Option Grant. The Company hereby grants to the Optionee an option to
purchase a total of seventeen thousand (17,000) shares of Common
Stock of the Company at an option exercise price of $9.3125 per
share, being not less than 100% of the Fair Market Value of a share
of Common Stock on the date of grant hereof. This option is not
intended to qualify as an incentive stock option within the meaning
of Section 422 of the Internal Revenue Code of 1986.
2. Time of Exercise. This option may be exercised (in the manner
provided in paragraph 3 hereof) in whole or in part, and from time
to time after the date hereof, subject to the following limitations:
(a) The options may not be exercised under the terms herein until
the first date set forth herein. It may then be exercised to a
maximum cumulative extent of 33% of the total shares covered
by this option on and after December 18,
ASG Non-Qualified Stock Option
Date of Document: 12/18/96
Document #ATL-371091
Page 1
<PAGE>
1998; and 33% of the total shares on December 18, 1998; and
34% of the total shares on December 18, 1999.
(b) This option may not be exercised after the earliest to occur
of any of the following:
(i) more than ninety (90) days after the termination of the
Optionee's employment with the Company or one of its
subsidiaries for any reason other than retirement,
permanent disability or death (and then only to the
extent the Optionee could have exercised this option on
the date of termination); or
(ii) more than one hundred eighty (180) days after the
termination of the Optionee's employment with the
Company or one of its subsidiaries as a result of
retirement or permanent disability (and then only to the
extent the optionee could have exercised this option on
the date of termination); or
(iii) more than one year after Optionee's death if death
occurs while the Optionee is employed by the Company or
one of its subsidiaries (and then only to the extent the
Optionee could have exercised this option on the date of
his death); or
(iv) in any event more than 10 days from the date of grant.
3. Method of Exercise. This option may be exercised only by notice in
writing delivered to the Treasurer of the Company and accompanied
by:
(a) The full purchase price of the shares purchased payable by a
certified or cashier's check payable to the order of the
Company and/or certificates of Common Stock of the Company
(which have been held by the Optionee for at least six months)
equal in value (based on their Fair Market Value on the date
of surrender) to such purchase price or the portion thereof so
paid; and
(b) Such other documents or representations (including without
limitation representations as to the intention of the
Optionee, or the purchase under paragraph 4 below, to acquire
the shares for investment) as the Company may reasonably
request in order to comply with securities, tax or other laws
then applicable to the exercise of the option.
ASG Non-Qualified Stock Option
Date of Document: 12/18/96
Document #ATL-371091
Page 2
<PAGE>
In the discretion of the Company, payment may also be made by
delivering a properly executed exercise notice to the Company
together with a copy of irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. To facilitate the foregoing, the Company
may enter into agreements for coordinated procedures with one or
more brokerage firms. In addition the Company may, in its discretion
and subject to such rules as it may adopt as are necessary to
prevent the withholding from being subject to Section 16(b) of the
Securities Exchange Act of 1934, permit the Optionee to satisfy any
tax withholding obligation associated with the exercise of this
option, in whole or in part, by electing to have the Company
withhold from the shares otherwise deliverable as a result of such
option exercise shares of Common Stock having a value (based on
their Fair Market Value on the date of delivery) equal to the amount
required to be withheld.
4. Non-Transferability Death. This option is not transferable by the
Optionee otherwise than by will or the laws of descent and
distribution and is exercisable during the Optionee's lifetime only
by him. If the Optionee dies while in the employ of the Company or
one of its subsidiaries, this option may be exercised during the
period described in paragraph 2(b)(iii) (but not later than 10 years
from the date hereof under 2(b)(iv)) by his estate or the person to
whom the option passes by will or the laws of descent and
distribution, but only to the extent that the Optionee could have
exercised this option on the date of his death.
5. Registration. The Company shall not be required to issue or deliver
any certificates for its Common Stock purchased upon the exercise of
this option prior to the admission of such shares to listing on any
stock exchange on which shares may at that time be listed. In the
event of the exercise of this option with respect to any shares
subject hereto, the Company shall make prompt application for such
listing. If at any time during the option period the Company shall
be advised by its counsel that shares deliverable upon exercise of
the option are required to be registered under the Federal
Securities Act of 1933, as amended, or that delivery of the shares
must be accompanied or preceded by a prospectus meeting the
requirements of the Act, the Company will use its best efforts to
effect such registration or provide such prospectus not later than a
reasonable time following each exercise of this option, but delivery
of shares by the Company may be deferred until registration is
effected or a prospectus available. The Optionee shall have no
interest in shares covered by this option until certificates for the
shares are issued.
6. Adjustments. If the Company shall at any time change the number of
shares of its Common Stock without new consideration to the Company
(such as by stock dividends or stock splits), the total number of
shares then remaining subject to
ASG Non-Qualified Stock Option
Date of Document: 12/18/96
Document #ATL-371091
Page 3
<PAGE>
purchase hereunder shall be changed in proportion to such change in
issue shares and the option price per share shall be adjusted so
that the total consideration payable to the Company upon the
purchase of all shares not theretofore purchased shall not be
changed. In the case of any merger, consolidation or combination of
the Company with or into another corporation, other than a merger,
consolidation or combination in which the Company is the continuing
corporation and which does not result in the outstanding Common
Stock being converted into or exchanged for different securities,
cash or other property, or any combination thereof (an
"Acquisition"), the Optionee shall have the right (subject to any
limitation applicable to this option) thereafter and during the term
of this option, to receive upon exercise hereof the Acquisition
Consideration (as defined below) receivable upon such Acquisition by
a holder of the number of shares of Common Stock which might have
been obtained upon exercise of this option or portion hereof, as the
case may be, immediately prior to such Acquisition. The term
"Acquisition Consideration" shall mean the kind and amount of shares
of the surviving or new corporation, cash, securities, evidence of
indebtedness, other property or any combination thereof receivable
in respect of one share of Common Stock of the Company upon
consummation of an Acquisition.
7. Subject to Plan. This option is granted subject to all of the terms
and conditions set forth in the Company's Incentive Stock Plan (the
"Plan") adopted in 1991 and amended May 23, 1996. Any capitalized
terms not defined herein shall be subject to the definitions set
forth in the Plan.
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
AMERICA SERVICE GROUP INC.
By: ___________________________________
Scott L. Mercy Dated:
Receipt is hereby acknowledged: Attest:
(SEAL)
________________________________ _______________________________________
Optionee Dated: Michael Catalano Dated:
ASG Non-Qualified Stock Option
Date of Document: 12/18/96
Document #ATL-371091
Page 4
<PAGE>
LEASE
THIS LEASE, made and dated the 6th day of September, 1996 by and between
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, (hereinafter called "Landlord") and
AMERICA SERVICE GROUP INC., (hereinafter called "Tenant").
W I T N E S S E T H:
1. PREMISES.
Landlord, for and in consideration of rents, covenants and agreements
hereinafter mentioned and hereby agreed to be paid, kept and performed by
Tenant, hereby leases to Tenant, and Tenant hereby hires from Landlord,
12,439 rentable square feet of space calculated using BOMA standards located
at 105 Westpark Drive, known as Harpeth on the Green III in the Maryland
Farms Office Park in the City of Brentwood, County of Williamson, State of
Tennessee, more particularly described and shown on the plan attached hereto
as Exhibit "A" and made a part hereof, hereinafter referred to as the "Leased
Premises." The Leased Premises are leased together with the appurtenances,
including the right to use, in common with others, the lobbies, elevators and
other common areas of the building of which the Leased Premises are a part.
The usable square footage is calculated as 11,056. The common area factor is
twelve point five percent (12.5%).
2. USE OF PREMISES.
The Leased Premises shall be used and occupied by Tenant, subject to the
conditions herein contained, for general office purposes only. In no event
shall the Leased Premises be used or occupied by Tenant in any manner
contrary to law, zoning regulations or recorded restrictions.
3. TERM.
The term of this Lease shall be for seven (7) years, commencing on the
first day of November, 1996, and ending unless sooner terminated as herein
provided, on the last day of October, 2003 both dates inclusive, subject to
the conditions contained in paragraph 4 hereof.
4. POSSESSION.
(a) If the Leased Premises are not available or ready for occupancy on or
before the commencement date hereinabove set forth and if such unavailability
or unreadiness is not occasioned or caused by Tenant (such as Tenant's
failure promptly to approve plans, make material or color selections, make
improvements to the Leased Premises which are to be made by Tenant, or make
other decisions or take other actions necessary to the preparation of the
Leased Premises for occupancy), then the term of this Lease shall commence on
a date fixed by Landlord in a notice to Tenant no sooner than ten (10) days
next following the giving of such notice, which notice shall state that the
Leased Premises are or, on or before the commencement date fixed in the
notice, will be available and ready for occupancy. If the day upon which the
term of this Lease commences shall fall on a day other than the first day of
a calendar month, then the term of this Lease shall run for the unexpired
portion of such calendar month plus seven (7) years beginning with the first
day of the calendar month next ensuing; and Tenant shall pay rent as herein
established on a pro rata basis for the portion of month from the date of
commencement of the term to the first of the month immediately succeeding.
(b) In the event that, pursuant to the provisions of this paragraph, the
dates of commencement and termination of this Lease shall be other than the
dates set forth in paragraph 3 hereof, promptly after the dates of
commencement and termination are determined, Landlord and Tenant agree to
execute a memorandum certifying said dates.
1
<PAGE>
(c) If Landlord is unable to give possession of the Leased Premises on
the commencement date by reason of the fact that the Leased Premises are
located in a building being constructed which has not been sufficiently
completed to make the Leased Premises ready for occupancy or by reason of the
fact that a certificate of occupancy has not been procured or by reason of
the holding over or retention of possession of any tenant or occupant, or if
repairs, improvements or decorations of the Leased Premises or of the
building of which said Leased Premises form a part are not completed, or for
any other reason, Landlord shall not be subject to any liability for the
failure to give possession on said date.
(d) Landlord's approval of any plans, specifications or work drawings
shall create no responsibility or liability on the part of the Landlord for
their completeness, design sufficiency or compliance with all laws, rules and
regulations of governmental agencies or authorities. Landlord shall use its
best efforts to ensure the architect (IDS) provides Tenant with certification
that such plans are in compliance with all laws, rules and regulations of
governmental agencies or authorities.
(e) If by mutual consent of the parties Tenant enters into possession
of the Leased Premises or occupies premises other than the Leased Premises
prior to the commencement date, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions
and agreements of this lease except as to the covenant to pay rent for such
prior period.
(f) Notwithstanding anything contained in this Lease to the contrary
and provided 1) final plans, drawings, and construction documents with
respect to the construction of solely the 10,005 rsf on the third floor (Suite
300) have been submitted to the Landlord on or before September 6, 1996 2) any
delays in completing such construction of Suite 300 are not caused by strike,
shortages of labor or materials, or other matters beyond the reasonable
control of the Landlord, and 3) a construction permit for construction of
Suite 300 has been issued by the City of Brentwood no later than September 20,
1996, if such construction is not complete by December 1, 1996, then Tenant's
rent on Suite 300 will be abated after the actual delivery date for the number
of days after December 1, 1996 that pass before actual delivery occurs, and the
Lease Term will remain seven (7) years outside of any rental abatement period.
(g) If the construction of Suite 300 is not completed by February 1,
1997 and the Tenant has cooperated with the Landlord to promote the efficient
and expeditious completion of such construction, then Tenant upon notice to
the Landlord shall have the right to terminate this Lease without liability
to Landlord.
5. RENT.
Tenant shall, without deduction, abatement or setoff of any nature
whatsoever, pay to Landlord as fixed minimum rent for the Leased Premises Two
Hundred Eleven Thousand Four Hundred Sixty-Three Dollars ($211,463.00) per
annum, payable in equal monthly installments of Seventeen Thousand Six
Hundred Twenty-One and 92/100 dollars ($17,621.92) each, in advance and
without demand on the first day of each and every month during the term of
this Lease, at the office of the Landlord or at such other place or to such
other person as Landlord may from time to time designate in writing, except
that Tenant shall pay the first monthly installment on the execution of this
Lease. If the term of this Lease shall commence on a date other than the
first day of a calendar month, such first installment shall be prorated for
the period between the date of commencement of the term of this Lease and the
first day of the following month. This minimum rent is calculated at $17.00
per square foot per annum based upon 12,439 square feet of rentable area.
A late charge of five percent (5%) shall be added to the amount due
unless the payment of fixed minimum rent is received by Landlord on or before
the fifth day of the month covered by said payment of fixed minimum rent. Any
amount due from Tenant to Landlord hereunder which is not paid when due shall
bear interest at the rate of eighteen (18%) percent per annum or the highest
rate permitted by applicable law (minus any late charge) from the due date
until paid, unless otherwise specifically provided herein, but the payment of
such interest shall not excuse or cure any default by Tenant under this Lease.
2
<PAGE>
6. RENT ADJUSTMENTS.
The minimum annual rental rate fixed in paragraph 5 hereof may be
increased for any calendar year following the year during which Tenant takes
possession of the Leased Premises as in this paragraph provided to reflect
the increase in Landlord's expenses incurred in operating the building of
which the Leased Premises form a part, and Tenant shall pay such rent, as
increased, in equal monthly installments.
The following definitions shall apply for the purposes of this paragraph:
(a) The Base Year shall be the calendar year 1997.
(b) For purposes of this section, "Operating Expenses" shall mean any or
all of the following incurred by Landlord with respect to the building of
which the Leased Premises form a part, including but not limited to:
salaries, wages, medical, surgical and general welfare benefits (including
group life insurance) and pension payments of employees of Landlord engaged
in the operation and maintenance of the building, payroll taxes, workmen's
compensation insurance, gas, electricity, steam, real estate taxes or special
assessments, utility taxes water (including sewer rents), all costs of
capital improvements made to the building after the commencement date required
under any governmental law or regulation that was not applicable to the
building at the time it was constructed, capital improvements which reduce
Operating Expenses as reasonably amortized by the Landlord with interest at
the rate of 10% per annum on the unamortized amount, casualty and liability
insurance, repairs and maintenance, pro-rata expenses for general park
maintenance, building and cleaning supplies, uniforms and dry cleaning,
window cleaning, commercially reasonable management fees, service contracts
with independent third party contractors, telephone, telegraph, stationary,
advertising, and all other expenses paid in connection with the operation of
said premises properly chargeable against income.
During the first quarter of each calendar year beyond the base year,
Landlord shall notify Tenant by written statement of any projected increases
in Operating Expenses over the Base Year. The statement shall show Tenant's
increased annual rental rate and the resulting monthly payment effective
retroactively to January 1 of the year the statement is provided. The manner
in which the increase, if any, was computed will also be furnished. Within
the same first quarter, Landlord shall notify Tenant by written statement
certified to be correct by Landlord or Landlord's agent of the actual
Operating Expenses. The increase shall be equal to the product of (a) the
projected increased Operating Expenses and (b) Fifteen point seventy-five
percent (15.75%), which percent constitutes the ratio which the net leased
area of the Leased Premises bears to the total net leasable area of the
building of which the Leased Premises form a part. To the extent that the
actual expense differs from the projected expenses as paid during the year, a
lump sum payment shall be made by Tenant within thirty (30) days or a lump
sum credit shall be made by Landlord to Tenant, as required.
Provided, however, for the purpose of determining the increase (if any)
in real estate taxes, any increase attributable to capital improvements made
by or for a particular tenant shall be assessed solely to that tenant.
Any increase in real estate taxes attributed to capital improvements
made to the building after the Lease commencement date that reduce other
Operating Expenses payable by Tenant during the Lease Term, as defined above,
or are required under any governmental law or regulation that was not
applicable to the building at the time it was constructed shall be included
in computing the rent adjustment under this paragraph.
7. SECURITY DEPOSIT.
Tenant shall deliver to Landlord on the date hereof additional security
(a credit enhancement) in the form of an Irrevocable Letter Of Credit in the
amount of Seventy-Five Thousand Dollars ($75,000.00) for Landlord's
consideration in entering into this Lease. In the event of Tenant's default
under this Lease, the additional security shall be applied to or drawn
3
<PAGE>
upon to satisfy Tenant's obligations under this Lease. Said letter of credit
must be acceptable to Principal Mutual Life Insurance Company ("PMLIC") as to
form, content, and issuing bank, and must not require any documentation in
order to be drawn/valued upon and must contain an explicit waiver by the
issuing bank of any statutory, UCP or other rights to delay or defer payment
upon demand including, but not limited to, a waiver of such rights as are set
forth in Article 5, Section 5-112(a)(a) and (b) of the Uniform Commercial
Code and in Article 15-C of the Uniform Customs and Practice for Documentary
Credits, 1983 Revision, ICC Publication Number 400, including any amendments
and revisions thereto. Said letter of credit shall have a seven (7) year term
with an expiration date no sooner than October 31, 2000. Said letter of
credit must also provide that the issuing bank, upon any presentation of a
draft (at sight) for valuation thereon, shall honor such draft by promptly
delivering the amount of the draft, by official bank or cashier's check to the
PMLIC or, at PMLIC's sole option, by promptly wiring Federal Funds in the
amount of the draft into such account(s) as PMLIC may specifically direct, in
writing. The letter of credit must name PMLIC, its successors and assigns, as
the beneficiary of said credit. The required form of the letter of credit is
attached hereto as Exhibit "C". All costs for issuance (or reissuance as
required by Landlord in the event of Landlord's sale of the Property) of said
letter of credit shall be paid by Tenant. In the event of Landlord's sale of
the Property, Tenant shall cooperate with Landlord in having the letter
of credit reissued to the new property owner. At such time after October 31,
2000, that Tenant achieves a net worth of $8,500,000.00 and has had during
the two consecutive preceding years a net income of $500,000.00 or greater,
Landlord must terminate such Irrevocable Letter of Credit.
When and if Tenant meets requirements set by Landlord in order to remove
such Irrevocable Letter of Credit and such Letter is removed, Tenant shall
immediately deposit with Landlord the sum of Eight Thousand Eight Hundred Ten
and 96/100 Dollars ($8,810.96) as a security deposit. Such security deposit
(which shall not bear interest to Tenant unless required to do so by any
provision of law) shall be considered as security for the payment and
performance by Tenant of all of Tenant's obligations, covenants, conditions
and agreements under the Lease. Upon the expiration of the term hereof (or
any renewal or extension thereof), Landlord shall (provided that Tenant is
not in default under the terms hereof) return and pay back such security
deposit to Tenant, less such portion thereof as Landlord shall have
appropriated to make good any default by Tenant with respect to any of
Tenant's aforesaid obligations, covenants, conditions and agreements. In the
event of any default by Tenant hereunder during the term of this Lease,
Landlord shall have the right, but shall not be obligated, to apply all or any
portion of the security deposit to cure such default, in which event Tenant
shall be obligated promptly to deposit with Landlord the amount necessary to
restore the security deposit to its original amount. In the event of the sale
or transfer of Landlord's interest in the building, Landlord shall have the
right upon notification to Tenant to transfer the security deposit to such
purchaser or transferee, in which event Tenant shall look only to the new
landlord for the return of the security deposit and Landlord shall thereupon
be released from all liability to Tenant for the return of such security
deposit.
8. ASSIGNMENT AND SUBLETTING.
Tenant will not assign, transfer, mortgage, or otherwise encumber this
Lease or sublet or rent (or permit occupancy or use of) the Leased Premises,
or any part thereof without Landlord's prior written consent which shall not
be unreasonably withheld.
In the event of any sublease or assignment of all or any portion of the
Leased Premises where the rent in the sublease or assignment exceeds the rent
or pro rata portion of the rent, as the case may be, for such space in the
Lease, Lessee shall pay the Lessor monthly, as additional Rent, at the same
time as the monthly installments of rent hereunder, one-half (1/2) of the
excess rent paid for the sublease over the rent in this Lease applicable to
the sublease space.
9. TENANT'S ALTERATIONS AND FURNISHINGS.
(a) Tenant shall not make any material alterations, improvements or
additions to the Leased Premises including, but not limited to, wall
coverings and special lighting installations, without the Landlord's advance
written consent in each and every instance. In the event Tenant
4
<PAGE>
desires to make any alterations, improvements or additions, Tenant shall
first submit to Landlord plans and specifications along with the necessary
permits and governmental approvals therefor and obtain Landlord's written
approval thereof prior to commencing any such work. All alterations,
improvements or additions, whether temporary or permanent in character, made
by Landlord or Tenant in or upon the Leased Premises shall become Landlord's
property and shall remain upon the Leased Premises at the termination of this
Lease without compensation to Tenant (excepting only Tenant's moveable office
furniture, trade fixtures, office and professional equipment). In the event
Landlord shall so elect, any such alteration, improvement or addition upon
the Leased Premises shall be removed by Tenant upon termination of this Lease
or any renewal thereof; should the Leased Premises suffer any damage(s)
during the course of removing such alteration, improvement or addition, the
Tenant agrees to and shall restore the Leased Premises to their original
condition, which shall be defined as the condition and the design of the
space at the time of acceptance of the space by Tenant, fair wear and tear
accepted, at Tenant's sole cost and expense, on or before the expiration of
the term of this Lease or any renewal thereof. Should Tenant fail to remove
same, then and in such event Landlord shall cause same to be removed at
Tenant's expense, and Tenant hereby agrees to reimburse Landlord for the cost
of such removal, together with any and all damages which Landlord may suffer
and sustain by reason of the failure of Tenant to remove same. Any damage
caused by or resulting from the removal of Tenant's office furniture, trade
fixtures, and office and professional equipment may be repaired by Landlord
at Tenant's cost and expense.
Any increase in Operating Expenses which results from improvements made
by the Tenant shall be the sole responsibility of that Tenant.
(b) Tenant shall not install or operate in the Leased Premises any
electrically operated equipment or other machinery other than normal office
equipment using 110/120 voltage wiring, or any other equipment of any kind or
nature whatsoever which will or may necessitate any changes, replacements or
additions to, or require the use of, the water, plumbing, heating, air
conditioning, or electrical system of the Leased Premises, without first
obtaining the prior written consent of Landlord, who may condition such
consent upon the payment by Tenant of additional rent in compensation for
such excess consumption of water or electricity or wiring as may be
occasioned by the operation of said equipment or machinery.
(c) Tenant shall not permit any mechanic's lien to be filed against
the fee of the Leased Premises or against Tenant's leasehold interest in the
Leased Premises by reason of work, labor services or materials supplied or
claimed to have been supplied to Tenant or anyone holding the Leased Premises
through or under Tenant, whether prior or subsequent to the commencement of
the term hereof. If any such mechanic's lien shall at any time be filed
against the Leased Premises and Tenant shall fail to remove same within
thirty (30) days thereafter, it shall constitute a default under the
provisions of this Lease. Tenant shall bear all costs, including attorney's
fees, incurred by Landlord in defending the Leased Premises against any such
lien.
(d) Landlord shall have the right to prescribe the weight and position
of safes and other heavy equipment or fixtures, which shall, if considered
necessary by the Landlord, stand on plank strips to distribute the weight.
Any and all damage or injury to the Leased Premises, or due to the same being
on the Leased Premises, shall be repaired by, and at the sole cost of,
Tenant. No furniture, equipment or other bulky matter of any description will
be received into the building or carried in the elevators except as approved
by Landlord or Landlord's agent, and all such furniture, equipment, and other
bulky matter shall be delivered only through the designated delivery entrance
of the building. Tenant agrees promptly to remove from the sidewalks adjacent
to the building any of the Tenant's furniture, equipment or other material
there delivered or deposited.
10. GOOD ORDER AND REPAIR.
Tenant agrees to keep and maintain the Leased Premises and the fixtures
therein in good order and condition and shall, at the expiration or sooner
termination of this Lease, surrender and deliver up the same in as good order
and condition as they were at the commencement of
5
<PAGE>
the term hereof, ordinary wear and tear and damage by the elements excepted.
Tenant shall immediately notify Landlord of any damage to the Leased Premises
or to the building of which they form a part caused by neglect, carelessness
or vandalism by Tenant, its employees, agents or invitees, and such damage
shall be immediately repaired by and at the cost of Tenant. If Tenant fails
to make such repairs, Landlord may make them for which costs Landlord shall
be reimbursed in full by Tenant together with interest at the maximum rate
permitted by law.
11. RESTRICTIONS ON USE.
Tenant shall not use, occupy or permit the Leased Premises or any part
thereof to be used or occupied for any business use or purpose deemed by
Landlord to be disreputable, disorderly or extra-hazardous, nor in such
manner as to disturb the peaceful and quiet occupancy of the other tenants of
the building or constitute a nuisance of any kind; nor shall Tenant allow,
permit or suffer any noise, vibration, smoke or odor to escape from the
Leased Premises in a manner which will disturb other occupants of the
building or of adjoining or adjacent properties.
12. INSURANCE BY LANDLORD.
Landlord shall, during the Lease Term, procure and keep in force the
following insurance, the cost of which shall be deemed as Additional Rent
payable, by Tenant pursuant to Paragraph 6:
(1) Property insurance insuring the building and improvements and rental
value insurance for perils covered by the causes of loss-special form (all
risk) and in addition coverage for flood, earthquake and boiler and machinery
(if applicable). Such coverage (except for flood and earthquake) shall be
written on a replacement cost basis equal to ninety percent (90%) of the full
insurable replacement value of the foregoing and shall not cover Tenant's
equipment, trade fixtures, inventory, fixtures or personal property located
on or in the Leased Premises.
(2) Commercial general liability insurance against any and all claims for
bodily injury and property damage occurring in or about the Building or the
Land. Such insurance shall have a combined single limit or not less than One
Million Dollars ($1,000,000) per occurrence per location with a Two Million
Dollar ($2,000,000) aggregate limit.
(3) Such other insurance as Landlord deems necessary and prudent or
required by Landlord's beneficiaries or mortgagees of any deed of trust or
mortgage encumbering the Premises.
13. INSURANCE BY TENANT.
Tenant shall, during the Lease Term, procure as its expense and keep
in force the following insurance:
(1) Commercial general liability insurance naming the Landlord as an
additional insured against any and all claims for bodily injury and property
damage occurring in, or about the Premises arising out of Tenant's use and
occupancy of the premises. Such insurance shall have combined single limit of
not less than One Million Dollars ($1,000,000) per occurrence with a Two
Million Dollar ($2,000,000) aggregate limit and excess umbrella liability
insurance in the amount of Two Million Dollars ($2,000,000). If the Tenant
has other locations that it owns or leases the policy shall include an
aggregate limit per location endorsement. Such liability insurance shall be
primary and not contributing to any insurance available to Landlord and
Landlord's insurance shall be in excess thereto. In no event shall the limits
of such insurance be considered as limiting the liability of Tenant under
this lease.
(2) Personal property insurance insuring all equipment, trade fixtures,
inventory,
6
<PAGE>
fixtures and personal property located on or in the Premises for perils
covered by the causes of loss - special form (all risk) and in addition,
coverage for flood, earthquake and boiler and machinery (if applicable).
(3) Workers' compensation insurance in accordance with statutory law and
employers' liability insurance with a limit of not less than $100,000 per
employee and $500,000 per occurrence.
(4) Such other commercially reasonable insurance as Landlord reasonably
deems necessary and prudent or required by Landlord's beneficiaries or
mortgagees of any deed of trust or mortgage encumbering the Premises.
The policies required to be maintained by Tenant shall be with companies
rated AX or better in the most current issue of Best's Insurance Reports.
Insurers shall be licensed to do business in the state in which the Premises
are located and domiciled in the USA. Any deductible amounts under any
insurance policies required hereunder shall not exceed $1,000. Certificates of
insurance (certified copies of the policies may be required) shall be
delivered to Landlord prior to the commencement date and annually thereafter
at least thirty (30) days prior to the expiration date of the old policy.
Tenant shall have the right to provide insurance coverage which it is
obligated to carry pursuant to the terms hereof in a blanket policy, provided
such blanket policy expressly affords coverage to the Premises and to
Landlord as required by this Lease. Each policy of insurance shall provide
notification to Landlord at least thirty (30) days prior to any cancellation
or modification to reduce the insurance coverage.
14. WAIVER OF SUBROGATION.
Landlord and Tenant hereby mutually waive their respective rights of
recovery against each other for any loss of, or damage to, either parties'
property, to the extent that such loss or damage is insured by an insurance
policy required by its insurer whereby the insurer waives its rights of
subrogation against the other party. The provisions of this clause shall not
apply in those instances in which waiver of subrogation would cause either
party's insurance coverage to be voided or otherwise made uncollectible.
15. SIGNS AND ADVERTISING.
No sign, fixture, advertisement or notice shall be displayed, inscribed,
painted or affixed by Tenant on any part of the outside or inside of the
Leased Premises or building of which they form a part or on adjacent parking
area(s) without the prior written consent of Landlord, except on the
directories and doors of offices, and then only in such size, color and
style as Landlord shall approve; and if any such sign, fixture, advertisement
or notice is exhibited, Landlord shall have the right to remove same and
Tenant shall be liable for any and all expenses incurred by Landlord in said
removal. Landlord shall have the right to prohibit any advertisement of any
Tenant which in Landlord's opinion tends to impair the reputation of the
building or its desirability as a building for offices, and upon written
notice from Landlord, Tenant shall refrain from and discontinue such
advertisement.
16. RULES AND REGULATIONS.
Tenant and Tenant's employees, agents and visitors shall faithfully
comply with the rules and regulations set forth in Exhibit "B" attached
hereto and made a part hereof, and with such further reasonable rules and
regulations as Landlord at any time and from time to time may make and
communicate in writing to Tenant, which, in Landlord's judgment, shall be
necessary for the reputation, safety, care of appearance of the Leased
Premises or the building of which they form a part, together with their
appurtenances, or the preservation of good order therein, or the operation or
maintenance of the building and its equipment, or the more useful occupancy
or the comfort of the tenants or others in the building. Landlord shall not
be liable to Tenant for the violation of any of said rules and regulations or
the breach of any covenant or condition in any lease, by any other tenant in
the building or by any employee, agent or visitor of Landlord.
7
<PAGE>
17. LANDLORD'S RIGHT OF ENTRY.
Landlord and the Landlord's duly authorized agents and representatives
upon reasonable advance notice during business hours (except for emergencies)
shall have the right to enter into or upon the Leased Premises or any part
thereof at all reasonable or necessary times for the purpose of inspecting
same or making such repairs or alterations as Landlord may deem necessary or
exhibiting the building for sale, lease or financing.
18. REPAIRS.
Landlord shall, at its own cost and expense, except as may be provided
elsewhere herein, make all necessary repairs and replacements to the exterior
and common areas of the building of which the Leased Premises form a part,
and to the equipment used to provide the services furnished by Landlord
hereunder, unless any such damage is caused by acts or omissions of Tenant,
its employees, agents or invitees, in which event Tenant shall bear the cost
of such repairs. All injury or damage to the building or the Leased Premises
caused by moving the property of Tenant in or out thereof, or by installation
or removal of furniture, fixtures or other property, or by any other act or
omission of Tenant, its employees, agents or invitees, shall be promptly
repaired by Tenant at Tenant's cost and expense. In the event Tenant shall
fail to do so repair the building or the Leased Premises, then Landlord shall
have the right to make such repair and any charge or cost incurred by
Landlord therefor shall be paid by Tenant and Landlord may elect, in its
discretion, to regard such charge or cost as additional rent which shall
become payable with the installment of rent next becoming due or thereafter
falling due under the terms of this Lease.
19. LANDLORD'S SERVICES.
Landlord shall provide the following services without cost to Tenant:
(a) Electricity, through conduits provided by Landlord, for lighting
and normal business equipment and all replacement light bulbs or tubes for
building standard fixtures.
(b) Hot and cold water for lavatory and drinking purposes in places
designated by Landlord, and lavatory supplies.
(c) Subject to all governmental regulations or limitations in effect
from time to time, heat and air conditioning during the hours as set forth in
the rules and regulations during such seasons of the year when such services
are normally and usually furnished in modern office buildings in the
Nashville area.
(d) Automatic elevator service; and
(e) Building standard cleaning service in the common areas of the
building and in the Leased Premises; except Saturdays, Sundays and Government
holidays, which service shall consist of sweeping floors, vacuuming carpets,
dusting surfaces of normal office furniture and emptying wastebaskets on each
normal business day. Windows will be cleaned at reasonable intervals.
Landlord does not warrant that any of the services above mentioned will
be free from interruptions caused by repairs, renewals, improvements,
alterations strikes, lockouts, accidents, inability of Landlord to obtain
fuel or supplies, or any other cause beyond the reasonable control of
Landlord. Any such interruption of service shall never be deemed an eviction
or disturbance of Tenant's use and possession of the Leased Premises or any
part thereof or render Landlord liable to Tenant for damages or relieve
Tenant from performance of Tenant's obligations under this Lease; provided,
however, that Landlord will at all times use reasonable efforts promptly to
remedy any situation which might interrupt such services.
8
<PAGE>
20. PARKING AREA.
Tenant shall have the right to use in common with the other tenants in
the building the parking spaces as provided by Landlord adjacent to the
building for parking of Tenant's automobiles and those of its employees and
visitors, subject to the rules and regulations now or hereafter adopted by
Landlord. Tenant shall not use nor permit any of its employees, agents or
visitors to use any parking area owned by Landlord other than the parking
area adjacent to the assigned to the building. If Landlord deems it
advisable, Landlord may set aside a part of the total parking field for use
as a separate area for visitors. Landlord reserves the right to adopt any
regulations necessary to curtail unauthorized parking, including the required
use of "parking permits."
21. DAMAGE OR DESTRUCTION.
(a) Total Destruction. If the Leased Premises is damaged or destroyed by
fire, earthquake or any other casualty to such an extent as to render the
same untenantable in whole or in substantial part, Tenant shall give Landlord
immediate notice of the occurrence of such casualty. Unless Landlord notifies
Tenant within (60) days after receipt of such notice of its election to
repair or to restore the Leased Premises, this Lease shall terminate at the
end of such sixty day period. If Tenant shall not be in default under this
Lease; then Tenant's liability for rent shall cease as of the day following
the casualty and any rent paid by Tenant in advance and not yet earned as of
the date of termination shall be refunded to Tenant. If Landlord elects to so
repair or restore the Leased Premises, Landlord shall do so within one
hundred eighty (180) days with due allowance given to landlord for any
reasonable delays caused by adjustment of insurance loss, strikes, labor
difficulties or any cause beyond Landlord's control provided Landlord is
diligently pursuing such restoration. The rent shall be abated during the
period of repair or restoration in the same proportion as the untenantable
portion of the Leased Premises bears to the former leasable area of the
Leased Premises. If such repair or restoration is not completed within 180
days with aforementioned due allowances, then either Landlord or Tenant at
its option, may terminate this Lease upon notice to the other. If more than
25% of the leasable square feet in the Building are damaged or destroyed by
fire, earthquake or any other casualty, then Landlord, at its sole option,
may terminate this Lease upon notice to the Tenant.
(b) Partial Destruction. In the event Leased Premises is damaged by fire,
earthquake or any other casualty to such an extent that it is not rendered
untenantable in whole or in substantial part, then Landlord shall promptly,
to the extent of any insurance proceeds received, repair and restore the
premises. The rent shall be abated proportionately as to the portion of the
Leased Premises damaged from the day following the casualty until the
completion of the repair and restoration. If such partial destruction renders
the Leased Premises unsuitable for Tenant's business purposes, and Landlord
fails to repair and restore same within 180 days (due allowances given to
Landlord for any reasonable delays caused by adjustment of insurance loss,
strikes, labor difficulties or any cause beyond Landlord's control provided
Landlord is diligent in pursuing such restoration), then either Tenant or
Landlord may at is option terminate this Lease upon notice to the other.
22. INDEMNIFICATION
The Tenant will indemnify and hold harmless the Landlord against and from
any and all claims arising from (i) the Tenant's occupancy of the premises,
(including, but not limited to, statutory liability and liability under
workers' compensation laws), (ii) any breach or default in the performance of
any obligation on the Tenant's part to be performed under the terms of this
Lease, (iii) any act of negligence of the Tenant, or any officer, agent,
employee, or invitee of the Tenant, (iv) all costs, attorneys' fees, expenses
and liabilities incurred in or about any such claim or any action or
proceeding brought thereon, and, in any case, action or proceeding brought
against the Landlord by reason of any such claim. The Tenant upon notice from
the Landlord will defend the same at the Tenant's expense by counsel approved
in writing by the Landlord.
The Tenant, as a material part of the consideration to the Landlord
assumes all risk of damage to property or injury to persons, in, upon or
about the Leased Premises except that, (i) the Tenant does not assume any
risk for damage to the Tenant resulting from the gross negligence or willful
misconduct of the Landlord or its authorized representative, (ii) which is
9
<PAGE>
caused by the failure of the Landlord to observe any of the terms and
conditions of the Lease if such failure has persisted for an unreasonable
period of time after written notice of such failure.
The Landlord is not liable for any claims, costs or liabilities arising
out of or in connection with the acts or omissions of any other tenants in
the Building. The Tenant waives all of its claims in respect thereof against
the Landlord.
23. CONDEMNATION.
(a) If the whole or any part of the Leased Premises shall be taken for
any public or quasi-public use under any statute or by right of eminent
domain, or by purchase under threat of condemnation, then this Lease shall at
Landlord's reasonable and sole option automatically terminate as of the date
that title shall be taken. If as a result of such condemnation, the Leased
Premises is rendered unsuitable for Tenant's business purposes in the
reasonable opinion of either Landlord or Tenant, then such party may
terminate this Lease as of the date that title shall be taken.
(b) If any part of the building of which the Leased Premises form a part
or any parking area adjacent thereto shall be so taken and this Lease shall
not be terminated under the provisions (a) above, then Landlord
shall have the option to terminate this Lease upon ninety (90) days notice to
Tenant if, in Landlord's sole discretion, continued operation of the
remaining structure or improvements is uneconomical.
(c) In any event, all compensation awarded or paid upon such a total or
partial taking shall belong to and be the property of Landlord without any
participation by Tenant; provided, however, that nothing contained herein
shall be construed to preclude Tenant from prosecuting any claim directly
against the condemning authority in such condemnation proceeding for loss of
business, depreciation to, damage to, or costs of removal of, or for the
value of, trade fixtures, furniture, and other personal property belonging to
Tenant; provided, however, that no such claim shall diminish or otherwise
adversely affect Landlord's award.
24. DEFAULT.
If Tenant shall fail to pay any installment of the fixed rent reserved
herein or any other charges at the time the same shall become due and
payable, although no demand shall have been made for same, or if Tenant shall
violate or fail or neglect to keep and perform any of the terms, covenants,
conditions or agreements herein contained on the part of Tenant to be kept
and performed, other than payment of rent and the same is not cured or
corrected within thirty (30) days after written notice thereof or if the
Leased Premises shall become vacant or deserted, or if Tenant shall make an
assignment of assets for benefit of creditors or file a voluntary petition in
bankruptcy or be adjudicated bankrupt or insolvent, or if an involuntary
petition in bankruptcy or for receivership be instituted against Tenant and
the same not be dismissed within sixty (60) days of the filing thereof, then,
and in each and every such event, and at all times thereafter, at the option
of Landlord, Tenant's right of possession of the Leased Premises and to
reenter same and expel or remove Tenant and any other person who may be
occupying said Leased Premises or any part thereof and any personal property
or trade fixtures located therein without demand of rent or demand of
possession, any notice to quit or of intention to re-enter being hereby
expressly waived by Tenant. In the event of such re-entry by process of law
or otherwise, Tenant agrees to and shall remain liable for any and all
damage, deficiency or loss of rent which Landlord may sustain by such
re-entry; and in such case Landlord reserves full power, which is hereby
acceded by Tenant, to re-let the Leased Premises for the benefit of Tenant,
in liquidation and discharge, in whole or in part, as the case may be, of the
liability of Tenant under the terms and provisions of this Lease.
If Tenant becomes the subject debtor in a case pending under the Federal
Bankruptcy Code, Landlord's right to terminate this Lease under this
paragraph shall be subject to the applicable rights, if any, of the Trustee
in Bankruptcy Code. The failure of the Trustee to effect such assumption or
assignment hereof within the applicable time period provided in the Federal
Bankruptcy Code shall conclusively and irrevocably constitute the Trustee's
rejection of this
10
<PAGE>
Lease and waiver of any right of the Trustee to assume or assign this Lease.
(The Trustee shall not have the right to assume or assign this Lease.) The
Trustee shall not have the right to assume or assign the Lease unless said
Trustee (i) promptly and fully cures all defaults under this Lease, (ii)
promptly and fully compensates Landlord for all monetary damages incurred as
a result of such default, and (iii) provides to Landlord "adequate assurance
of future performance", (as defined herein below). Landlord and Tenant hereby
agree in advance that "adequate assurance of future performance", as used in
this paragraph, shall mean that all of the following minimum criteria must be
met: (a) Tenant's gross receipts in the ordinary course of its business
during the thirty (30) days immediately preceding the initiation of the case
under the Federal Bankruptcy Code must be at least two (2) times greater than
the next payment of rent due under this Lease, (b) both the average and
median of Tenant's monthly gross receipts in the ordinary course of business
during the six (6) months immediately preceding initiation of the case under
Federal Bankruptcy Code must be at least two (2) times greater than the next
payment of rent due under this Lease, (c) Tenant must pay to Landlord all
rentals and other sums payable by Tenant hereunder including also therein its
share (as estimated by Landlord) of the cost of all services provided by
Landlord (whether directly or through agents or contractors, and whether or
not the cost of such services, and (d) the Tenant must agree (by writing
delivered to Landlord) that the Tenant's business liquidating sales,
auctions, or other non-first class business operations shall be conducted on
the Leased Premises, and that the use of the Leased Premises as stated in
these Lease will remain unchanged, and that the assumption or assignment of
this Lease will not violate or affect the rights of other tenants in the
building. In the event Tenant is unable to (i) cure its defaults, (ii)
reimburse Landlord for its monetary damages, (iii) pay the rents due under
this Lease or any other payments required of Tenant under this Lease on time,
or (iv) meet the criteria and obligations imposed by (a) through (d) above in
this paragraph 23, then Tenant hereby agrees in advance that it has not met
its burden to provide adequate assurance of future performance, and this
Lease may be terminated by Landlord in accordance with this paragraph. Should
the Trustee fail to comply with the provisions of the Federal Bankruptcy Code
governing the assumption or assignment of this Lease or should the Trustee
reject this Lease, then Landlord shall have the right to terminate this Lease
by giving thirty (30) days prior written notice to Tenant. The provisions of
this paragraph shall apply not only to a Trustee in Bankruptcy but also to
Tenant as a Debtor In Possession Under the Federal Bankruptcy Code.
Landlord's pursuit of any remedy herein provided shall not preclude
pursuit of any other remedies provided by law, nor shall pursuit of any
remedy herein provided constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages accruing to Landlord by reason of the
violation of Tenant of any of the terms, covenants, conditions or agreements
of this Lease. In addition to the foregoing, upon such default, at Landlord's
option, the entire amount of the rent then remaining to be paid under this
Lease shall become due and payable. No waiver by Landlord of any violation or
breach of any of the terms, covenants, conditions or agreements of this Lease
shall be deemed or construed to constitute a waiver of any other violation or
breach of any of the terms, covenants, conditions or agreements hereof; and
no provision of this Lease shall be deemed to have been waived by Landlord
unless such waiver shall be in writing signed by Landlord. No payment by
Tenant or receipt by Landlord of a lesser amount than the monthly
installments of rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent nor shall any endorsement or
statement on any check or any letter accompanying any check or payment of
rent be deemed an accord and satisfaction, and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of
such rent or pursue any other remedy provided in this Lease.
11
<PAGE>
In no event shall any lender on personal property of Tenant cause to
be recorded any financing statements, Uniform Commercial Code filings or
their equivalents (in connection with the Landlord's striking of the
preceding paragraph regarding a lien upon all personal property of Tenant)
which offset or otherwise impair title to Landlord's fixtures and real or
personal property located on the Premises.
Tenant, upon default, agrees to pay all costs and expenses of
Landlord in the enforcement of Landlord's right hereunder including all
reasonable attorney's fees.
24A. TENANT'S SELF HELP RIGHTS.
If Landlord has defaulted in the performance of any term or covenant
required to be performed by it under this lease so that at least thirty
percent (30%) of the Leased Premises is untenantable, inaccessible or
incapable of use by Tenant in the ordinary course of its business, after not
less than thirty (30) days' prior notice to Landlord, and provided that
Landlord has not within such thirty (30) day period promptly commenced and
diligently pursued a cure, Tenant may, but shall not be obligated to, remedy
such default and in connection therewith may pay reasonable sums to cure or
alleviate such default and employ counsel. All reasonable sums expended or
obligations incurred by Tenant in connection therewith shall be paid by
Landlord to Tenant upon demand.
25. HOLDOVER.
Notwithstanding any provision of law or any judicial decision to the
contrary, no notice shall be required to terminate the term of this Lease as
herein mentioned without notice being required from either party. However,
if Tenant shall remain in possession of the Leased Premises beyond the
expiration of the term without the express written consent of Landlord, then
such possession shall be as a month-to-month tenant at double the rent of the
last month of the Lease term, and the provisions of this Lease shall be
applicable.
26. SUBORDINATION.
This Lease is subject and subordinate to all ground or underlying
leases and to all mortgages and/or deeds of trust which may now or hereafter
affect such leases or the real property of which the Leased Premises form the
part, and to all renewals. modifications, consolidations, replacements and
extensions thereof. This paragraph shall be self-operative and no further
instrument of subordination shall be necessary to evidence the priority of
any mortgagee or trustee. In confirmation of such subordination, Tenant
shall execute promptly any certificate that the Landlord may request.
Provided, however that notwithstanding the foregoing, the party secured by
any such deed of trust shall recognize this Lease and, in the event of any
foreclosure sale under such deed of trust, this Lease shall continue in full
force and effect; and the Tenant covenants and agrees that it will, at the
written request of the party secured by any such deed of trust, execute,
acknowledge and deliver any reasonable instrument that has for its purposes
and effect the subordination of the lien of this Lease to said deed of trust.
At the option of any landlord under any ground underlying Lease to which the
lease is now or may hereafter become subject or subordinate. Tenant agrees
that neither the cancellation nor termination of such ground or underlying
lease shall by operation of law or otherwise, result in cancellation or
termination of this Lease or the obligations of the Tenant hereunder, and
Tenant covenants and agreed to attorn to such landlord or to any
successor to Landlord's interest in such
12
<PAGE>
ground or underlying lease, and in that event, this Lease shall continue as a
direct lease between the Tenant herein and such landlord or its successor;
and in any case, such landlord or successor under such ground or underlying
lease shall not be bound by any prepayment on the part of Tenant of any rent
for more than the amount of the security deposit, so that rent shall be
payable under this Lease in accordance with its terms, from the date of the
termination of the ground or underlying lease, as if such prepayment had not
been made.
27. ESTOPPEL CERTIFICATE.
Tenant agrees, at any time and from time to time, upon not less than five
(5) business days prior written notice by Landlord, to execute, acknowledge
and deliver to Landlord a statement in writing (i) certifying that this Lease
is unmodified and in full force and effect (or if there have been
modifications, that the Lease is in full force and effect as modified and
stating the modification), (ii) stating the dates to which the rent and any
other charges hereunder have been paid by Tenant, (iii) stating whether or
not to the best knowledge of Tenant, Landlord is in default in the
performance of any covenant, agreement or condition contained in the Lease,
and if, so, specifying each such default of which Tenant may have knowledge,
and (iv) stating the address to which notices to Tenant should be sent. Any
such statement delivered pursuant hereto may be relied upon by any owner of
the building of which the Leased Premises are a part or the land underlying
said building, and any prospective purchaser of said building or said land,
any mortgagee or prospective mortgagee of said building or said land or of
Landlord's interest in either, or any prospective assignee of any such
mortgagee.
28. NOTICES.
Any notice to be given by either party to the other pursuant to the
provisions of this Lease shall be in writing and shall be deemed to be duly
given if delivered personally or mailed by registered or certified mail,
return receipt requested, addressed to Landlord at the address at which it
receives rent and addressed to Tenant at the Leased Premises.
29. SALE.
In the event the original Landlord hereunder, or any successor owner of
the building, shall sell or convey the building, all liabilities and
obligations on the part of the original Landlord, or such successor owner,
under this Lease accruing thereafter shall terminate, and thereupon all such
liabilities and obligations shall be binding on the new owner. Tenant agrees
to attorn to such new owner.
30. MODIFICATIONS.
Landlord and Tenant agree that this Lease contains the entire agreement
between them and shall not be modified in any manner except by an instrument
in writing signed by each of them.
31. PARAGRAPH HEADINGS.
The paragraph headings as to contents of particular paragraphs herein are
inserted for convenience only and shall not be considered to be part of this
Lease or in any way to modify, amend or affect the provisions hereof.
13
<PAGE>
32. MISCELLANEOUS.
Words of any gender used in this Lease shall be held to include any other
gender, and words in the singular number shall be held to include the plural,
when the context requires.
33. BENEFIT.
This Lease shall inure to the benefit of and be binding upon Landlord and
Tenant and their respective legal representatives, successors, and such
assigns and sublessees as may be approved by Landlord hereunder.
34. GOVERNING LAW.
This Lease and its provisions shall be interpreted, governed and enforced
in accordance with the law of the State of Tennessee.
35. COMPLIANCE WITH LAWS.
Tenant shall (a) at Tenant's expense, comply with all present and future
laws and requirements of any public authorities in respect of the use and
occupation of the Premises, or the abatement of any nuisance in, on or about
the Leased Premises, and (b) be responsible for the cost of the compliance
with all present and future laws and requirements of any public authorities
in respect of the Landlord's property of which the Leased Premises are a part
arising from (i) Tenant's use of the Leased Premises, (ii) the manner of
conduct of Tenant's business or operation of its installations, equipment or
other property therein, (iii) any cause or condition created by or at the
instance of Tenant, or (iv) the breach of any of Tenant's obligations
hereunder, whether or not such compliance requires work which is ordinary or
extraordinary, foreseen or unforeseen; and Tenant shall pay all the costs,
expenses, fines penalties and damages which may be imposed upon Landlord by
reason of or arising out of Tenant's failure to fully and promptly comply
with and observe the provisions of this section. Without limiting the
generality of the foregoing, it is specifically agreed that Tenant shall
comply with all laws dealing with hazardous materials and, specifically, will
not allow their presence in or about the Leased Premises or any other part of
Landlord's property. Tenant shall give prompt notice to Landlord of any
notice it receives of the violation of any law or requirement of any public
authority with respect to the Leased Premises or the use or occupation
thereof.
36. LIMITATION OF LIABILITY
Notwithstanding anything contained in this Lease, or in any other
document to the contrary, Tenant shall look solely to the then interest of
Landlord in the Premises, or of any successor in interest to Landlord as
owner of the Building, for the satisfaction of any remedy of Tenant for
failure to perform any of Landlord's obligations under this Lease, express or
implied, or under any law. Neither Landlord nor any disclosed or undisclosed
principal of Landlord (or officer, director, stockholder, partner or agent of
Landlord or of any such principal), nor any successor of any of them, shall
have any personal liability for any such failure under this Lease or
otherwise.
37. ADA GENERAL COMPLIANCE
Tenant, at Tenant's sole expense, shall comply with all laws, rules,
orders, ordinances, directions, regulations and requirements of federal,
state, county and municipal authorities now in force or which may hereafter
be in force, which shall impose any duty upon the Landlord or Tenant with
respect to the use, occupation or alteration of the Leased Premises, and that
the
14
<PAGE>
Tenant shall use all reasonable efforts to fully comply with the American's
With Disability Act. Landlord's responsibility for compliance with Americans
With Disability Act shall include the common areas and restrooms of the
Building, but not the Leased Premises.
38. HAZARDOUS SUBSTANCE - GENERAL
The term "Hazardous Substances," as used in this lease shall mean
pollutants, contaminants, toxic or hazardous wastes, or any other substances
the use and/or the removal of which is required or the use of which is
restricted; prohibited or penalized by any "Environmental Law." which term
shall mean any federal, state or local law, ordinance or other statute of a
governmental authority relating to pollution or protection of the environment.
Tenant hereby agrees that (i) no activity will be conducted on the Premises
that will produce any Hazardous Substance, except for such activities that
are part of the ordinary course of Tenant's business activities (the
"Permitted Activities") provided said Permitted Activities are conducted in
accordance with all Environmental Laws and have been approved in advance in
writing by Landlord; Tenant shall be responsible for obtaining any required
permits and paying any fees and providing any testing required by any
governmental agency; (ii) the Premises will not be used in any manner for the
storage of any Hazardous Substances except for the temporary storage of such
materials that are used in the ordinary course of Tenant's business (the
"Permitted Materials") provided such Permitted Materials are properly stored
in a manner and location meeting all Environmental Laws and approved in
advance in writing by Landlord; Tenant shall be responsible for obtaining any
required permits and paying any fees and providing any testing required by any
governmental agency; (iii) no portion of the Premises will be used as a
landfill or a dump; (iv) Tenant will not install any underground tanks of any
type; (v) Tenant will not allow any surface or subsurface conditions to exist
or come into existence that constitute, or with the passage of time may
constitute a public or private nuisance; (vi) Tenant will not permit any
Hazardous Substances to be brought into the Premises, except for the
Permitted Materials described above, and if so brought or found located
thereon, the same shall be immediately removed, with proper disposal, and all
required cleanup procedures shall be diligently undertaken pursuant to all
Environmental Laws. Landlord or Landlord's representative shall have the
right but not the obligation to enter the Premises for the purpose of
inspecting the storage, use and disposal of Permitted Materials to ensure
compliance with all Environmental Law. Should it be determined that said
Permitted Materials are being improperly stored, used or disposed of, then
Tenant shall immediately take such corrective action as requested by
Landlord. Should Tenant fail to take such corrective action within 24 hours,
Landlord shall have the right to perform such work and Tenant shall promptly
reimburse Landlord for any and all costs associated with said work. If at
any time during or after the term of the lease, the Premises is found to be
so contaminated or subject to said conditions, Tenant shall diligently
institute proper and thorough cleanup procedures at Tenant's sole cost, and
Tenant agrees to indemnify and hold Landlord harmless from all claims,
demand, actions, liabilities, costs, expenses, damages and obligations of any
nature arising from or as a result of the use of the Premises by Tenant. The
foregoing indemnification and the responsibilities of Tenant shall survive
the termination or expiration of this Lease.
Landlord agrees to indemnify and hold Tenant harmless from all
claims, demands, actions, liabilities, costs, expenses, damages, and
obligations arising solely out of the use, storage, or handling or Hazardous
Materials by Landlord or those under the control of Landlord. The foregoing
indemnification shall survive the termination or expiration of this Lease.
39. SPECIAL STIPULATIONS
1. Tenant shall be entitled to an improvement allowance of up to
$12.00/rsf (the Tenant Allowance) to be used solely for improvements to the
Leased Premises. All space planning and construction document costs will be
included as part of this Tenant Allowance. All costs incurred by Landlord in
completing the Leasehold Improvements in excess of the Tenant Allowance shall
be borne by Tenant. If the total cost for tenant improvements is less than
$12.00/rsf, any savings will be split equally between the Landlord and the
Tenant and credited to the Tenant in the form of rental abatement.
15
<PAGE>
2. Landlord will permit Tenant to occupy the 2,434 rsf on the
fourth floor (Suite 420) from October 1, 1996 to October 31, 1996 at no
rental charge. Such space will be delivered to Tenant "as-is" and Tenant
will abide by all the terms, conditions, rules and regulations of the Lease
with respect to such early occupancy. Rental payments on the entire Leased
Premises including Suite 300 will commence November 1, 1996 in accordance with
paragraph "4" of the Lease; furthermore; rental payments will commence
specifically on Suite 420 on November 1, 1996 regardless of status of
construction of Suite 300. Tenant shall have four (4) month's following
commencement of the Lease to allocate any residual Tenant Allowance towards
improving Suite 420. Rent on Suite 420 shall not abate during any
construction period and Landlord will complete such construction in an
expeditious and efficient manner.
3. Provided Tenant is not in default hereunder, Tenant shall have
one (1) option to extend the term of the Lease for one (1) five (5) year
period. Notice of exercising the option to extend must be received by
Landlord not less than one hundred eighty (180) days prior to the expiration
of the Term that Tenant seeks to extend in order to be effective and binding
on Landlord. The extension shall be on the same terms and conditions except
that the annual Base Rental shall be adjusted to the then existing market
rate of buildings of similar size and quality in the Maryland Farms Office
Park. Such existing market rate at time of notice to renew will be
determined by taking the average of the determination of the market rate as
put forth by two independent certified appraisers using standard appraisal
procedures. Landlord shall provide at its sole cost one appraiser and Tenant
shall provide at its sole cost one appraiser for determination of the renewal
option rate.
4. Tenant shall have a one-time right of first refusal on the
11,396 rsf (Suite 310) of contiguous space on the third floor when it comes
available. Terms and conditions of such right of first refusal will be the
same as those offered a bonafide third party prospect. In the event Landlord
receives a bonafide offer to lease Suite 310, Landlord shall notify Tenant
and Tenant shall have ten (10) business days to deliver Landlord written
notice that it intends to lease the space under those terms offered by the
bonafide third party prospect.
5. Tenant shall have one (1) time right to cancel this Lease
after the fifth (5th) full year of the term by paying a termination fee in
the amount of three months rent plus the unamortized costs of leasing
commissions and tenant improvements (amortized over the lease term at an
annual five percent (5%) simple interest rate) together with 180 days prior
written notice of Tenant's intent to cancel.
IN WITNESS WHEREOF, the parties herein have hereunto set their hands
the day and year first above mentioned.
LANDLORD:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By: /s/ Kurt D. Schaeffer
--------------------------
Assistant Director
Title Commercial Real Estate
--------------------------
Kurt D. Schaeffer
Assistant Director
Commercial Real Estate
Date: 9/6/96
---------------------------
Karen A. Pearston
TENANT:
AMERICA SERVICE GROUP INC.
By: /s/ Illegible
---------------------------
Title: Executive Vice President
---------------------------
Date: 29 August 1996
---------------------------
16
<PAGE>
EXHIBIT A
[DIAGRAM OF FLOOR PLAN]
HARPETH ON THE GREEN
BUILDING III
THIRD FLOOR
<PAGE>
EXHIBIT A (cont)
[DIAGRAM OF FLOOR PLAN]
HARPETH ON THE GREEN
BUILDING III
FOURTH FLOOR
<PAGE>
EXHIBIT "B"
RULES AND REGULATIONS
1. Rental payments are due on the first of each month and should be
mailed to Principal Mutual Life Insurance Company c/o Eakin & Smith, Inc.,
2100 West End Avenue, Suite 950, Nashville, TN 37203. Should your check be
returned from the bank, you must Reimburse Landlord with a certified check
plus a $5.00 charge for handling and to cover the fee charged by the bank for
handling. Should you have more than two checks returned by the bank, you will
be asked to pay by cashiers check from that point on.
2. The sidewalks, entries, passages, elevators, stairways and other
common areas of the building shall not be obstructed or used for any other
purpose than ingress and egress.
3. No additional locks shall be placed upon any doors in the building;
and the doors leading to the corridors shall be kept closed during business
hours, except as they may be used for ingress or egress.
4. No draperies, shades or blinds visible from the exterior of the
building shall be installed unless the color, material, shape, style and size
have been approved by Landlord, or Landlord's agent, in writing.
5. No awning, canopy or the like shall be installed unless approved by
Landlord or Landlord's agent, in writing.
6. No loud speaker system or other sound system shall be constructed,
maintained, used or operated in the Leased Premises or in or about the
building unless Tenant shall have first obtained the prior written consent of
Landlord, or Landlord's agent.
7. No vending machines shall be installed unless approved by Landlord or
Landlord's agent, in writing.
8. No freight, furniture or other bulky matter of any description shall
be moved into or out of the building or carried in the elevators, stairways
or through the windows of said building except as approved in advance by
Landlord or Landlord's agent, and at such times and in such manner as
Landlord or Landlord's agent may direct. There will be a supervision fee of
$15.00 per hour for any moves which occur during weekends or legal holidays.
There shall not be used in any space, or in any public halls of said
building, either by Tenant or by jobbers or other, in the delivery or receipt
of merchandise any hand truck, except those equipped with rubber tires and
side guards. No trash or other materials shall be left on the Premises at any
time unless it is retained in trash receptacles located within Tenant's
designated space. During move-outs all trash shall be removed from the Leased
Premises at the Tenant's expense.
9. Tenant shall promptly remove from the public areas adjacent to the
building any of Tenant's property there delivered or deposited.
10. No parking is permitted in areas which are not properly designated as
parking. Cars parked in "No Parking" areas will be subject to being removed
and stored at owner's expense.
11. No portable heater or fans should be used, maintained or operated
within the Leased Premises unless Tenant shall have first obtained the prior
written consent of Landlord or Landlord's agent.
12. No animals shall be kept in or about the Premises.
<PAGE>
13. No room or rooms shall be occupied or used as sleeping or lodging
apartments at any time, or for any immoral or illegal purposes, under penalty
of immediate cancellation of lease.
14. Maintenance and repair of plumbing or kitchen facilities within the
Leased Premises will be at the expense of Tenant.
15. Landlord's services shall be provided from 8:00 a.m. to 6:00 p.m. on
Mondays through Fridays and 8:00 a.m. to 1:00 p.m. on Saturdays, --
government holidays excepted.
<PAGE>
EXHIBIT C
FORM OF UNCONDITIONAL
LETTER OF CREDIT
(FOR PMLIC ONLY)
BANK LETTERHEAD
---------------
Date:
-------------------
Irrevocable Credit No.
----------------
To Beneficiary: Principal Mutual Life Insurance Company, its
successors and assigns
711 High Street
Des Moines, IA 50309
Attn: , CRE-Equities
---------------------
Gentlemen:
We hereby authorize you to value on ( X Bank )
----------------------
for the account of (depositor)
----------------------------
for a sum or sums not exceeding a total of ($ ) Dollars available by
---------
your draft or drafts at sight. Drafts must be drawn and presented at our
office no later than , 19 .
-------------- --
All drafts must be marked "Drawn on ( X Bank )
------------------------------
Credit No. and all drawings negotiated under this credit must be
--------
endorsed on the reverse hereof.
We hereby agree with the drawers, endorsers and bona fide holders of all
drafts drawn on and in compliance with the terms of this credit that such
drafts will be duly honored upon presentation to the drawee, and that any
statutory, UCP or other rights to delay honor of sight drafts, including such
rights under Article 5, Section 5-112(1)(a) and (b) of the Uniform
Commercial Code are hereby specifically waived.
Very truly yours,
--------------------------
(Authorized Signature)
<PAGE>
Exhibit 11.1
America Service Group Inc.
COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
Net income (loss) attributable
to Common Shares......................($8,912,000) $ 687,000 $ 996,000
Adjust for Interest Income under the
Modified Treasury Calculation......... -- 37,000 --
------------ ----------- -----------
Net Income (loss) attributable
to Common Shares......................($8,912,000) $ 724,000 $ 996,000
------------ ----------- -----------
------------ ----------- -----------
Weighted average shares outstanding..... 3,171,000 3,027,000 2,994,000
Common stock equivalents................ -- 328,000 225,000
Adjust for 20% limit under the
modified treasury calculation......... -- (20,000) --
------------ ----------- -----------
Total weighted average common and
common equivalent shares.............. 3,171,000 3,335,000 3,219,000
------------ ----------- -----------
------------ ----------- -----------
Income (loss) per common and common
equivalent share...................... $(2.81) $0.21 $0.31
------------ ----------- -----------
------------ ----------- -----------
<PAGE>
EXHIBIT 21.1
AMERICA SERVICE GROUP INC.
LIST OF SUBSIDIARIES
1. Prison Health Services, Inc.
2. UniSource, Inc.
3. Harbour Insurance, Inc.
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the America Service Group
Inc. Registration Statement (Form S-8, filed May 29, 1992) pertaining to the
Incentive Stock Plan, the Registration Statement (Form S-8, filed April 1,
1996) pertaining to the Executive Stock Purchase Plan, the Registration
Statement (Form S-8, filed May 31, 1996) pertaining to the amended Incentive
Stock Plan for 275,000 shares, and the Registration Statement (Form S-8,
filed May 31, 1996) pertaining to the Employee Stock Purchase Plan of our
report dated March 28, 1997, with respect to the consolidated financial
statements and schedules of America Service Group Inc. for the year ended
December 31, 1996.
Ernst & Young LLP
Nashville, Tennessee
March 28, 1997
<PAGE>
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-48231, No. 33-304895, No. 33-304803 and No.
30-303010) of America Service Group Inc. of our report dated March 11, 1996,
except as to Note 15, which is as of March 28, 1996, related to the audits of
the consolidated financial statements and financial statement schedules of
America Service Group Inc. as of December 31, 1995 and for each of the two
years in the period then ended, included in this Form 10-K for the year ended
December 31, 1996.
/s/ Price Waterhouse LLP
- ----------------------------
PRICE WATERHOUSE LLP
Linthicum, Maryland
March 31, 1997
EXHIBIT 23.2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from America
Service Group, Inc. Consolidated (1) Balance Sheets (2) Statements of Opera-
tions (3) Statements of Changes in Common Stock, Additional Paid-In Capital,
Retained Earnings (Deficit) and Treasury Stock (4) Statements of Cash Flow
and is qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,550,000
<SECURITIES> 2,105,000
<RECEIVABLES> 12,894,000
<ALLOWANCES> (2,016,000)
<INVENTORY> 0
<CURRENT-ASSETS> 36,289,000
<PP&E> 5,976,000
<DEPRECIATION> (2,940,000)
<TOTAL-ASSETS> 46,457,000
<CURRENT-LIABILITIES> 39,755,000
<BONDS> 0
1,916,000<F1>
0
<COMMON> 34,000
<OTHER-SE> 2,434,000
<TOTAL-LIABILITY-AND-EQUITY> 46,457,000
<SALES> 151,743,000
<TOTAL-REVENUES> 152,282,000
<CGS> 145,618,000
<TOTAL-COSTS> 162,924,000<F2>
<OTHER-EXPENSES> 42,000
<LOSS-PROVISION> 1,822,000
<INTEREST-EXPENSE> 42,000
<INCOME-PRETAX> (9,933,000)
<INCOME-TAX> (1,247,000)
<INCOME-CONTINUING> (8,686,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,686,000)
<EPS-PRIMARY> (2.81)
<EPS-DILUTED> (2.81)
<FN>
<F1>Represents Redeemable Common Stock
<F2>Includes $6,241,000 of non-recurring expenses.
</FN>
</TABLE>
<PAGE>
SAFE HARBOR COMPLIANCE STATEMENT
All statements made by America Service Group Inc. ("ASG") that are not
historical facts are based on current expectations. These statements are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause
actual results to differ materially are the following: dependence on major
contracts; price competition in the prison healthcare industry, ASG's ability
to provide adequate staffing to meet its contractual commitments; changes in
performance bonding requirements; substantial damage awards against ASG in
connection with medical malpractice claims, changes in laws or regulations or
the application thereof, general business and economic conditions, and the
other risk factors described in ASG's reports filed from time to time with
the Commission.
Dependence on Major Contracts
ASG's operating revenue is derived exclusively from contracts with
state, county and local governmental agencies. ASG's contract with the State
of Georgia Department of Corrections (the "Georgia Contract") accounted for
approximately 37.2% of ASG's gross revenues during the year ended December
31, 1996. This contract will expire on June 30, 1997 and the Georgia
Department or Corrections has stated its intent thereafter to enter into a
relationship with the Medical College of Georgia to provide healthcare
services. In addition, ASG's contracts with the State of Kansas, the City of
Philadelphia and the State of Maryland accounted for approximately 11.2%,
10.5% and 10.2%, respectively, of its revenue during the year ended December
31, 1996. Generally, contracts may be terminated by the governmental agency
at will and without cause upon proper notice (typically between 30 and 180
days). Governmental agencies may be subject to political influences that
could lead to termination of a contract with no fault of the contractor.
Although ASG generally attempts to renew or renegotiate contracts at or prior
to their termination, contracts that are put out for bid are subject to
intense competition. The loss of one or more of the major contracts could
have a material adverse effect on ASG's business.
Contracts with government agencies are generally complex in nature and
subject contractors to extensive regulation under state, county and local
law. Under certain circumstances, a government contractor may be debarred or
suspended from obtaining future contracts. While ASG considers the
possibility remote, such debarment or suspension could have a material
adverse effect on ASG.
Privatization of Government Services, Competition and Correctional Population
ASG's future financial performance will depend in part on continued
privatization by state, county and local governmental agencies of healthcare
services for correctional facilities. There can be no assurance that this
market will continue to grow or that existing contracts will continue to be
made available to the private sector. The business of providing correctional
healthcare services to governmental agencies is highly competitive. ASG is in
direct competition with local, regional and national correctional healthcare
providers, some of which are public entities. ASG believes that some
<PAGE>
of its competitors may have larger staffs and greater resources than ASG. As
the private market for providing correctional healthcare matures. ASG's
competitors may gain additional experience in bidding and administering
correctional healthcare contracts. In addition, new competitors, some of whom
may have extensive experience in related fields or greater financial
resources than ASG, may enter the market. ASG'S business could also be
adversely affected by material decreases in the inmate population of
correctional facilities.
Acquisitions
ASG's expansion strategy involves both internal growth and, as
attractive opportunities become available, acquisitions. ASG has limited
experience acquiring businesses and successfully integrating them into its
operations. There can be no assurances that ASG will be able to integrate
successfully any acquired business into its operations. Futhermore, there
can be no assurance that ASG will be able to operate an acquired business in
a profitable manner.
Operating Results
ASG incurred an operating loss before extraordinary items in the year
ended December 31, 1996 due primarily to operating losses in connection with
the Georgia Contract, the pending expiration of the Georgia Contract and
non-recurring charges relating to executive compensation and corporate
reengineering and downsizing. Although ASG has increased revenues in each of
the last three fiscal years, there can be no assurances that it will continue
to generate increased revenues or that additional revenues will generate
operating profits. ASG has in the past operated contracts at low
profitability or a loss and there can be no assurances that ASG will be able
to operate profitably under future contracts with its customers.
Catastrophic Events
Contracts accounting for 21.2% of revenues for the year ended December
31, 1996, contain no limits on ASG's exposure for treatment costs related to
catastrophic illnesses or injuries to inmates. In September 1996, ASG procured
insurance with respect to catastrophic illnesses or injuries for amounts in
excess of $125,000 per inmate. ASG attempts to compensate for the increased
financial risk when pricing contracts that do not contain catastrophic
limits. Although, the occurrence of severe individual cases without such
limits could render the contract unprofitable and could have a material
adverse effect, ASG believes the potential impact of any such occurrences is
mitigated by such insurance.
Dependence on Key Personnel
The success of ASG will depend in large part on the ability and
experience of its senior management. The loss of services of one or more key
employees could adversely affect ASG's operations. Except for employment
contracts with Scott L. Mercy, President and Chief Executive Officer, Michael
Catalano, Executive Vice President and General Counsel, Jeffrey J. Bairstow,
Chief Operating Officer, and Noel B. Williams, Chief Information Officer,
2
<PAGE>
ASG does not have employment or noncompetition agreements with any key
employees.
Dependence on Healthcare Personnel
ASG's success will depend on its ability to attract and retain highly
skilled healthcare personnel. A shortage of trained and competent employees
and/or independent contractors may result in overtime costs or the need to
hire less efficient temporary staff. Attracting qualified nurses at a
reasonable cost has been and continues to be of concern to ASG. There can be
no assurance that ASG will be successful in attracting and retaining a
sufficient number of qualified healthcare personnel in the future.
Classification of Independent Contractors
Prior to July 1995, ASG generally contracted with physicians, dentists
and certain other healthcare professionals as independent contractors to
fulfill its contractual obligations to state, county and local governmental
agencies. Beginning in July 1995, ASG treats any such person as an
independent contractor only if (i) such person provides 8 hours or less of
service to ASG per week or (ii) such person is employed by or is part of a
professional association or professional corporation under state law. A
determination by federal taxing authorities that ASG misclassified a material
number of persons as independent contractors could adversely affect ASG and
its operations.
Corporate Exposure to Professional Liability
ASG periodically becomes involved in medical malpractice claims with the
attendant risk of substantial damage awards. The most significant source of
potential liability in this regard is the risk of suits brought by inmates
alleging lack of timely or adequate healthcare services. ASG may be liable,
as employer, for the negligence of nurses or other healthcare professionals
who are employees of ASG. ASG may also have potential liability for the
negligence of healthcare professionals engaged by ASG as independent
contractors. ASG's contracts generally provide for ASG to indemnify the
governmental agency for losses incurred related to healthcare provided by
ASG. ASG maintains professional liability insurance in amounts deemed
appropriate by management based upon ASG's claims history and the nature and
risks of its business. There can be no assurance that a future claim or
claims will not exceed the limits of available insurance coverage or that
such coverage will continue to be available at a reasonable cost.
Licensing of Healthcare Providers
No state in which ASG does business has sought to apply its general
insurance, health maintenance organization ("HMO") or similar statutes and
regulations to ASG or, to the best of ASG's knowledge, to its competitors.
ASG does not believe that these statutes and regulations were intended to
apply to ASG or its activities since HMO's are designed to provide voluntary
enrollment or subscription, typically to employee groups, in a plan providing
healthcare as
3
<PAGE>
an alternative to other public or private providers. However, if ASG is
required to become licensed in and meet the insurance or HMO reporting,
financial, operating and other regulatory requirements of any such state,
failure to comply could result in fines or proceedings ordering ASG to cease
its activities in the state. ASG believes that for it to satisfy the
licensing and regulatory requirements of states in which it operates would
required the states to waive various statutory or regulatory requirements
which provide rights not available to inmates in correctional institutions.
These requirements vary from state to state but in some states include
providing participants the right to choose their physicians, the right to be
members of advisory panels and to participate in policy matters, the right to
convert coverage to individual coverage and the right to continuing benefits
after the contract terminates. Alternatively, ASG would be required to modify
its methods of doing business in any such state where such requirements are
not waived and could not be satisfied, principally by changing its pricing
method from a fixed fee to a fee for service arrangement. However, there is
no assurance that such waiver, licensing or modification could be
accomplished. Further, if ASG were to seek to become licensed or to modify
its methods of doing business, its profits could be adversely affected.
4
