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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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
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Commission file number 0-23340
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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 27, 1998 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $37,305,844 As of March 27, 1998, the registrant had
3,528,645 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on May 19, 1998 are incorporated by reference in Part III.
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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 below under the caption "Cautionary Statements."
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" or the "Company"), through its
subsidiary Prison Health Services, Inc. ("PHS"), contracts to provide managed
healthcare services to correctional facilities throughout the United States. ASG
was incorporated in 1990 as a holding company for PHS. 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.
RECENT DEVELOPMENTS
On October 1, 1997, the Company entered into a Plan and Agreement of
Merger (the "Merger Agreement") with MedPartners, Inc., a Delaware corporation
("MedPartners"), and a wholly owned subsidiary of MedPartners, pursuant to which
the Company would have been acquired by MedPartners (the "Merger"). In
connection with the Merger, each issued and outstanding share of the Company's
Common Stock, $0.01 par value per share (the "Company's Common Stock"), would
have been converted into the right to receive 0.71 of a share of MedPartners'
Common Stock. On October 29, 1997, MedPartners entered into a Plan and Agreement
of Merger (the "PhyCor Merger Agreement") with PhyCor, Inc., a Delaware
corporation ("PhyCor"), pursuant to which MedPartners would have been acquired
by PhyCor (the "MedPartners/PhyCor Merger") and each issued and outstanding
share of MedPartners' Common Stock would have been converted into the right to
receive 1.18 shares of PhyCor Common Stock.
On November 20, 1997, the Company mailed a proxy statement to the
holders of its Common Stock relating to a special meeting of the Company's
stockholders scheduled to be held on December 29, 1997, for the purpose of
considering and voting upon the Merger. On December 29, the Company postponed
the special meeting at the request of MedPartners until January 20, 1998. On
January 7, 1998, MedPartners announced that the PhyCor Merger Agreement had been
terminated by the mutual agreement of MedPartners and PhyCor. In a related
announcement also on January 7, 1998, MedPartners stated that it expected to
record pre-tax charges to earnings in the fourth quarter of 1997 of
approximately $115 million related to the restructuring of certain of its
operating units and $30 million related to certain discontinued operations.
MedPartners further announced that it estimated that it could incur a loss in
the fourth quarter of 1997 from continuing operations in the range of $0.20 to
$0.25 per share and that its earnings per share in 1998 would be approximately
30% less than analysts' current consensus estimates. Following the announcements
by MedPartners, the price of a share of its Common Stock fell below $17.50.
Pursuant to the Merger Agreement, if the average price of MedPartners Common
Stock was less than $17.50 for a consecutive 30-day trading period prior to
consummation of the Merger, the Company had the right to terminate the Merger
Agreement.
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On January 20, 1998, the Company announced that it would not hold the
special meeting of its stockholders originally scheduled for December 29, 1997,
and that it was engaged in discussions with MedPartners regarding the Merger
Agreement. On February 26, 1998, the Company announced the termination of the
Merger Agreement and the execution of a Release and Settlement Agreement (the
"Settlement Agreement") with MedPartners relating to the Merger Agreement.
Pursuant to the Settlement Agreement, MedPartners agreed to pay the Company
approximately $3.5 million in cash and to reimburse or assume certain other
costs incurred by the Company in connection with the Merger in the amount of
approximately $2.0 million. The Company and MedPartners and certain of their
respective affiliates also entered into a Non-Compete, Non-Solicitation and
Standstill Agreement (the "Non-Competition Agreement") in connection with the
termination of the Merger Agreement.
CORRECTIONAL HEALTHCARE SERVICES
Generally. ASG, through PHS, contracts with state, county and local
governmental agencies to provide comprehensive healthcare services to inmates of
prisons and jails, with a focus on those facilities that maintain an average
daily population of over 300 inmates.
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 sources. 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.
The following table sets forth information regarding ASG's correctional
contracts.
<TABLE>
<CAPTION>
December 31
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Number of correctional contracts (1) 31 34 35 35 41
Average number of inmates in all facilities
covered by correctional contracts (2) 54,364 83,288 82,310 51,939 46,509
</TABLE>
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(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.
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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."
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, some 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 46% of revenues for the year
ended December 31, 1997, including ASG's contracts with the Indiana Department
of Correction (the "Indiana Contract"), Delaware Department of Corrections,
Kansas Department of Corrections, and Alameda County, California, contain no
limits on ASG's exposure for treatment costs related to catastrophic illnesses
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.
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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 maintains
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.
The Indiana Contract provides for a fixed payment, per inmate, per day.
The remainder of ASG's largest existing contracts for the year ended December
31, 1997 -- contracts with the Kansas Department of Corrections, the Delaware
Department of Corrections, Alameda County, California, and the 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. Of the aforementioned contracts, only the contracts with the City of
Philadelphia significantly limits ASG's obligations for treatment costs for
catastrophic illnesses and injuries. The restrictions imposed under that
contract are currently scheduled to expire in July 1998. 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 most healthcare services required by inmates on an inpatient and
outpatient basis. The current automated utilization review program is an
integral part 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 in the least costly setting while maintaining traditional standards of
quality of care. 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) a daily operating report to control staffing and off-site utilization.
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.
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Many RFPs for significant contracts require the bidder to post a bid
bond. Performance bonding requirements are for the length of the contract and at
December 31, 1997, generally ranged between 4% and 60% (and in one case, 100%)
of the 1997 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 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 small 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>
<CAPTION>
<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 December 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 and $2 million in the
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 a portion 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) and $3.5 million
annual aggregate (including loss adjustment expenses and attorneys' fees).
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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.
In July, 1997, ASG commenced operations under the Indiana Contract. The
Company has third party commercial insurance on an occurrence basis with respect
to the Indiana Contract.
For the period December 1, 1997 through December 31, 1998, ASG has third
party commercial insurance on a claims made basis with primary limits of $1
million each occurrence and $3 million in the aggregate. For the period January
1, 1998 through December 31, 1998, the Company has excess liability coverage on
a claims made basis of $15 million each claim and $15 million annual aggregate,
which excess coverage attaches at the limits of the underlying primary coverage.
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 hospitalization for
amounts in excess of $125,000 per inmate. ASG believes this insurance mitigates
its exposure to unanticipated expenses of catastrophic hospitalization.
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.
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, 1997, ASG had approximately 1,645 full-time
equivalent employees, including 1,375 medical personnel. ASG also had under
contract 230 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, and ASG expects price competition
to become more intense. ASG is in direct competition with local, regional and
national correctional healthcare providers, some of which are public entities.
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 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.
The Company and MedPartners and certain affiliates of MedPartners
entered into the Non-Competition Agreement in connection with the termination of
the Merger Agreement because significant amounts of confidential information
were shared by ASG and MedPartners in preparation for the consummation of the
Merger. Such agreement
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provides that for a period of three years no party may directly or indirectly or
by assisting others (i) compete with any other party to provide services
equivalent to the services provided by any other party to such other party's
existing clients, (ii) recruit or hire away each others employees or (iii)
acquire, conduct a tender offer for or solicit proxies for each others equity
securities or take any other action to effect the control of the management or
the Board of Directors of each other party, among other customary provisions.
MAJOR CONTRACTS
ASG's operating revenue is derived exclusively from contracts with
state, county and local governmental agencies. ASG's contracts with the State of
Kansas and the City of Philadelphia each accounted for approximately 14% of
revenues during the year ended December 31, 1997. The contract with the Georgia
Department of Corrections (the "Georgia Contract"), which expired on June 30,
1997, accounted for 24% of 1997 revenues. 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 through 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.
CAUTIONARY STATEMENTS
All statements made by 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.
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 through 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, and ASG
expects price competition to become more intense. ASG is in direct competition
with local, regional and national correctional healthcare providers, some of
which are public entities. 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
experience in bidding and administering correctional healthcare contracts. In
addition, new competitors, some of whom may have
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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. Furthermore, 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. There can be no assurances that ASG will
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 Limits. Contracts accounting for 46% of revenues for the
year ended December 31, 1997, contain no limits on ASG's exposure for treatment
costs related to catastrophic illnesses or injuries to inmates. ASG maintains
insurance with respect to catastrophic illnesses or injuries for amounts in
excess of $125,000 per inmate for contracts that contain no catastrophic limits.
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.
ASG has employment contracts with Scott L. Mercy, President and Chief Executive
Officer, Michael Catalano, Executive Vice President of Development, General
Counsel and Secretary, Gerard F. Boyle, Executive Vice President and President
of PHS, and Bruce A. Teal, Senior Vice President and Chief Financial Officer.
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 eight 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
-9-
<PAGE> 10
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 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 require 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.
ITEM 2. PROPERTIES.
In February 1997, the Company 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 Indianapolis, Indiana; Alameda,
California; and Topeka, Kansas. The Company owns land and the warehouse and
office building of approximately 30,000 square feet in Mobile, Alabama that
formerly housed the operations of UniSource, Inc., a subsidiary of the Company
that formerly sold pharmaceuticals and related products to institutions where
PHS delivered healthcare services as well as to other institutions. Such real
property is currently under contract for sale. In connection with the Merger,
the Company ceased operations at its regional offices in Atlanta, Georgia and
substantially reduced operations at its regional offices in Newark, Delaware.
Pursuant to the Settlement Agreement, MedPartners agreed to assume all of the
Company's obligations pursuant to the Company's leases of such offices,
effective as of February 1, 1998. The Company assigned to MedPartners all of its
right, title and interest in and to any and all amounts paid by any sublessee or
assignee of such leases and agreed to co-operate with MedPartners in its efforts
to sublease or assign the leases. 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
-10-
<PAGE> 11
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.
On December 29, 1997, a special meeting of the Company's stockholders
(the "Special Meeting") was held for the purpose of voting on the Merger. At the
Special Meeting, the stockholders voted, by a vote of 2,552,227 shares in favor,
none opposed, and none abstaining with no broker non-votes, to adopt a proposal
to temporarily adjourn the special meeting until January 20, 1998.
On January 20, 1998, the Special Meeting was reconvened, and the
stockholders adopted a proposal to permanently adjourn the Special Meeting by a
vote of 2,552,227 shares in favor, none opposed, and none abstaining with no
broker non-votes. See "General -- Recent Developments."
-11-
<PAGE> 12
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 30, 1998,
there were approximately 1,320 holders of record of ASG common stock. The high
and low prices of the Company's common stock as reported on The Nasdaq Stock
Market during each quarter from January 1, 1996 through December 31, 1997 are
shown below:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ---------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------
March 31, 1997 $13.63 $9.25
June 30, 1997 14.75 9.25
September 30, 1997 15.75 14.00
December 31, 1997 19.13 13.38
- ---------------------------------------------------
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Healthcare revenues ................................. $ 129,211 $ 152,282 $ 115,238 $ 109,983 $ 108,932
Income (loss) before income taxes (benefits) ........ 1,786 (9,933) 1,146 1,646 363
Net income (loss) ................................... 1,685 (8,686) 687 996 225
Net income (loss) attributable to common shares .... 1,742 (8,912) 687 996 225
Net income (loss) per common shares - basic ......... 0.50 (2.81)(a) 0.23 (a) 0.33(a) 0.08 (a)
Net income (loss) per common shares - diluted ....... 0.48 (2.81)(a) 0.21 (a) 0.32(a) 0.07 (a)
Weighted average common shares outstanding .......... 3,480 3,171 (a) 3,027 (a) 2,994(a) 2,989 (a)
Weighted average common shares outstanding and common
equivalent shares outstanding..................... 3,657 3,171 (a) 3,221 (a) 3,126(a) 3,148 (a)
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) ........................... $ 257 $ (2,434) $ 2,692 $ 2,302 $ (399)
Total assets ........................................ 27,754 42,709 42,501 32,108 34,634
Redeemable common stock, common stock,
additional paid-in-capital, retained
earnings (deficit) and treasury stock ............ 6,641 4,384 8,667 8,188 7,151
</TABLE>
- ---------------
(a) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("Statement 128"). For further discussion of
earnings per share and the impact of Statement 128, see the notes to
the consolidated financial statements beginning on page F-8.
-12
<PAGE> 13
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 total revenue of certain items in the Consolidated Statements of
Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PERCENTAGE OF TOTAL REVENUES 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare revenue ........................... 99.5% 99.5% 99.8%
Interest income .............................. .5 .5 .2
------------------------
Total revenue ................................ 100.0 100.0 100.0
Healthcare expenses .......................... 91.3 95.2 89.3
------------------------
Gross margin ................................. 8.7 4.8 10.7
Selling, general and administrative expenses . 7.3 7.2 8.6
Nonrecurring charge .......................... -- 4.1 1.1
------------------------
Income (loss) from operations ................ 1.4 (6.5) 1.0
Provision for income taxes (benefits) ........ .1 (.8) .4
------------------------
Net income (loss) ............................ 1.3 (5.7) .6
Change in redeemable common stock ............ -- .1 --
------------------------
Net Income (loss) attributable to
common stock................................. 1.3% (5.8)% .6%
========================
</TABLE>
1997 COMPARED TO 1996
Healthcare revenues decreased $23.1 million from $152.3 million in 1996
to $129.2 million in 1997, representing a 15% decrease. The decline in revenues
resulted primarily from the Georgia Contract, which took effect in October 1995,
and generated $30.9 million in the year ended December 31, 1997, compared to
$56.7 million in 1996. The Georgia Contract expired in June 1997. The Company
added five new contracts in 1997, which generated $9.9 million in new revenues,
and experienced $13.4 million of revenue growth from existing contracts through
contract renegotiations, automatic price adjustments and from being in effect a
full year. Revenues were negatively impacted by the loss of eight contracts
during 1997, which generated $40.2 million of revenues in 1997, compared to
$77.5 million of revenues in 1996. Contract revenues for 1996 include $9.1
million of revenues from contracts that were terminated in that year.
Interest income of $.7 million in 1997 declined from $.8 million in 1996
due to the cash usage involved with the expiration of the Georgia Contract.
The cost of healthcare decreased $27.0 million or 19% to $118.6 million
in 1997. Healthcare expenses as a percentage of revenues were 91% in 1997 versus
95% in 1996. Healthcare expenses exclusive of the Georgia Contract were 89% and
91% in 1997 and 1996, respectively. Personnel costs and fringe benefits related
to inmate care were 57% of revenues in 1997 versus 64% of revenues in 1996. The
significant decline is attributable to the existing contracts generally being
more full service versus staffing only. Costs related to outside services
(defined as hospitalization, emergency room and ambulance and outpatient
surgeries and visits) were 17% of revenues in 1997 and 1996.
At December 31, 1996, the Company had reserved $2.8 million in
anticipated losses relating to the Georgia Contract. During 1997, the Company
recorded an additional $1.4 million in healthcare expenses relating to the
further deterioration of the contract's operating performance. Due to continued
enhancements in the clinical and risk management areas, healthcare expenses were
positively impacted by $1.4 million in adjustments to Harbour's medical
malpractice claims.
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<PAGE> 14
Selling general and administrative expenses were $9.5 million in 1997
compared to $11.1 million in 1996. The decrease was attributable to the
corporate reengineering and downsizing implemented throughout 1997.
The provision for income taxes was $.1 million of expense in 1997 compared
to $1.2 million of benefit in 1996. Income taxes for 1997 relate to various
state income taxes. The Company did not incur any federal income taxes due to
the utilization of net operating loss carryforwards. As of December 31, 1997,
the Company had approximately $7.5 million in unutilized net operating loss
carryforwards.
1996 COMPARED TO 1995
Healthcare 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. The Georgia Contract generated
$56.7 million in the year ended December 31, 1996, compared to $13.5 million
recognized 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 of revenues 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% in 1996 versus
89% in 1995. Healthcare expenses as a percentage of revenue, exclusive of the
Georgia Contract, were 91% and 89% in 1996 and 1995, respectively. Excluding
the Georgia Contract, contracts in effect at December 31, 1996 reflected
healthcare expenses of 91% of revenues. Personnel costs and fringe benefits
related to inmate care were 64% of revenues in 1996 and 1995. Costs related to
outside services (defined as hospitalization, emergency room and ambulance and
outpatient surgeries and visits) were 17% and 16% of revenues in 1996 and 1995,
respectively. Under the Georgia Contract, the Company incurred costs related to
outside services of 20% of revenues in 1996 and 1995.
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.
During 1996, the Company recognized various, non-recurring charges
consisting of (i) a non-cash compensation charge of $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, (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.
Interest income was $.8 million and $.2 million in 1996 and 1995. The
increase is mainly attributable to the investment of additional cash on hand
resulting from the prepayment of the Georgia premium.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents as of December 31, 1997 were $3.4
million compared to $12.6 million as of December 31, 1996. The reduction is
attributable to cash used in the Georgia Contract which approximated $14.6
million. During 1997, the Company received $.5 million in cash from the exercise
of stock options.
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<PAGE> 15
Accrued expenses of the Company decreased $9.2 million from $25.7 million
at December 31, 1996 to $16.5 million at December 31, 1997. The reduction is
primarily attributable to the payout of medical claims, liability claims,
salaries and employee benefits and funding losses related to the Georgia
Contract.
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.
The Company has 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 1997 over December 1996
was 2.8% nationally compared to an overall increase in the Consumer Price Index
of 2.3% for all costs for 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.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. Statement
130 is effective for interim and annual periods beginning in 1998. Comprehensive
income encompasses all changes in stockholders' equity (except those arising
from transactions from owners) and includes net income, net unrealized capital
gains or losses on available for sale securities and foreign currency
translation adjustments. Management of the Company does not expect the adoption
of Statement 130 to have a material impact on the Company's financial
statements.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"). Statement
131 establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
these enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for fiscal years beginning after December
15, 1997. Management of the Company is currently reviewing the impact of
Statement 131. The Company will adopt Statement 131 on December 31, 1998 and
will report interim information effective in the first quarter of 1999.
-15-
<PAGE> 16
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs recognize a date using "00" as the year 1900 rather than the
year 2000. This fact could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities (the "Year 2000 Issue").
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 Issue cost is estimated to be immaterial to the operating results of the
Company. Estimated costs consist primarily of the purchase of new software that
will be capitalized. To date, the Company has incurred minimal expenses relating
to the Year 2000 Issue.
The project is estimated to be completed not later than December 31,
1998, which is prior to any anticipated impact of the Year 2000 Issue on the
Company's operating systems. The Company believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not timely completed, the
Year 2000 Issue could have a material impact on the operations of the Company.
The costs of the project and the estimated date of completion are based
on management's best estimates, which were derived using numerous assumptions of
future events, including the continued availability of certain resources and
other factors. There can be no guarantee, however, that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements, together with the
reports thereon of Ernst & Young LLP, dated March 17, 1998 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.
There are no disagreements with accountants on accounting and financial
disclosure required to be reported in this annual report pursuant to Item 304 of
Regulation S-K.
-16-
<PAGE> 17
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 May 19, 1998 (the "1998 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the 1998 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 1998 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 1998 Proxy Statement is incorporated
herein by reference.
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<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Listed on the Index to the Consolidated Financial Statements and
Schedule on page F-1 of this Report.
(2) Financial Statement Schedule
Listed on the Index to the Consolidated Financial Statements and
Schedule on page F-1 of this Report.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
2.1 -- Plan and Agreement of Merger, as amended, dated October 1,
1997 by and among America Service Group, Inc., MedPartners,
Inc. and ASG Merger Corporation, a wholly-owned subsidiary of
MedPartners, Inc. (incorporated herein by reference to Exhibit
2.1 to ASG's Current Report on Form 8-K filed on October 2,
1997 (File No. 0-19673) and to Exhibit 2.1 to ASG's Current
Report on Form 8-K filed on December 30, 1997 (File No.
0-19673)).
2.2 -- Consent and Agreement, dated January 19, 1998 by and among
America Service Group, Inc., MedPartners, Inc. and ASG Merger
Corporation, a wholly-owned subsidiary of MedPartners, Inc.
(incorporated herein by reference to Exhibit 2.1 to ASG's
Current Report on Form 8-K filed on January 20, 1998 (File No.
0-19673)).
2.3 -- Release and Settlement Agreement, dated February 25, 1998 by
and among America Service Group, Inc., MedPartners, Inc. and
ASG Merger Corporation and EMSA Correctional Care, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1,
Registration No.
33-43306, as amended).
3.2 -- Amended and Restated By-Laws of America Service Group Inc.
(incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to 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 to 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 to 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 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1992).
10.5 -- Settlement Agreement among Prison Health Services, Inc.,
Georgia Department of Corrections and The Georgia Department of
Administrative Services dated January 6, 1997 (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 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 to 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 to 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 to 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 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1993).
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C>
10.10 -- Healthcare Services Contract with the State of Delaware,
dated June 3, 1996 (incorporated by reference to Exhibit 10.5
to the Registrant's Quarterly Report on Form 10-Q for the three
month period ending June 30, 1996).
10.11 -- Contractual Agreement between the Indiana Department of
Correction and Prison Health Services, Inc. dated April 18,
1997 (incorporated by reference to Exhibit 10.26 to the
Registrant's Quarterly Report on Form 10-Q for the three month
period ending June 30, 1997).
10.12 -- Credit Agreement dated May 30, 1997 for $20,000,000 with
NationsBank of Tennessee, N.A. (incorporated by reference to
Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q
for the three month period ending June 30, 1997).
10.13 -- Employment Agreement dated April 1, 1996 between Scott L.
Mercy and America Service Group Inc., as amended (incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the three month period ending June 30,
1996 and to Exhibit 10.28 to Registrant's Quarterly Report on
Form 10-Q for the three month period ending June 30, 1997).
10.14 -- Employment Agreement dated November 1, 1996 between Jeffrey
J. Bairstow and America Service Group Inc. (incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.15 -- Non-qualified Stock Option by America Service Group Inc. and
Jeffrey J. Bairstow dated December 18, 1996 (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.16 -- Employment Agreement dated July 12, 1996 between Michael
Catalano and America Service Group Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the three month period ending September 31,
1996).
10.17 -- Non-Qualified Stock Option between America Service Group
Inc. and Michael Catalano dated July 12, 1996 (incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.18 -- Employment Agreement dated February 20, 1998 between Bruce
A. Teal and America Service Group, Inc.
10.19 -- Non-Qualified Stock Option between America Service Group
Inc. and Bruce A. Teal dated December 18, 1996 (incorporated
by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.20 -- Employment Agreement dated February 12, 1998 between Gerard
F. Boyle and America Service Group Inc.
10.21 -- Non-Qualified Stock Option between America Service Group
Inc. and Gerard F. Boyle dated February 12, 1998.
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 to 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
(incorporated by reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997).
10.24 -- Sublease Agreement, dated April 22, 1997, between the
Registrant and Citibank Delaware for office space located at
Two Penns Way, Suite 200, New Castle, Delaware (incorporated by
reference to Exhibit 10.24 to the Registrant's Quarterly Report
on Form 10-Q for the three months ending March 31, 1997).
10.25 -- Amended and Restated Incentive Stock Plan of the Registrant
(incorporated by reference to Exhibit 10.27 to the Registrant's
Quarterly Report on Form 10-Q for the three months ending June
30, 1997).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Price Waterhouse LLP.
27.1 -- Financial Data Schedule for the year ended December 31, 1997
27.2 -- Restated Financial Data Schedule for the year ended December
31, 1996
27.3 -- Restated Financial Data Schedule for the year ended December
31, 1995
</TABLE>
-19-
<PAGE> 20
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the fourth quarter of
1997.
(a) Current Report on Form 8-K dated October 1, 1997
reporting the execution of the Merger Agreement between the Company and
MedPartners.
(b) Current Report on Form 8-K dated December 9, 1997
reporting the issuance of a press release regarding the decision of Scott L.
Mercy, the President and Chief Executive Officer of the Company, to leave the
Company and take a position with Columbia/HCA Healthcare Corporation upon
consummation of the proposed merger between the Company and MedPartners.
(c) Current Report on Form 8-K dated December 29, 1997
reporting the amendment of the Merger Agreement between the Company and
MedPartners and the adjournment until January 20, 1998 of the special meeting of
stockholders scheduled to consider the proposed merger between the Company and
MedPartners.
-20-
<PAGE> 21
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 March 30, 1998.
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 March 30, 1998.
<TABLE>
<CAPTION>
Signatures
<S> <C>
/s/ SCOTT L. MERCY Title: President and Chief Executive Officer
- ------------------------ and Director
SCOTT L. MERCY
/s/ MICHAEL CATALANO Title: Executive Vice President of Development,
- ------------------------ General Counsel and Secretary
MICHAEL CATALANO
/s/ BRUCE A. TEAL Title: Senior Vice President and
- ------------------------ Chief Financial Officer
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
</TABLE>
-21-
<PAGE> 22
AMERICA SERVICE GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
Financial Statements Number
- -------------------- ------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Report of Independent Accountants........................................ F-3
Consolidated Balance Sheets at December 31, 1997 and 1996................ F-4
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995.............................. F-5
Consolidated Statements of Changes in Common
Stock, Additional Paid-in Capital, Retained Earnings
(Deficit) and Treasury Stock for the years
ended December 31, 1997, 1996 and 1995.............................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Financial Statement Schedule
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Report of Independent Accountants on Financial Statement Schedule........ F-25
Valuation and Qualifying Accounts and Reserves
(Schedule II) for the years ended
December 31, 1997, 1996 and 1995 ................................... F-26
</TABLE>
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> 23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Service Group Inc.
We have audited the accompanying consolidated balance sheets of America Service
Group Inc. and subsidiaries as of December 31, 1997 and 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 each of the two years in the period ended December 31, 1997. Our audits also
included the financial statement schedule for 1997 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, 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 17, 1998
F-2
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
America Service Group Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity for the year ended December 31, 1995 (appearing
on pages F-4 through F-26 of the America Service Group Inc.'s 1997 Annual Report
to Shareholders which has been incorporated by reference in this Form 10-K
Annual Report) present fairly, in all material respects, the results of
operations and cash flows of America Service Group Inc. and its subsidiaries for
the year 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of America Service Group Inc. for any period
subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Linthicum, Maryland
March 11, 1996,
Except as to Note 15, which is as of
March 28, 1996.
F-3
<PAGE> 25
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,445,000 $12,550,000
Short-term investments 1,559,000 2,105,000
Accounts receivable: Healthcare and other
Less allowance for doubtful accounts
of $384,000 and $2,016,000, respectively 8,242,000 9,146,000
Assets held for sale - 2,900,000
Prepaid expenses and other current assets 2,384,000 3,688,000
Current deferred taxes 2,116,000 2,152,000
------------ -----------
Total currents assets 17,746,000 32,541,000
Restricted investments 5,639,000 5,458,000
Property and equipment, net 2,468,000 3,036,000
Deferred taxes 1,193,000 1,056,000
Cost in excess of net assets acquired, net 411,000 453,000
Other assets 297,000 165,000
============ ===========
Total assets $ 27,754,000 $42,709,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,243,000 $ 7,656,000
Accrued expenses 12,836,000 22,319,000
Deferred revenue 1,410,000 5,000,000
------------ -----------
Total current liabilities 17,489,000 34,975,000
Noncurrent portion of accrued expenses 3,624,000 3,350,000
Commitments and contingencies
Redeemable common stock, $.01 par value, 186,000 shares
issued and outstanding at December 31, 1997 and 1996 1,842,000 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;
3,529,000 and 3,404,000 shares issued and outstanding at
December 31, 1997 and 1996 35,000 34,000
Additional paid-in-capital 7,926,000 7,546,000
Accumulated deficit (3,162,000) (4,904,000)
Less: Treasury stock, at cost, 31,000 shares at
December 31, 1996 - (208,000)
=========== ===========
Total liabilities and stockholders' equity $27,754,000 $42,709,000
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 26
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Healthcare revenue $ 129,211,000 $ 152,282,000 $ 115,238,000
Investment and interest income 679,000 751,000 223,000
------------- ------------- -------------
Total revenue 129,890,000 153,033,000 115,461,000
Healthcare expenses 118,631,000 145,618,000 103,150,000
------------- ------------- -------------
Gross margin 11,259,000 7,415,000 12,311,000
Selling, general, and administrative expenses 9,461,000 11,065,000 9,921,000
Nonrecurring charges -- 6,241,000 1,225,000
------------- ------------- -------------
Income (loss) from operations 1,798,000 (9,891,000) 1,165,000
Interest expense 12,000 42,000 19,000
------------- ------------- -------------
Income (loss) before income taxes (benefits) 1,786,000 (9,933,000) 1,146,000
Provision for income taxes (benefits) 101,000 (1,247,000) 459,000
------------- ------------- -------------
Net income (loss) 1,685,000 (8,686,000) 687,000
Decrease (increase) in redeemable common stock 57,000 (226,000) --
============= ============= =============
Net income (loss) attributable to common shares $ 1,742,000 $ (8,912,000) $ 687,000
============= ============= =============
Net income (loss) per common share:
Basic $ .50 $ (2.81) $ .23
============= ============= =============
Diluted $ .48 $ (2.81) $ .21
============= ============= =============
Weighted average common shares outstanding:
Basic 3,480,000 3,171,000 3,027,000
============= ============= =============
Diluted 3,657,000 3,171,000 3,221,000
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE> 27
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, 1995 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
Compensation for stock options -- -- 2,034,000 -- --
Increase in redemption of value
of common stock -- -- -- (226,000) --
Net loss -- -- -- (8,686,000) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 3,404,000 34,000 7,546,000 (4,904,000) (208,000)
Issuance of common stock
under employee stock plan 8,000 -- 68,000 -- --
Exercise of options 117,000 1,000 312,000 -- 208,000
Decrease in redemption value of
common stock -- -- -- 57,000 --
Net income -- -- -- 1,685,000 --
=========== =========== =========== =========== ===========
Balance at December 31, 1997 3,529,000 $ 35,000 $ 7,926,000 $(3,162,000) $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 28
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,685,000 $ (8,686,000) $ 687,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,114,000 1,533,000 738,000
Noncash compensation charge -- 2,384,000 --
Noncash change in redeemable common stock (17,000) 62,000 --
Provision for contract cancellation -- 3,802,000 --
Provision for doubtful accounts 841,000 1,822,000 421,000
Deferred income tax provision (101,000) -- (588,000)
Loss on disposal of assets held for sale 457,000 -- --
Changes in operating assets and liabilities:
Accounts receivable 63,000 5,621,000 (1,904,000)
Assets held for sale 2,900,000 -- --
Prepaid expenses and other current assets 1,304,000 (2,136,000) 153,000
Other assets (132,000) (72,000) 186,000
Accounts payable (4,413,000) 243,000 1,970,000
Accrued expenses (9,209,000) 4,839,000 3,021,000
Deferred revenue (3,590,000) (4,109,000) 4,766,000
Income taxes payable -- (284,000) 156,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (9,098,000) 5,019,000 9,606,000
INVESTING ACTIVITIES
Proceeds (purchases) of short-term investments 546,000 (1,405,000) 63,000
Proceeds from sale of restricted investments 625,000 1,392,000 1,520,000
Purchases of restricted investments (806,000) (2,276,000) (1,356,000)
Capital expenditures (961,000) (4,268,000) (1,405,000)
Proceeds from sale of property and equipment -- 81,000 --
------------ ------------ ------------
Net cash used in investing activities (596,000) (6,476,000) (1,178,000)
FINANCING ACTIVITIES
Purchase of treasury stock -- (875,000) (525,000)
Issuance of redeemable common stock -- 1,278,000 --
Issuance of common stock 68,000 67,000 --
Exercise of stock options 521,000 1,487,000 317,000
------------ ------------ ------------
Net cash provided by (used in) financing activities 589,000 1,957,000 (208,000)
Net increase (decrease) in cash and cash equivalents (9,105,000) 500,000 8,220,000
Cash and cash equivalents at beginning of year 12,550,000 12,050,000 3,830,000
============ ============ ============
Cash and cash equivalents at end of year $ 3,445,000 $ 12,550,000 $ 12,050,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 12,000 $ 42,000 $ 19,000
============ ============ ============
Cash paid for income taxes $ -- $ 326,000 $ 835,000
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 29
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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 medical supplies 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 the remaining
10% in July 1997. 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.
Fair Value of 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 and accounts payable, approximate their fair values.
F-8
<PAGE> 30
AMERICA SERVICE GROUP INC.
NOTES 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
rendered. Cash received in advance for future services is recorded as deferred
revenue and recognized as income when the service is performed. 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 dates. 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> 31
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, consisted primarily of computer
hardware and software acquired or developed by the Company under the terms of
the Georgia Department of Corrections contract. The assets were purchased by the
State of Georgia for $2,900,000 subsequent to the expiration of the contract on
June 30, 1997.
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. Amortization expense of $42,000, $43,000 and $42,000 for 1997, 1996
and 1995, 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, 1997 and 1996 was $323,000 and $281,000,
respectively.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and cost in excess of net
assets acquired and has determined there were no indications of impairment as of
December 31, 1997 and 1996.
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 was reflected in
additional paid-in capital. Treasury stock includes 31,000 and 420,000 common
shares at December 31, 1996 and 1995, respectively. The 31,000 common shares
held in treasury as of December 31, 1996, were issued during 1997.
F-10
<PAGE> 32
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Preferred Stock
Preferred stock may be issued in one or more series with distinctive serial
designations. The Board of Directors has the power and authority to establish
preferences related to dividends, redemptions, payment on liquidation,
conversion privileges and voting rights. As of December 31, 1997 and 1996, the
Company had no shares of preferred stock issued.
Income Taxes
The Company uses the liability method of accounting for federal and state income
taxes. Under the liability method, 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.
Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, Earnings Per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share, and uses the treasury stock method in
calculating dilution. All earnings per share amounts for all periods have been
presented and restated to conform to Statement 128 requirements.
Stock Options
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 SFAS 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> 33
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Newly Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for interim and annual
periods beginning in 1998. Comprehensive income encompasses all changes in
stockholders' equity (except those arising from transactions from owners) and
includes net income, net unrealized capital gains or losses on available for
sale securities and foreign currency translation adjustments. Management of the
Company does not expect the adoption of Statement 130 to have a material impact
on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information ("Statement 131"). Statement 131
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
these enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for fiscal years beginning after December
15, 1997. Management of the Company is currently reviewing the impact of
Statement 131. The Company will adopt Statement 131 on December 31, 1998 and
will report interim information effective in the first quarter of 1999.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
3. RELEASE AND SETTLEMENT AGREEMENT
On October 1, 1997, the Company entered into a Plan and Agreement of Merger (the
"Merger Agreement") with MedPartners, Inc., a Delaware corporation
("MedPartners"), and a wholly owned subsidiary of MedPartners, pursuant to which
the Company would have been acquired by MedPartners (the "Merger"). In
connection with the proposed Merger, each issued and outstanding share of the
Company's common stock, $0.01 par value per share (the "Common Stock") would
have been converted into the right to receive 0.71 of a share of MedPartners'
Common Stock. On October 29, 1997, MedPartners entered into a Plan and Agreement
of Merger (the "PhyCor Merger Agreement") with PhyCor, Inc., a Delaware
corporation ("PhyCor"), pursuant to which MedPartners would have been acquired
by PhyCor (the "MedPartners/PhyCor Merger") and each issued and outstanding
share
F-12
<PAGE> 34
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELEASE AND SETTLEMENT AGREEMENT (CONTINUED)
of MedPartners' Common Stock would have been converted into the right to receive
1.18 shares of PhyCor Common Stock.
The Company mailed a Proxy Statement to the holders of its Common Stock on
November 20, 1997. The Proxy Statement related to a special meeting of the
Company's stockholders scheduled to be held on December 29, 1997, for the
purpose of considering and voting upon the Merger. On December 29, the Company
postponed the special meeting at the request of MedPartners until January 20,
1998.
On January 20, 1998, the Company announced that it would not hold the special
meeting of its stockholders originally scheduled for December 29, 1997, and that
it was engaged in discussions with MedPartners regarding the Merger Agreement.
On February 26, 1998, the Company announced the termination of the Merger
Agreement and the execution of a Release and Settlement Agreement (the
"Settlement Agreement") with MedPartners relating to the Merger Agreement.
Pursuant to the Settlement Agreement, MedPartners agreed to pay the Company
approximately $3.5 million in cash and to reimburse or assume certain other
costs incurred by the Company in connection with the Merger in the amount of
approximately $2.0 million. The Company and MedPartners and certain of their
respective affiliates also entered into a Non-Compete, Non-solicitation and
Standstill Agreement (the "Non-Competition Agreement") in connection with the
termination of the Merger Agreement.
The Company has capitalized Merger related costs totaling $965,000, included in
prepaid expenses and other current assets in the Consolidated Balance Sheet, and
accrued related expenses of $247,000 at December 31, 1997.
Results of operations of the Company as of December 31, 1997 do not include any
direct costs relating to the Merger Agreement as all such amounts are to be
reimbursed as part of the Settlement Agreement.
4. NONRECURRING CHARGES
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.
The Company increased its 1996 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 agreed to purchase for $2,900,000. The Company feels it has satisfied
substantially all obligations relating to the contract with the State of Georgia
as of December 31, 1997.
F-13
<PAGE> 35
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NONRECURRING CHARGES (CONTINUED)
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.
5. 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
------------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S.Treasury and governmental
agency obligations $1,723,000 $1,722,000 $1,738,000 $1,721,000
Corporate bonds 3,262,000 2,921,000 3,194,000 2,929,000
Mortgage backed securities 654,000 815,000 654,000 808,000
========== ========== ========== ==========
$5,639,000 $5,458,000 $5,586,000 $5,458,000
========== ========== ========== ==========
</TABLE>
The amortized cost of restricted investments at December 31, 1997 mature as
follows: due less than one year $1,373,000; due after one year through five
years - $3,257,000; due after five years - $1,009,000.
F-14
<PAGE> 36
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31 ESTIMATED
1997 1996 USEFUL LIVES
--------------------------------------------------
<S> <C> <C> <C>
Building and improvements $ 604,000 $ 617,000 10 - 31.5 years
Equipment and furniture 3,988,000 5,004,000 5 - 10 years
Medical equipment 344,000 341,000 5 - 7 years
Automobile 14,000 14,000 3 - 5 years
---------- ---------- ---------------
4,950,000 5,976,000
Less: Accumulated depreciation (2,482,000) (2,940,000)
========== ==========
$2,468,000 $3,036,000
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$1,072,000, $1,490,000 and $696,000, respectively.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
Medical claims $ 6,047,000 $ 5,471,000
Liability claims 4,494,000 5,992,000
Salaries and employee benefits 4,345,000 7,868,000
Merger costs 247,000 265,000
Legal 429,000 1,270,000
Severance 290,000 1,055,000
Accrued loss on Georgia contract 200,000 2,883,000
Other 408,000 865,000
------------ ------------
16,460,000 25,669,000
Less: Noncurrent portion of liability claims (3,624,000) (3,350,000)
============ ============
$ 12,836,000 $ 22,319,000
============ ============
</TABLE>
F-15
<PAGE> 37
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BANKING ARRANGEMENTS
On March 28, 1997, the Company entered into 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 on LIBOR or prime rates subject to the quarterly operating performance of
the Company, as defined in the Agreement. The line of credit is collateralized
by all assets of the Company and its operating subsidiaries. The line of credit
is also subject to certain quarterly financial covenants of which the Company
was in compliance with throughout 1997. The Company had a $26,500,000 line of
credit facility at December 31, 1996, which expired in July 1997. No borrowings
were outstanding under the lines of credit at December 31, 1997 and 1996.
PHS had open letters of credit of $3,641,000 and $10,865,000 at December 31,
1997 and 1996, respectively, supporting performance guarantees 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 $0
and $700,000 at December 31, 1997 and 1996.
9. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ -- $(1,110,000) $ 838,000
State -- (137,000) 209,000
----------- ----------- -----------
-- (1,247,000) 1,047,000
Deferred taxes:
Federal -- -- (438,000)
State 101,000 -- (150,000)
----------- ----------- -----------
101,000 -- (588,000)
=========== =========== ===========
Income taxes (benefits) $ 101,000 $(1,247,000) $ 459,000
=========== =========== ===========
</TABLE>
F-16
<PAGE> 38
Deferred tax assets (liabilities) are comprised of the following at December 31:
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 2,835,000 $ 347,000
Self-insurance reserves 1,714,000 2,351,000
Executive stock options 773,000 773,000
Accrued vacation 299,000 804,000
Accrued merger costs 247,000 --
Bad debt allowance 146,000 769,000
Accrued legal 140,000 410,000
Accrued severance 109,000 348,000
Accrued loss on Georgia contract 76,000 675,000
Depreciation (461,000) (266,000)
Other 96,000 6,000
----------- -----------
5,974,000 6,217,000
Valuation allowance (2,665,000) (3,009,000)
=========== ===========
$ 3,309,000 $ 3,208,000
=========== ===========
</TABLE>
As of December 31, 1997, the Company had federal and state net operating loss
carryforwards of $7,459,000 expiring in 2005 through 2006.
A valuation allowance has been established for deferred tax assets, where
utilization is uncertain. 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.
A reconciliation of the federal statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Federal tax 34.0% (34.0)% 34.0%
State income taxes 5.7 (1.4) 5.2
Other 1.0 -- 0.8
Increase (decrease) in valuation allowance (35.0) 22.8 --
==== ==== ====
5.7% (12.6)% 40.0%
==== ==== ====
</TABLE>
F-17
<PAGE> 39
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 was calculated at 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. As of March 31, 1997, the
redemption price was fixed at $9.90 per share, through an amendment to the Chief
Executive Officer's employment agreement. Changes in the redemption value of the
purchased and awarded shares were recorded as adjustments to retained earnings
and compensation expense, respectively. During 1997, the Company adjusted the
redemption value of the purchased and awarded shares, respectively, by $57,000
and $17,000, and during 1996 by $226,000 and $62,000.
11. NET INCOME (LOSS) PER SHARE
The table below sets forth the computation of basic and diluted earnings per
share as required by FASB Statement No. 128 for the three years in the period
ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 1,685,000 $(8,686,000) $ 687,000
Decrease (increase) in redeemable common stock 57,000 (226,000) --
=========== =========== ===========
Numerator for basic and diluted
earnings per share - income (loss)
available to common stockholders $ 1,742,000 $(8,912,000) $ 687,000
=========== =========== ===========
DENOMINATOR:
Denominator for basic earnings
per share - weighted average
shares 3,480,000 3,171,000 3,027,000
Effect of dilutive securities:
Employee stock options 177,000 -- 194,000
----------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 3,657,000 3,171,000 3,221,000
=========== =========== ===========
Basic earnings (loss) per share $ .50 $ (2.81) $ .23
=========== =========== ===========
Diluted earnings (loss) per share $ .48 $ (2.81) $ .21
=========== =========== ===========
</TABLE>
F-18
<PAGE> 40
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
During any given quarter for the years ended December 31, 1997, 1996 and 1995
there were no more than 175,000, 762,000, and 180,000 options, respectively, to
purchase common stock with weighted average exercise prices of $12.84, $8.60,
and $9.52, respectively, not included in the computation of diluted earnings per
share because the option's exercise price was greater than the average market
price of the common shares for the period or there was a loss for the year and,
therefore, the effect would be antidilutive.
In addition, during any given quarter for the years ended December 31, 1997 and
1996 there were no more than 186,000 shares of common stock which the Company is
required to repurchase upon termination of the Chief Executive Officer, as part
of the written put option included in the employment agreement (see Note 10),
which were not included in the computation of diluted earnings per share because
the exercise (redemption) price was less than the average market price of the
common shares for the period or there was a loss for the year and, therefore,
the effect would be antidilutive.
12. STOCK OPTION PLANS
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 the Company's 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 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>
WEIGHTED
AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
----------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 776,400 $ 2.33 - 11.19 $ 4.60
Granted 140,800 4.50 - 6.31 3.91
Exercised (80,500) 2.33 - 6.50 3.60
Canceled (168,500) 2.66 - 6.50 3.59
-------- -------------- -------
Outstanding, December 31, 1995 668,200 2.33 - 11.19 5.00
Granted 402,350 6.93 - 13.13 10.53
Exercised (324,950) 2.33 - 6.50 3.39
Stock award vested (40,000) 8.75 - 8.75 8.75
Canceled (18,800) 4.50 - 13.12 12.16
-------- -------------- -------
Outstanding, December 31, 1996 686,800 2.67 - 13.12 8.66
Granted 97,500 10.19 - 14.44 12.98
Exercised (147,500) 2.67 - 13.13 3.45
Canceled (42,500) 4.50 - 13.88 11.91
======== ============== =======
Outstanding, December 31, 1997 594,300 $ 4.50 - 14.44 $ 10.41
======== ============== =======
</TABLE>
F-19
<PAGE> 41
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTION PLANS (CONTINUED)
Total options available for future grants at December 31, 1997 and 1996, were
76,000 and 131,000, 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, 1997, 449,000 options were exercisable under all plans. The
Company has reserved 818,000 shares of common stock for options outstanding and
for options which may be granted in the future.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ ------------------------------------
WEIGHTED AVG. WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIVE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------------------------------------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.50 - 6.50 67,700 6.95 $ 5.74 61,900 $ 5.78
8.75 - 11.19 429,000 8.53 9.68 351,300 9.71
13.13 - 14.44 172,600 9.55 13.59 35,800 13.13
-------------- ------- -------
$ 4.50 - 14.44 669,300 449,000
============== ======= =======
</TABLE>
Options exercisable at December 31, 1996 had a weighted average exercise price
of $6.72.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS No. 123 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 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------------------
<S> <C> <C>
Volatility..................... 0.7 1.0
Interest rate.................. 5.8% 8.5%
Expected life (years).......... 3 3
Dividend yields................ 0.0% 0.0%
</TABLE>
F-20
<PAGE> 42
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTION PLANS (CONTINUED)
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 option's vesting period. The Company's pro
forma information for the years ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996
-------------------------------------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss).................................. $1,685 $1,029 $(8,686) $(7,190)
Income (Loss) per common share:
Basic........................................... $ .50 $ .30 $ (2.81) $ (2.04)
Diluted......................................... $ .48 $ .28 $ (2.81) $ (2.04)
</TABLE>
The resulting pro forma disclosures may not be representative of that to be
expected in future years.
13. 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 $266,000, $299,000 and $338,000 for the years
ended December 31, 1997, 1996 and 1995, 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. At December 31,
1997, the Company has recorded $136,000, included in accrued expenses, related
to a one-time opportunity for employees to rescind the purchase of common stock
under the plan and to receive a refund of their payroll deductions for the July
1, 1997 through December 31, 1997 period.
F-21
<PAGE> 43
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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 ended December 31, 1997, 1996 and 1995 was $3,500,000, $3,250,000
and $2,450,000, respectively.
Possible claims in excess of the individual and aggregate claims per policy year
up to a maximum of $15,000,000 for 1997 and $5,000,000 for 1996 and 1995, are
covered by third-party insurance policies on a claims-made basis. During the
1994-95 and 1993-94 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, which terminated on June 30, 1997, is an occurrence-based policy
with similar levels of self-insured retention.
In July 1997, the Company commenced operations under the Indiana contract. The
Company has third party commercial insurance on an occurrence basis with respect
to the Indiana contract.
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 the cost of settling losses and loss
adjustment expenses discounted at 6% in 1997 and 1996, and 7% in 1995. Amounts
accrued were $4,494,000 and $5,992,000 at December 31, 1997 and 1996,
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. Reserves for medical malpractice exposures are subject to fluctuations in
frequency and severity. Given the inherent degree of variability in any such
estimates, the reserves reported at December 31, 1997, represent management's
best estimate of the amounts necessary to discharge the Company's obligations.
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment through October 2003 under certain
noncancelable operating leases.
F-22
<PAGE> 44
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has 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
option renewal through April 30, 2000, no lease termination expense has been
recorded by the Company. In connection with the MedPartners Settlement Agreement
(see Note 3), the Company closed its regional offices in Atlanta, Georgia, and
Newark, Delaware and assigned future lease payments totaling $230,000 to
MedPartners.
Future minimum annual lease payments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 581,000
1999 602,000
2000 460,000
2001 230,000
2002 211,000
Thereafter 176,000
----------
2,260,000
Sublease receipts (407,000)
==========
$1,853,000
==========
</TABLE>
Rental expense under operating leases was $516,000, $564,000 and $457,000 for
the years ended December 1997, 1996 and 1995, respectively.
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. The Company maintains 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.
F-23
<PAGE> 45
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 at December 31, 1997 and 1996. 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 consolidated financial position or results of operations.
16. MAJOR CUSTOMERS AND GEOGRAPHICAL CONCENTRATIONS
The following is a summary of revenues from major customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------------------------------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
State of Georgia $30,854 23.9% $56,662 37.2% $13,530 11.8%
State of Kansas 18,095 14.0 17,096 11.2 15,476 13.5
City of Philadelphia 17,865 13.8 16,034 10.5 14,713 12.8
State of Maryland - - 15,479 10.2 18,747 16.3
</TABLE>
Estimated credit losses associated with the receivables are provided for in the
consolidated financial statements. The contract with the state of Georgia
expired June 30, 1997 (see Note 4).
17. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The Company made a year end adjustment in 1997 resulting from a change in
estimate relating to medical malpractice reserves. The adjustment of $1,400,000
increased basic and diluted earnings per share by $.40 and $.39, respectively.
F-24
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULE
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-3 of the 1997 Annual Report to Shareholders of America
Service Group Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Linthicum, Maryland
March 11, 1996
Except as to Note 15, which is as of
March 28, 1996
F-25
<PAGE> 47
Schedule II
AMERICA SERVICE GROUP INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
----------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Allowance for doubtful accounts $2,016,000 $ 841,000 $2,473,000 $ 384,000
Valuation allowance for deferred
tax asset 3,009,000 -- 344,000 2,665,000
========== ========== ========== ==========
$5,025,000 $ 841,000 $2,817,000 $3,049,000
========== ========== ========== ==========
DECEMBER 31, 1996
Allowance for doubtful accounts $ 840,000 $1,822,000 $ 646,000 $2,016,000
Valuation allowance for deferred
tax asset -- 3,009,000 -- 3,009,000
========== ========== ========== ==========
$ 840,000 $4,831,000 $ 646,000 $5,025,000
========== ========== ========== ==========
DECEMBER 31, 1995
Allowance for doubtful accounts $ 419,000 $ 421,000 -- $ 840,000
========== ========== ========== ==========
</TABLE>
F-26
<PAGE> 1
EXHIBIT 2.3
RELEASE AND SETTLEMENT AGREEMENT
THIS RELEASE AND SETTLEMENT AGREEMENT (the "Agreement") is made and
entered into this 25th day of February, 1998 by and among MedPartners, Inc., a
Delaware corporation ("MedPartners"), ASG Merger Corporation, a Delaware
corporation and a wholly owned subsidiary of MedPartners (the "Subsidiary"),
EMSA Correctional Care, Inc., a Delaware corporation and an indirect wholly
owned subsidiary of MedPartners ("EMSA"), and America Service Group Inc., a
Delaware corporation ("ASG").
WITNESSETH:
WHEREAS, MedPartners, the Subsidiary and ASG entered into that certain
Plan and Agreement of Merger, dated October 1, 1997 (the "Merger Agreement"), as
amended by the Amendment to Plan and Agreement of Merger, dated December 29,
1997 (the "First Amendment"), and the Consent and Agreement, dated January 19,
1998 (the "Second Amendment") (collectively, the "Amended Merger Agreement");
WHEREAS, in connection with the negotiations surrounding the Merger
Agreement, MedPartners and ASG entered in that certain Confidentiality
Agreement, dated July 28, 1997;
WHEREAS, in the absence of this Agreement, ASG will file a lawsuit
against MedPartners and Subsidiary seeking actual, consequential and punitive
damages for the breach of certain of their representations, warranties,
covenants and agreements contained in the Amended Merger Agreement, and various
tort law claims, among other causes of action (the "Action");
WHEREAS, the Parties hereto wish to terminate the Amended Merger
Agreement and release their respective rights, claims, obligations and
liabilities thereunder;
<PAGE> 2
WHEREAS, in partial consideration of the payment by MedPartners to ASG,
ASG will assign all of its rights to EMSA and EMSA will assume all of ASG's
obligations and liabilities under each of the Joint Venture Agreements between
Prison Health Services, Inc. and EMSA related to the provision of services to
(i) Augusta-Richmond County, Georgia (3 facilities), (ii) Central Region New
York (Specialty Care Program), (iii) Ector County Detention Center, Texas, (iv)
Floyd County Indigent Care, Georgia, (v) Franklin County, Ohio, (vi) Hampton
Roads Regional Jail (Portsmith), Virginia, (vii) Marion County Jail, Florida,
(viii) State of New Mexico, and (ix) Trumball Correctional Institution, Ohio
(the "Joint Venture Agreements"); and
WHEREAS, in consideration of the covenants and consideration herein set
forth, MedPartners will assume all of ASG's obligations and liabilities under
the leases of the office space comprising ASG's Atlanta, Georgia, and Newark,
Delaware, regional offices and ASG will assign to MedPartners all of its right,
title and interest in and to any amounts received with respect to any sublease
or assignment of the Leases.
WHEREAS, the Parties are entering into a Non-Compete, Non-Solicitation
and Standstill Agreement (the "Non-Compete Agreement") in connection with the
settlement effected pursuant to this Agreement.
NOW, THEREFORE, in consideration of the covenants and consideration
herein set forth, and the payment described herein, the receipt and sufficiency
of which are hereby acknowledged by each of the Parties hereto, the Parties
agree as follows:
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<PAGE> 3
ARTICLE 1.
DEFINITIONS
As used in this Agreement, the following terms have the
meanings specified below:
(a) "ASG" shall mean ASG and its predecessors, successors,
subsidiaries, affiliates, parents, divisions, partners, assigns,
insurers, agents, representatives, and present or former directors,
officers, and employees.
(b) "Leases" shall mean, collectively, the Lease, dated
September 19, 1996, between Piedmont Center, 1-4 LLC, a Delaware
limited liability company, and ASG, as amended, and the Agreement of
Lease, dated as of February 1, 1997, between American Trading Real
Estate Properties, Inc., a Maryland corporation, and Prison Health
Services, Inc., a Delaware corporation.
(c) "MedPartners" shall mean MedPartners, Inc. and its
predecessors, successors, subsidiaries, affiliates, parents, divisions,
partners, assigns, insurers, agents, representatives, and present or
former directors, officers, and employees, including Subsidiary and
EMSA.
(d) "Parties" means MedPartners and ASG, collectively.
(e) "Non-Compete Agreement" means the Non-Compete,
Non-Solicitation and Standstill Agreement attached hereto as Exhibit A.
(f) "Released Claims" means all known and unknown claims,
counterclaims, demands, rights, liabilities, obligations, and causes of
action, of every nature and description whatsoever (in equity and at
law), including without limitation any of the
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<PAGE> 4
foregoing that (i) might have been asserted by ASG or MedPartners in
the Action; (ii) arise out of or relate to (A) the Amended Merger
Agreement or (B) any of the facts that could have been alleged in the
Action; (iii) arise out of or relate to the Joint Venture Agreements,
including, without limitation, Section 2.08 thereof; or (iv) arise out
of or relate to ASG's employment of Mr. Gerald F. Boyle.
Notwithstanding the foregoing, Released Claims shall not include any
known or unknown claims, counterclaims, demands, rights, liabilities,
obligations, and causes of action, of every nature and description
whatsoever (in equity and at law) arising under or related to the
Confidentiality Agreement or the Non-Compete Agreement.
ARTICLE 2.
THE SETTLEMENT
2.1 Upon execution of this Agreement, MedPartners will pay ASG
the amounts set forth in Schedule 1 to this Agreement at the times set forth
therein, which payments, together with the performance by MedPartners of its
obligations set forth in Sections 2.5 and 2.6 shall be in full satisfaction of
the Released Claims and as consideration for ASG's interest in the Joint Venture
Agreements.
2.2 In consideration of the mutual covenants herein, and upon
execution of this Agreement, MedPartners hereby fully, finally, and forever
releases, relinquishes, and discharges all Released Claims against ASG. In
connection with such release, MedPartners and EMSA agree that they, their
affiliates, officers or directors will not arrange for, cooperate with, consent
to, encourage, support, supply information to, or solicit any individual, entity
or group (including stockholders of ASG) in the pursuit or prosecution of any
Released Claim against
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<PAGE> 5
ASG, its officers or directors, unless in the written opinion of counsel to
MedPartners such action is necessary for MedPartner's Board of Directors to
fulfill its fiduciary duty or is otherwise required by law. In the event any
individual, entity or group (including stockholders of MedPartners) shall elect
to pursue a derivative suit (or any similar such action) involving any Released
Claim, MedPartners shall file a motion with the appropriate court for dismissal
of the suit and shall fully cooperate with ASG in the defense of any such suit
unless in the written opinion of counsel to MedPartners such action is
inconsistent with Fed.R.Civ.P. 11, similar state law provisions, or the
fiduciary duties of MedPartner's Board of Directors, or any committee thereof.
ASG shall reimburse MedPartners for any and all reasonable expenses incurred by
MedPartners in connection with filing such motion or cooperating with ASG in
such defense. Notwithstanding the foregoing, in the event MedPartners is a named
defendant in any such action, it shall assume and be responsible for any
attorney's fees, costs and expenses associated with its defense, except as set
forth in the preceding sentence.
2.3 In consideration of the mutual covenants herein, and upon
execution of this Agreement, the Joint Venture Agreements are hereby amended to
delete the entirety of Section 2.08, Article V and Section 10.02 of each Joint
Venture Agreement.
2.4 EMSA hereby assumes from ASG and ASG hereby assigns to
EMSA the Joint Venture Agreements and all of ASG's rights and obligations
thereunder.
2.5 MedPartners hereby assumes all of ASG's obligations
pursuant to the Leases, effective as of February 1, 1998. ASG hereby assigns to
MedPartners all of its right, title and interest in and to any and all amounts
paid by any sublessee or assignee of the Leases or either of them and hereby
agrees to co-operate with MedPartners in its efforts to sublease or
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<PAGE> 6
assign the Leases. MedPartners agrees to pay to ASG on the date of the execution
hereof the sum of $4,339.50, representing the amount of the security deposit
paid by ASG with respect to the Leases. ASG agrees that MedPartners shall be
entitled to receive, and agrees to pay to MedPartners, the amount of any refund
of such security deposit received by ASG.
2.6 MedPartners shall maintain at its own expense, the same
employee benefits program presently in effect for all employees of ASG, which
employee benefits program is more particularly described on Schedule 2 hereto,
for the period from January 1, 1998, through December 31, 1998. MedPartners
shall provide such benefits in a manner that will not require "reenrollment" by
ASG's employees.
2.7 MedPartners and EMSA jointly and severally agree to
indemnify and hold harmless ASG from, against and in respect of any and all
claims, liabilities, obligations, losses, costs, expenses, penalties, fines and
judgments (at equity or at law) and damages whenever arising or incurred
(including, without limitation, amounts paid in settlement, cost of
investigation and reasonable attorneys' fees and expenses) arising out of or
relating to the Joint Venture Agreements.
2.8 In consideration of the mutual covenants herein, and upon
execution of this Agreement, ASG hereby fully, finally, and forever releases,
relinquishes, and discharges all Released Claims against MedPartners. In
connection with such release, ASG agrees that it, its affiliates, officers or
directors will not arrange for, cooperate with, consent to, encourage, support,
supply information to, or solicit any individual, entity or group (including
stockholders of ASG) in the pursuit or prosecution of any Released Claim against
MedPartners, its officers or directors, unless in the written opinion of counsel
to ASG such action is necessary for ASG's
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<PAGE> 7
Board of Directors to fulfill its fiduciary duty or is otherwise required by
law. In the event any individual, entity or group (including stockholders of
ASG) shall elect to pursue a derivative suit (or any similar such action)
involving any Released Claim, ASG shall file a motion with the appropriate court
for dismissal of the suit and shall fully cooperate with MedPartners in the
defense of any such suit unless in the written opinion of counsel to ASG such
action is inconsistent with Fed.R.Civ.P. 11, similar state law provisions, or
the fiduciary duties of ASG's Board of Directors, or any committee thereof.
MedPartners shall reimburse ASG for any and all reasonable expenses incurred by
ASG in connection with filing such motion or cooperating with MedPartners in
such defense. Notwithstanding the foregoing, in the event ASG is a named
defendant in any such action, it shall assume and be responsible for any
attorney's fees, costs and expenses associated with its defense, except as set
forth in the preceding sentence.
2.9 The Parties agree to mutually terminate the Amended Merger
Agreement pursuant to Section 8.1(a) of the Merger Agreement.
2.10 Pursuant to Paragraph 1 of the Confidentiality Agreement
dated July 28, 1997, by and between ASG and MedPartners, ASG and MedPartners and
their respective affiliates shall promptly destroy all "Confidential
Information" (as defined in the Confidentiality Agreement) furnished by either
of them to the other.
ARTICLE 3.
OTHER
3.1 In entering into this Agreement, the undersigned represent
that they have read all the terms hereof, have discussed the terms with counsel
and that such terms are fully understood and voluntarily accepted.
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<PAGE> 8
3.2 This Agreement shall be in all respects interpreted,
enforced, and governed by and under the laws of the State of Delaware, without
regard to the conflict of laws principles thereof.
3.3 Each party to this Agreement acknowledges that this
Agreement supersedes all prior agreements, discussions, or representations,
whether oral or written, with respect to the subject matter hereof, with the
exception of the Confidentiality Agreement and the Non-Compete Agreement. This
Agreement specifically supersedes the Amended Merger Agreement and the Joint
Venture Agreements. The Parties further acknowledge that this Agreement cannot
be varied or amended except by writing signed by the Parties hereto.
3.4 Each party represents and warrants that the person
executing this Agreement in its behalf is duly authorized and fully competent to
execute this Agreement in its behalf.
3.5 All payments required to be made pursuant to this
Agreement shall be made on the due date by wire transfer of immediately
available funds to the account of ASG specified on Schedule 1 hereto. Any
payment that is required to be made on a due date that is not a day on which
commercial banks are open for business in either Birmingham, Alabama, or
Nashville, Tennessee, shall be made on the next day on which such banks in both
such cities are open for business, without interest. Subject to the preceding
sentence, any payment due pursuant to this Agreement that is not paid on the due
date shall bear interest at an interest rate per annum equal to the "prime rate"
from time to time announced by SunTrust Bank, Atlanta, Georgia, plus 2%. If ASG
shall be required to collect any amount due to it pursuant to this Settlement
Agreement by law or through an attorney at law, MedPartners shall pay all
reasonable costs of
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<PAGE> 9
collection incurred by ASG, including, without limitation, reasonable attorney's
fees, to the extent actually incurred.
3.6 This Agreement shall be construed without regard to the
Party or Parties responsible for its preparation, and it shall be deemed to have
been prepared jointly by both Parties. Any ambiguity or uncertainty arising
herein shall not be interpreted or construed against any Party hereto.
CONSENTED AND AGREED:
MEDPARTNERS, INC.
By: /s/ Tracy P. Thrasher
--------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
ASG MERGER CORPORATION
By: /s/ Tracy P. Thrasher
--------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
EMSA CORRECTIONAL CARE, INC.
By: /s/ Tracy P. Thrasher
--------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
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<PAGE> 10
AMERICA SERVICE GROUP INC.
By: /s/ Scott L. Mercy
---------------------------------------------
Name: Scott L. Mercy
Title: President and Chief Executive Officer
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<PAGE> 11
SCHEDULE 1 TO SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
PAYMENT AMOUNT: DUE DATE:
- --------------- ---------
<S> <C>
On execution $1,694,660.50
On April 1, 1998 $605,333.33
On July 1, 1998 $605,333.33
On September 1, 1998 $605,333.33
</TABLE>
WIRE TRANSFER INSTRUCTIONS:
All amounts due to ASG pursuant to the Settlement Agreement shall be remitted to
such account as shall be specified by ASG to MedPartners in writing.
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<PAGE> 12
SCHEDULE 2 TO SETTLEMENT AGREEMENT
----------------------------------
Employee Benefit Plans
Medical Plans*
Caremark Prescription Drug Program*
Dental Plans*
Life Insurance
Spouse Life Insurance
Child Life Insurance
Business Travel Insurance
Accidental Death & Dismemberment
Supplemental Life Insurance
Short Term Disability
Long Term Disability
Healthcare Reimbursement Account
Dependant Care Voucher
*Includes coverage for employee, spouse and dependants. In addition, MedPartners
must pay each employee $600 annually if they have other medical coverage and
elect no coverage through the MedPartners' Plans listed above.
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<PAGE> 13
EXHIBIT A
NON-COMPETE, NON-SOLICITATION AND STANDSTILL AGREEMENT
NON-COMPETE, NON-SOLICITATION AND STANDSTILL AGREEMENT ("NON-COMPETE"),
made and entered into as of the 25th day of February, 1998, by and among
MEDPARTNERS, INC., a Delaware corporation ("MedPartners"), ASG MERGER
CORPORATION, a Delaware corporation (the "Subsidiary"), INPHYNET GOVERNMENTAL
SERVICES, INC., a Florida corporation and an indirect wholly owned subsidiary of
MedPartners ("InPhyNet"), EMSA CORRECTIONAL CARE, INC., a Florida corporation
and a direct wholly owned subsidiary of InPhyNet ("EMSA") (MedPartners,
Subsidiary, InPhyNet and EMSA being sometimes collectively referred to herein as
"MedPartners Entities" or individually as, a "MedPartners Entity") and AMERICA
SERVICE GROUP INC., a Delaware corporation ("ASG").
W I T N E S S E T H:
WHEREAS, MedPartners, the Subsidiary and ASG entered into that certain
Plan and Agreement of Merger, dated October 1, 1997 (the "Merger Agreement"), as
amended by the Amendment to Plan and Agreement of Merger, dated December 29,
1997 (the "First Amendment"), and the Consent and Agreement, dated January 19,
1998 (the "Second Amendment") (collectively, the "Amended Merger Agreement");
WHEREAS, in connection with the negotiations surrounding the Merger
Agreement, MedPartners and ASG entered in that certain Confidentiality
Agreement, dated July 28, 1997 (the Confidentiality Agreement");
WHEREAS, MedPartners, the Subsidiary and ASG have entered into a
Settlement and Release Agreement, dated the date hereof (the "Settlement
Agreement"), pursuant to which MedPartners paid and agreed to pay ASG certain
amounts specified therein and to perform certain other undertakings for the
benefit of ASG, and MedPartners, the Subsidiary and ASG agreed to release each
other from any and all Released Claims (as defined in the Settlement Agreement)
and the Merger Agreement was terminated;
WHEREAS, each of the MedPartners Entities acknowledge that while
conducting due diligence in connection with the Merger Agreement and following
the signing of the Merger Agreement they came into possession of information
concerning ASG that would give them a competitive advantage over ASG when
competing for business against ASG;
WHEREAS, ASG acknowledges that while conducting due diligence in
connection with the Amended Merger Agreement and following the signing of the
Amended Merger Agreement, it came into possession of information concerning the
MedPartners' Entities which would give it
<PAGE> 14
a competitive advantage over the MedPartners Entities when competing for
business against the MedPartners Entities.
WHEREAS, each of the MedPartners Entities acknowledges that their
respective employees (and the employees of their respective subsidiaries and
affiliates) have been contacting and meeting with the clients of ASG in
preparation for the consummation of the Merger;
NOW, THEREFORE, in consideration of the premises, and the
mutual covenants and agreements contained herein, the parties hereto do hereby
agree as follows:
ARTICLE 1.
DEFINITIONS
1.1 Definitions. For the purposes of this Agreement, the following
definitions shall apply:
(a) "Affiliate" shall mean, with respect to any Person, any
other Person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by, or is under common
Control with, such Person.
(b) "Activities" shall mean the provision of capitated
contracts and other contractual arrangements, directly or indirectly,
with federal, state, county, and local government agencies to provide
health care services to adult or juvenile prison or jail inmates or
wards (including on-site health care programs, off-site hospitalization
and specialty out-patient care, physical and mental health screening,
dental screening and care, psychiatric care, OB-GYN screening and care,
diagnostic testing, emergency room care and surgery).
(c) "Applicable Law" shall mean all applicable provisions of
all (a) constitutions, treaties, statutes, laws (including common law),
rules, regulations, ordinances or codes of any Governmental Authority,
and (b) orders, decisions, injunctions, judgments, awards and decrees
of any Governmental Authority.
(d) "ASG Client" shall mean those Persons, facilities or
contracts, as applicable, listed on Exhibit A.
(e) "ASG Voting Securities" shall mean ASG's Common Stock, par
value $.01 per share, and any other securities of ASG having the right
to Vote.
(f) "Associate" shall mean, with respect to any person, (1)
any corporation or organization (other than such person or a
majority-owned subsidiary of such person) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner
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<PAGE> 15
of 10 percent or more of any class of equity securities, (2) any trust
or other estate in which such person has a substantial beneficial
interest or as to which such person serves as trustee or in a similar
fiduciary capacity, and (3) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person or
who is a director or officer of the person or any of its parents or
subsidiaries.
(g) "Beneficial Owner" (including, with its correlative
meanings, "Beneficially Own" and "Beneficial Ownership"), with respect
to any securities, shall mean any Person which:
(i) has, or any of whose Affiliates or
Associates has, directly or indirectly, the
right to acquire (whether such right is
exercisable immediately or only after the
passage of time) such securities pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or upon the
exercise of conversion rights, exchange
rights, warrants or options or otherwise;
(ii) has, or any of whose Affiliates or
Associates has, directly or indirectly, the
right to vote or dispose of (whether such
right is exercisable immediately or only
after the passage of time) or "beneficial
ownership" of (as determined pursuant to
Rule 13d-3 under the Exchange Act as in
effect on the date hereof but including all
such securities which a Person has the right
to acquire beneficial ownership of, whether
or not such right is exercisable within the
60-day period specified therein) such
securities, including pursuant to any
agreement, arrangement or understanding
(whether or not in writing); or
(iii) has, or any of whose Affiliates or
Associates has, any agreement, arrangement
or understanding (whether or not in writing)
for the purpose of acquiring, holding,
voting or disposing of any securities which
are Beneficially Owned, directly or
indirectly, by any other Person (or any
Affiliate or Associate thereof).
(h) "Confidential Information" shall mean any data or
information of ASG and its subsidiaries and joint ventures, other than
Trade Secrets, which is valuable to the operation of the business of
ASG and not generally known to competitors.
(i) "EMSA Clients" shall mean those Persons, facilities or
contracts, as applicable, listed on Exhibit B.
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<PAGE> 16
(j) "Exchange Act" shall mean the Securities Exchange Act of
1934, or any similar federal statute, and the rules and regulations of
the SEC thereunder, all as the same shall be in effect at the time.
(k) "Group" shall mean any group within the meaning of Section
13(d)(3) of the Exchange Act as in effect on the date hereof.
(l) "Governmental Authority" shall mean any federation,
nation, state, sovereign, or government, any federal, supranational,
regional, state or local political subdivision, any governmental or
administrative body, instrumentality, department or agency or any
court, administrative hearing body, arbitration tribunal, commission or
other similar dispute resolving panel or body, and any other entity
exercising the executive, legislative, judicial, regulatory or
administrative functions of a government.
(m) "Noncompete Period" shall mean the period beginning on the
date hereof and continuing for a period of three (3) years from the
date hereof.
(n) "Party" shall mean, on the one hand, the MedPartners
Entities and, on the other hand, ASG.
(o) "Person" shall mean an individual, a partnership, an
association, a joint venture, a corporation, a business, a limited
liability company, a trust, any entity organized under Applicable Law,
an unincorporated organization or any Governmental Authority.
(p) "SEC" shall mean the United States Securities and Exchange
Commission.
(q) "Territory" shall mean the United States of America, such
area being where the customers of ASG and the MedPartners Entities are
located.
(r) "Trade Secrets" shall mean information of ASG and its
Affiliates, subsidiaries and joint ventures, on the one hand, or, the
MedPartners Entities and their Affiliates, subsidiaries and joint
ventures, on the other hand, including, but not limited to, technical
or nontechnical data, a formula, pattern, compilation, program,
including, without limitation, computer software and related source
codes (including ASG's proprietary "Daily Operating Indicators"
software), device, method, technique, drawing, process, financial data,
financial plan, product plan, list of actual or potential customers or
suppliers, or other information similar to any of the foregoing, which
derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other
persons who can derive economic value from its disclosure or use. For
purposes of this Agreement, the term Trade Secrets shall not include
information that the applicable MedPartners Entity or ASG, as the case
may be,
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<PAGE> 17
can show by competent proof becomes generally known to the public after
the date hereof through no act or omission of any MedPartners Entity or
ASG, as the case may be, or their respective Affiliates and Associates.
(s) "Vote" shall mean, as to any entity, the ability to cast a
vote at a stockholders' or comparable meeting of such entity with
respect to the election of directors or other members of such entity's
governing body.
ARTICLE 2.
NONCOMPETE AND NO SOLICITATION
2.1 Trade Secrets. Each Party shall, and shall cause each of its
respective Affiliates and Associates to, hold in confidence at
all times after the date hereof all Trade Secrets of the other
Party, and shall not disclose, publish or make use of Trade
Secrets of the other Party at any time after the date hereof
without the prior written consent of such Party. Nothing in
this Agreement shall diminish the rights of either Party
regarding the protection of Trade Secrets and other
intellectual property pursuant to applicable law.
2.2 Confidential Information. Each Party hereby agrees that, prior
to the third anniversary of the date hereof, each Party shall,
and shall cause each of its respective Affiliates and
Associates to, hold in confidence all Confidential Information
of the other Party and will not disclose, publish or make use
of Confidential Information of the other Party without the
prior written consent of such Party.
2.3 Noncompetition.
(a) Each Party hereby acknowledges that the other Party
conducts or will conduct Activities throughout the Territory. Each
Party acknowledges that to protect adequately the interest of the other
Party, it is essential that any noncompete covenant with respect
thereto cover all ASG Activities and the entire Territory. Each Party
further acknowledges that the covenants set forth in this Agreement are
a material condition to the willingness of the other Party to enter
into the Settlement Agreement, and that each Party and its respective
Affiliates and Associates desires to enter into these covenants in
order to obtain the substantial benefits that each Party and its
respective Affiliates and Associates will obtain as a result of the
Settlement Agreement.
(b) Each Party hereby agrees that each such Party shall not,
and it shall cause each of its respective Affiliates and Associates not
to, during the Noncompete Period, in any manner, directly or indirectly
or by assisting others, communicate with, make proposals or bids to or
render services (that (i) are being provided by the other Party on
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<PAGE> 18
the date of this Agreement and (ii) are, at least in part, equivalent
to Activities) to any ASG Client or EMSA Client, as the case may be, in
the Territory; subject, however, to exceptions set forth in Exhibit C.
Any Party to this Agreement may seek the written consent of each other
Party to this Agreement to the waiver of the prohibition set forth in
this Section 2.3(b) with respect to any ASG Client or EMSA Client, as
the case may be, specified in such request, which consent may not be
unreasonably withheld.
2.4 Nonsolicitation. Each Party hereby agrees that it shall not, and it
shall cause each of its respective Affiliates and Associates not to, prior to
the third anniversary of the date hereof, in any manner, directly or indirectly
or by assisting others, recruit or hire away or attempt to recruit or hire away,
on behalf of themselves or on behalf of any other Person, any person who is an
employee of the other Party or any of its Affiliates.
2.5 Future Acquisitions. The Parties agree that nothing set forth in
this Agreement shall preclude either Party from acquiring another entity engaged
in the Activities or shall require either Party to terminate any contract
entered into by or withdraw any bid or response to a request-for-proposals
issued by any entity acquired by such Party.
ARTICLE 3.
STANDSTILL COVENANTS
3.1 Standstill Covenants. Each Party agrees that, prior to the
third anniversary of the date of this Agreement (the
"Standstill Period"), it will not, and it will cause each of
its Affiliates and Associates not to, directly or indirectly,
alone or in concert with others, unless specifically requested
in writing by the Chairman of the other party, take any of the
actions set forth below:
(a) effect, seek, offer, propose (whether publicly or
otherwise) or cause or participate in, or assist any other Person to
effect, seek, offer or propose (whether publicly or otherwise) or
participate in:
(i) any acquisition of Beneficial Ownership of
the other Party's Voting Securities or other
equity interests in the other Party;
(ii) any tender or exchange offer, merger,
consolidation, share exchange or business
combination involving the other Party or any
material portion of its business or any
purchase of all or any substantial part of
the assets of the other Party or any
material portion of its business;
(iii) any recapitalization, restructuring,
liquidation, dissolution or other
extraordinary transaction with respect to
the other Party or any material portion of
its business; or
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<PAGE> 19
(iv) any "solicitation" of "proxies" (as such
terms are used in the proxy rules of the SEC
but without regard to the exclusion set
forth in Section 14a-1(l)(2)(iv) from the
definition of "solicitation") with respect
to ASG or any of its Affiliates or any
action resulting in such Person becoming a
"participant" in any "election contest" (as
such terms are used in the proxy rules of
the SEC) with respect to a Party or any of
its Affiliates;
(b) propose any matter for submission to a vote of
stockholders of the other Party or any of its Affiliates;
(c) form, join or participate in a Group with respect to any
of the other Party's Voting Securities;
(d) take any other action to seek to affect the control of the
management or Board of Directors of the other Party or any of its
Affiliates;
(e) enter into any discussions, negotiations, arrangements or
understandings with any Person with respect to any of the foregoing, or
advise, assist, encourage or seek to persuade others to take any action
with respect to any of the foregoing;
(f) disclose to any Person, any intention, plan or arrangement
inconsistent with the foregoing or form any such intention which would
result in either Party or any of its Affiliates or Associates being
required to make any such disclosure in any filing with a Governmental
Authority or being required by Applicable Law to make a public
announcement with respect thereto; or
(g) request the other Party or any of its Affiliates,
directors, officers, employees, representatives, advisors or agents,
directly or indirectly, to amend or waive in any material respect this
Agreement or the Certificate of Incorporation or the Bylaws of the
other Party or any of its Affiliates.
ARTICLE 4.
MISCELLANEOUS
4.1 Representations and Warranties. The Parties represent and
warrant to one another that this Agreement has been duly
authorized by all corporate action required to be taken on
each of their parts, that it has been duly executed by and
delivered and that it constitutes the legal, valid and binding
obligation of each of them, except as enforcement may be
subject to bankruptcy, moratorium and similar laws and except
as the availability of equitable remedies may be subject to
customary limitations.
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<PAGE> 20
4.2 Severability. If a judicial or arbitral determination is made
that any of the provisions of this Agreement constitutes an
unreasonable or otherwise unenforceable restriction against
either Party or their respective Affiliates or Associates, the
provisions of this Agreement shall be rendered void only to
the extent that such judicial or arbitral determination finds
such provisions to be unreasonable or otherwise unenforceable
with respect to either Party or their respective Affiliates or
Associates. In this regard, each MedPartners Entity and ASG
hereby agree that any judicial authority construing this
Agreement shall be empowered to sever any portion of the
Territory, any prohibited business activity or any time period
from the coverage of this Agreement and to apply the
provisions of this Agreement to the remaining portion of the
Territory, the remaining business activities and the remaining
time period not so severed by such judicial or arbitral
authority. Moreover, notwithstanding the fact that any
provision of this Agreement is determined not to be
specifically enforceable, each Party shall nevertheless be
entitled to recover monetary damages as a result of the breach
of such provision by the other Party or its respective
Affiliates or Associates. The time period during which the
prohibitions set forth in this Agreement shall apply with
respect to each Party and its respective Affiliates or
Associates shall be tolled and suspended for a period equal to
the aggregate time during which any such party violates such
prohibitions in any respect.
4.3 Injunctive Relief. Each Party hereby agrees that any remedy at
law for any breach of the provisions contained this Agreement
shall be inadequate and that the other Party shall be entitled
to injunctive relief in addition to any other remedy the other
Party might have under this Agreement.
4.4 Notices. Any communications required or desired to be given
hereunder shall be deemed to have been properly given if sent
by hand delivery or by facsimile and overnight courier to the
parties hereto at the following addresses, or at such other
address as either party may advise the other in writing from
time to time:
If to any MedPartners Entity:
MedPartners, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
Facsimile: (205) 982-7709
Attention: J. Brooke Johnston, Jr., Esq.
Senior Vice President and General Counsel
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<PAGE> 21
with a copy to:
Haskell Slaughter & Young, L.L.C.
1200 AmSouth Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Facsimile: (205) 324-1133
Attention: Robert E. Lee Garner, Esq.
If to ASG:
America Service Group Inc.
Suite 300
105 Westpark Drive
Brentwood, Tennessee 37027
Attention: Michael Catalano, Esq.
Executive Vice President and
General Counsel
with a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1763
Facsimile: (404) 572-5100
Attention: Philip A. Theodore, Esq.
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
4.5 Further Assurances. Each party hereby agrees to perform any
further acts and to execute and deliver any documents which
may be reasonably necessary to carry out the provisions of
this Agreement.
4.6 Governing Law. This Agreement shall be interpreted, construed
and enforced in accordance with the laws of the State of
Delaware, applied without giving effect to any
conflicts-of-law principles.
4.7 Captions. The captions or headings in this Plan of Merger are
made for convenience and general reference only and shall not
be construed to describe, define or limit the scope or intent
of the provisions of this Non-Compete Agreement.
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<PAGE> 22
4.8 Entire Agreement. This Non-Compete Agreement, the Settlement
Agreement, the Joint Venture Agreements and the
Confidentiality Agreement, contain the entire agreement of the
parties and supersedes any and all prior or contemporaneous
agreements between the parties, written or oral. Such
agreement may not be changed or terminated orally, but may
only be changed by an agreement in writing signed by the party
or parties against whom enforcement of any waiver, change,
modification, extension, discharge or termination is sought.
4.9 Counterparts. This Non-Compete Agreement may be executed in
several counterparts, each of which, when so executed, shall
be deemed to be an original, and such counterparts shall,
together, constitute and be one and the same instrument.
4.10 Binding Effect. This Non-Compete Agreement shall be binding
on, and shall inure to the benefit of, the parties hereto, and
their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this
Agreement. No party may assign any right or obligation
hereunder without the prior written consent of the other
parties.
4.11 No Rule of Construction. The parties acknowledge that this
Agreement was initially prepared by ASG, and that all parties
have read and negotiated the language used in this Agreement.
The parties agree that, because all parties participated in
negotiating and drafting this Agreement, no rule of
construction shall apply to this Agreement which construes
ambiguous language in favor of or against any party by reason
of that party's role in drafting this Agreement.
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<PAGE> 23
IN WITNESS WHEREOF, MedPartners, Subsidiary, InPhyNet, EMSA and ASG
have caused this Agreement to be executed by their respective duly authorized
officers, all as of the day and year first above written.
MEDPARTNERS, INC.
By: /s/ Tracy P. Thrasher
------------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
ASG MERGER CORPORATION
By: /s/ Tracy P. Thrasher
------------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
INPHYNET GOVERNMENTAL SERVICES,
INC.
By: /s/ Tracy P. Thrasher
-------------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
EMSA CORRECTIONAL CARE, INC.
By: /s/ Tracy P. Thrasher
------------------------------------------
Name: Tracy P. Thrasher
Title: Secretary
AMERICA SERVICE GROUP INC.
By: /s/ Scott L. Mercy
-------------------------------------------
Name: Scott L. Mercy
Title: President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
AGREEMENT dated the 20th day of February, 1998 between BRUCE A. TEAL
("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
senior vice president and chief financial 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 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 $160,000.00, 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> 2
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 any 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 two 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 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
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<PAGE> 3
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 or 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 as of 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
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 Sections
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;
(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;
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<PAGE> 4
(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 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 (i) 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
(A) 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; (B) 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 (C) 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 time of the transaction; (ii)
employ or retain as an independent contractor any employee of the Company; or
(iii) recruit, solicit or otherwise induce any employee of the Company to
discontinue such employment relationship. For purposes hereof, the "Business"
shall consist of (i) delivery of contract health care to correctional
facilities, and (ii) 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 or area.
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<PAGE> 5
(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:
(a) If to the Company:
America Service Group Inc.
105 Westpark Drive, Suite 300
Brentwood, TN 37027
Attn: Chief Executive Officer
(b) If to Employee:
Bruce A. Teal
100 Liberty Cove
Henderson, TN 37075
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.
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 enforceable, and that the Agreement in its reduced from shall be valid
and enforceable to the full extent permitted by law.
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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 and governed
by the internal laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a binding contract as of the day and year first above written.
EMPLOYEE AMERICA SERVICE GROUP INC.
By: /s/ Bruce A. Teal By: /s/ Scott L. Mercy
------------------------------ ------------------------------------
Bruce A. Teal Scott L. Mercy
Chief Executive Officer
6
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EXHIBIT 10.20
EMPLOYMENT AGREEMENT
AGREEMENT dated the 12th day of February, 1998 between GERARD F. BOYLE
("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
President and Chief Executive Officer of Prison Health Services, Inc. ("PHS"), a
wholly-owned subsidiary 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 on
March 2, 1998 and shall 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 $180,000.00, 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> 2
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 any 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 two 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 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
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<PAGE> 3
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 or 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 as of 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
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 Sections
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;
(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;
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(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 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 (i) 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
(A) 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; (B) 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 (C) 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 time of the transaction; (ii)
employ or retain as an independent contractor any employee of the Company; or
(iii) recruit, solicit or otherwise induce any employee of the Company to
discontinue such employment relationship. For purposes hereof, the "Business"
shall consist of (i) delivery of contract health care to correctional
facilities, and (ii) 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 or area.
4
<PAGE> 5
(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:
(a) If to the Company:
America Service Group Inc.
105 Westpark Drive, Suite 300
Brentwood, TN 37027
Attn: Chief Executive Officer
(b) If to Employee:
Gerard F. Boyle
105 Westpark Drive, Suite 300
Brentwood, TN 37027
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.
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 enforceable, and that the Agreement in its reduced from shall be valid
and enforceable to the full extent permitted by law.
5
<PAGE> 6
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 and governed
by the internal laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a binding contract as of the day and year first above written.
EMPLOYEE AMERICA SERVICE GROUP INC.
By: /s/ Gerard F. Boyle By: /s/ Scott L. Mercy
---------------------------- -----------------------------------
Gerald F. Boyle Scott L. Mercy
Chief Executive Officer
6
<PAGE> 1
EXHIBIT 10.21
AMERICA SERVICE GROUP INC.
NONQUALIFIED STOCK OPTION
THIS NONQUALIFIED STOCK OPTION, granted this 12th day of February, 1998 by
AMERICA SERVICE GROUP INC., a Delaware corporation (the "Company"), to Gerard F.
Boyle (the "Optionee").
WITNESSETH:
WHEREAS, as an inducement to the Optionee to enter into an Employment
Agreement, the Company agreed to grant this option to the Optionee;
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 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 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 $9.375 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 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> 2
(i) more than thirty days following the termination of the
Optionee's employment with the Company under Section 7(a) or
7(e) of his Employment Agreement;
(ii) 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
(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 the 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 promptly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price.
2
<PAGE> 3
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 other 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.
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 of
the Company therefor, 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 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.
3
<PAGE> 4
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 we 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 Stock
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 and 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.
<TABLE>
<CAPTION>
AMERICA SERVICE GROUP INC.
<S> <C> <C>
By: /s/ Scott L. Mercy February 12, 1998
---------------------------------------
Scott L. Mercy Dated:
Receipt is hereby acknowledged: Attest:
(SEAL)
/s/ Gerard F. Boyle February 12, 1998 /s/ Michael Catalano February 12, 1998
- ---------------------------------------- ------------------------------------------
Optionee Dated: Michael Catalano Dated:
</TABLE>
4
<PAGE> 1
EXHIBIT 21.1
American Service Group, Inc.
List of Subsidiaries
1. Prison Health Services, Inc.
2. UniSource, Inc.
3. Harbour Insurance, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the America Service
Group Inc. Registration Statement on Form S-8 (Registration No.
33-48231), pertaining to the Incentive Stock Plan, the Registration
Statement on Form S-8 (Registration No. 333-03010), pertaining to the
Executive Stock Purchase Plan, the Registration Statement on Form S-8
(Registration No. 333-04903), pertaining to the Amended Incentive Stock
Plan for 275,000 shares, the Registration Statement on Form S-8
(Registration No. 333-04895), pertaining to the Employee Stock
Purchase Plan, the Registration Statement on Form S-8 (Registration No.
333-26903), pertaining to the Executive Stock Option Plan and the
Registration Statement on Form S-8 (Registration No. 333-26905),
pertaining to the Amended Incentive Stock Plan for 107,500 shares, of
our report dated March 17, 1998, with respect to the consolidated
financial statements and schedule of America Service Group Inc. for the
year ended December 31, 1997.
Ernst & Young LLP
Nashville, Tennessee
March 26, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-48231, No. 33-304895, No. 33-304903, No.
33-303010, No. 33-326903 and No. 33-326905) 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 schedule of America Service Group Inc. for the year ended
December 31, 1995, included in this Form 10-K for the year ended December 31,
1997.
/s/ Price Waterhouse LLP
Linthicum, Maryland
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,445,000
<SECURITIES> 1,559,000
<RECEIVABLES> 8,626,000
<ALLOWANCES> (384,000)
<INVENTORY> 0
<CURRENT-ASSETS> 17,746,000
<PP&E> 4,950,000
<DEPRECIATION> (2,482,000)
<TOTAL-ASSETS> 27,754,000
<CURRENT-LIABILITIES> 17,489,000
<BONDS> 0
1,842,000<F1>
0
<COMMON> 35,000
<OTHER-SE> 4,764,000
<TOTAL-LIABILITY-AND-EQUITY> 27,754,000
<SALES> 129,211,000
<TOTAL-REVENUES> 129,890,000
<CGS> 118,631,000
<TOTAL-COSTS> 128,092,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 841,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,786,000
<INCOME-TAX> 101,000
<INCOME-CONTINUING> 1,685,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,685,000
<EPS-PRIMARY> .50
<EPS-DILUTED> .48
<FN>
<F1>REPRESENTS REDEEMABLE COMMON STOCK
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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> 11,162,000
<ALLOWANCES> (2,016,000)
<INVENTORY> 0
<CURRENT-ASSETS> 32,541,000
<PP&E> 5,976,000
<DEPRECIATION> (2,940,000)
<TOTAL-ASSETS> 42,709,000
<CURRENT-LIABILITIES> 34,975,000
<BONDS> 0
1,916,000<F1>
0
<COMMON> 34,000
<OTHER-SE> 2,434,000
<TOTAL-LIABILITY-AND-EQUITY> 42,709,000
<SALES> 152,282,000
<TOTAL-REVENUES> 153,033,000
<CGS> 145,618,000
<TOTAL-COSTS> 162,924,000<F2>
<OTHER-EXPENSES> 0
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP FOR THE YEAR ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,050,000
<SECURITIES> 700,000
<RECEIVABLES> 13,257,000
<ALLOWANCES> (840,000)
<INVENTORY> 0
<CURRENT-ASSETS> 28,773,000
<PP&E> 6,401,000
<DEPRECIATION> (3,162,000)
<TOTAL-ASSETS> 38,329,000
<CURRENT-LIABILITIES> 26,081,000
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 8,633,000
<TOTAL-LIABILITY-AND-EQUITY> 38,329,000
<SALES> 115,238,000
<TOTAL-REVENUES> 115,461,000
<CGS> 103,150,000
<TOTAL-COSTS> 114,296,000<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 421,000
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 1,146,000
<INCOME-TAX> 459,000
<INCOME-CONTINUING> 687,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 687,000
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
<FN>
<F1>INCLUDES $1,225,000 OF NONRECURRING EXPENSES
</FN>
</TABLE>
