<PAGE> 1
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FORM 10Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
---------------------
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
Commission File Number: 0-20135
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AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 51-0332317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
105 WESTPARK DRIVE, SUITE 300
BRENTWOOD, TENNESSEE 37027
(Address and zip code of principal executive office)
(615) 373-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed under Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
There were 3,576,163 shares of Common Stock outstanding as of May 6, 1999.
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<PAGE> 2
AMERICA SERVICE GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998.................................. 3
Condensed Consolidated Income Statements for the quarters
ended March 31, 1999 and March 31, 1998................ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 1998... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II. OTHER INFORMATION
Item 5: Other Events........................................ 14
Item 6: Exhibits and Reports on Form 8-K.................... 14
Signature page.............................................. 15
</TABLE>
2
<PAGE> 3
PART I:
FINANCIAL INFORMATION
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,477,000 $ 7,211,000
Accounts receivable: Healthcare and other, less allowance
for doubtful accounts.................................. 54,901,000 13,760,000
Prepaid expenses and other current assets................. 4,282,000 1,098,000
Current deferred taxes.................................... 2,730,000 2,730,000
------------ -----------
Total current assets.............................. 63,390,000 24,799,000
Property and equipment, net................................. 3,264,000 1,886,000
Deferred taxes.............................................. 1,341,000 1,341,000
Cost in excess of net assets acquired, net.................. 45,933,000 --
Other assets................................................ 827,000 349,000
------------ -----------
$114,755,000 $28,375,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12,468,000 $ 2,438,000
Accrued expenses.......................................... 30,434,000 11,846,000
Subordinated notes........................................ 14,460,000 --
------------ -----------
Total current liabilities......................... 57,362,000 14,284,000
Noncurrent portion of accrued expenses...................... 1,477,000 1,300,000
Long-term debt.............................................. 37,000,000 --
Commitments and contingencies
Mandatory redeemable preferred stock........................ 5,000,000 --
Mandatory redeemable common stock........................... 1,842,000 1,842,000
Common stock................................................ 36,000 36,000
Additional paid in capital.................................. 10,985,000 8,351,000
Retained earnings........................................... 1,053,000 2,562,000
------------ -----------
Total liabilities and stockholders' equity........ $114,755,000 $28,375,000
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
(RESTATED)
<S> <C> <C>
Healthcare revenue.......................................... $58,281,000 $27,632,000
Healthcare expenses......................................... 52,478,000 24,842,000
----------- -----------
Gross margin................................................ 5,803,000 2,790,000
Selling, general and administrative expenses................ 3,020,000 2,761,000
Depreciation and amortization............................... 667,000 294,000
MedPartners settlement...................................... -- (1,595,000)
----------- -----------
Income from operations...................................... 2,116,000 1,330,000
Interest, net............................................... (1,024,000) 132,000
----------- -----------
Income before taxes......................................... 1,092,000 1,462,000
Provision for income taxes.................................. 612,000 --
----------- -----------
Net income.................................................. 480,000 1,462,000
Preferred stock dividends................................... 1,989,000 --
----------- -----------
Net income (loss) attributable to common shares............. $(1,509,000) $ 1,462,000
=========== ===========
Net income (loss) per common share:
Basic..................................................... $ (0.42) $ 0.41
=========== ===========
Diluted................................................... $ (0.42) $ 0.41
=========== ===========
Weighed average shares outstanding:
Basic..................................................... 3,575,000 3,530,000
=========== ===========
Diluted................................................... 3,575,000 3,591,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------------
1999 1998
------------ ----------
<S> <C> <C>
Operating activities:
Net income.................................................. $ 480,000 $1,462,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 667,000 294,000
Accretion of subordinated notes........................... 119,000 --
Changes in operating assets and liabilities, net of
effects from acquisition:
Accounts receivable.................................... (1,688,000) (2,179,000)
Prepaid expenses and other current assets.............. (2,386,000) 507,000
Other assets........................................... (218,000) 2,000
Accounts payable....................................... 10,031,000 (503,000)
Accrued expenses....................................... (3,434,000) 1,154,000
Deferred revenue....................................... -- (1,410,000)
------------ ----------
Net cash provided by (used in) operating activities......... 3,571,000 (673,000)
Investing activities:
Cash paid for acquisition, net of cash acquired............. (66,077,000) --
Capital expenditures........................................ (259,000) (129,000)
Change in short-term investments............................ -- 566,000
Change in restricted investments............................ -- (652,000)
------------ ----------
Net cash used in investing activities....................... (66,336,000) (215,000)
Financing activities:
Proceeds from long-term debt................................ 47,000,000 --
Proceeds from mandatory redeemable preferred stock.......... 5,000,000 --
Proceeds from subordinated notes............................ 15,000,000 --
Payments on long-term debt.................................. (10,000,000) --
Exercise of stock options................................... 31,000 247,000
------------ ----------
Net cash provided by financing activities................... 57,031,000 247,000
Net decrease in cash and cash equivalents................... (5,734,000) (641,000)
Cash and cash equivalents, beginning of period.............. 7,211,000 3,445,000
------------ ----------
Cash and cash equivalents, end of period.................... $ 1,477,000 $2,804,000
============ ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(RESTATED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements as of March 31, 1999 and for
the quarter then ended are unaudited, but in the opinion of management, have
been prepared in conformity with generally accepted accounting principles
applied on a basis consistent with those of the annual audited consolidated
financial statements. Such interim consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial position and the results of operations for the
quarter presented. The results of operations for the three months presented are
not necessarily indicative of the results to be expected for the year ending
December 31, 1999. The interim consolidated financial statements should be read
in connection with the audited consolidated financial statements for the year
ended December 31, 1998.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the March 1998 Condensed
Consolidated Income Statement relating to the presentation of the MedPartners
Release and Settlement Agreement as discussed in Note 4. Specifically, $0.4
million of reimbursements relating to healthcare and lease costs are now
reflected in healthcare expenses and $0.7 million of costs and associated with
the failed merger are included in selling, general and administrative expenses.
The reclassifications increased the nonrecurring gain by $1.1 million to $1.6
million. The reclassifications did not impact net income or earnings per share
calculations and were discussed in conjunction with the Company's March 1998
10-Q's Management's Discussion and Analysis of Financial Condition and Results
of Operations.
3. ACQUISITION OF GOVERNMENT SERVICES DIVISION
On January 26, 1999, the Company purchased all of the outstanding stock of
EMSA Government Services, Inc. ("EMSA") from InPhyNet Administrative Services,
Inc. ("InPhyNet") for $67.0 million in cash pursuant to a Stock Purchase
Agreement, dated as of December 18, 1998 (the "Stock Purchase Agreement"), as
amended by the First Amendment to Stock Purchase Agreement, dated as of January
26, 1999 (the "First Amendment"), between the Company and InPhyNet. InPhyNet is
a wholly-owned subsidiary of MedPartners, Inc. ("MedPartners").
EMSA conducts its operations through two wholly-owned subsidiaries, EMSA
Correctional Care, Inc. and EMSA Military Services, Inc., each of which became
indirect subsidiaries of the Company pursuant to its acquisition of EMSA. EMSA
Correctional provides comprehensive managed healthcare solutions to state and
local correctional facilities, managing healthcare for approximately 70,000
inmates. Following the EMSA acquisition, the Company, through EMSA Correctional
and Prison Health Services, Inc. ("PHS"), manages healthcare for approximately
133,000 inmates in 25 states. EMSA Military contracts with the U.S. Department
of Defense (the "DOD") and the Veterans Administration (the "VA") to provide
emergency medicine and primary healthcare services to active and retired
military personnel and their dependents at medical facilities operated by the
DOD and the VA.
The purchase price paid to InPhyNet was subject to increase or decrease on
a dollar-for-dollar basis by an amount equal to the amount by which EMSA's
working capital, as defined, and as reflected on its balance sheet as of January
25, 1999 (the "Closing Date Balance Sheet"), was in excess of or was less than
$27.6 million. The Closing Date Balance Sheet reflected working capital, as
defined, of $24.0 million. Accordingly, the Company received $3.6 million in
March 1999 as part of the purchase price adjustment. The Company will account
for the EMSA acquisition using the purchase method of accounting.
In connection with the EMSA acquisition: (i) the Company and all of its
subsidiaries, including EMSA, EMSA Military and EMSA Correctional, entered into
an Amended and Restated Credit Agreement, dated as of January 26, 1999, with
NationsBank, N.A., as Administrative Agent and Issuing Bank ("NationsBank"),
6
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AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which provides for a revolving credit facility of up to $52.0 million (the
"Credit Facility") through July 26, 1999, at which time availability is reduced
as defined within the Credit Facility and (ii) the Company entered into a
Securities Purchase Agreement, dated as of January 26, 1999 (the "Securities
Purchase Agreement") with Health Care Capital Partners L.P. ("Capital Partners")
and Health Care Executive Partners L.P. ("Executive Partners"), investment funds
managed by Ferrer Freeman Thompson & Co. (collectively, with Capital Partners
and Executive Partners, "FFT"). On January 26, 1999, pursuant to the Securities
Purchase Agreement, the Company issued to Capital Partners and Executive
Partners (i) $15.0 million aggregate principal amount of the Company's 12%
Subordinated Convertible Bridge Notes due January 26, 2000 (the "Notes") with
detachable warrants (the "Warrants") to purchase an aggregate 135,000 shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"), and
(ii) 50,000 shares of the Company's Series A Convertible Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), for $5.0 million. The Preferred
Stock is subject to mandatory redemption on July 26, 2005. The Notes, Warrants
and Preferred Stock are referred to collectively as the "Convertible Shares."
The Company has obtained an independent valuation computation of the fair
values of the Warrants ($4.88 per Warrant). Significant assumptions used in the
fair value calculation include: risk-free interest rate (4.79%); expiration
period (7 years); volatility (49%); and dividend per share (zero). The proceeds
from the sale of the Notes and Warrants were allocated in January 1999 based on
the relative fair values of the Warrants and Notes, with the fair value of the
Warrants being accounted for as an addition to paid-in capital. The resulting
discount on the Notes is accounted for as such and is being accreted and charged
to interest expense over the one year life of the notes.
The Preferred Stock, recorded at fair value, has a 5% dividend requirement.
The Preferred Stock is recorded outside of permanent equity due to its mandatory
redemption feature. Preferred Stock dividends are reported below net income to
display net income available to common stockholders.
The Company follows the requirements of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. Diluted earnings per share will
include shares to be issued relating to the Warrants under the treasury stock
method and the conversion of Preferred Stock to Common Stock at the applicable
conversion ratio. The Notes are contingent as to conversion based on a vote of
the stockholders. Under SFAS No. 128, until all necessary conditions to
conversion have been satisfied, the Notes are not considered in the diluted
earnings per share computation.
The Company has included in its proxy statement filing a detailed
description of the Notes, the Warrants and the Preferred Stock, including
conversion features and redemption requirements.
The Company used $47.0 million in borrowings under the Credit Facility and
the aggregate $20.0 million in proceeds received from its issuance of the
Convertible Securities to Capital Partners and Executive Partners to finance, in
part, the EMSA acquisition, which consisted of assets acquired of $89.2 million,
including cash of $0.9 million and $46.4 million of cost in excess of net assets
acquired and the assumption of $22.2 million in liabilities. The following
unaudited pro forma results of operations give effect to the operations of the
Company as if the acquisition had occurred effective January 1, 1999 and January
1, 1998:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
MARCH 31, MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Healthcare revenue.......................................... $68,009,000 $65,792,000
Net income (loss) attributable to common shares............. (1,511,000) 681,000
Net income (loss) per common share:
Basic..................................................... $ (0.42) $ 0.19
=========== ===========
Diluted................................................... $ (0.42) $ 0.19
=========== ===========
</TABLE>
7
<PAGE> 8
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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 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 28, 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 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.
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.
5. RESTATEMENT FOR BENEFICIAL CONVERSION FEATURE
The results of operations presented in the financial statements for the
quarter ended March 31, 1999 have been restated to give effect to the accounting
treatment recommended by the Securities and Exchange Commission (the "SEC") at a
meeting of the Emerging Issues Task Force relating to securities similar to the
Company's Series A Convertible Preferred Stock (the "Convertible Preferred
Stock") that have a "beneficial conversion" feature. The Emerging Issues Task
Force issued clarifying guidance, effective for transactions consummated after
May 20, 1999, indicating that whether a beneficial conversion feature exists
with respect to a convertible security should be determined at the date the
issuer enters into a commitment to issue the security and that, if a beneficial
conversion feature exists, it should be recorded upon the issuance of the
security. The Company originally accounted for the issuance of the Convertible
Preferred Stock in January 1999 following the Emerging Issues Task Force's
guidance requiring that the existence of a beneficial conversion feature be
determined at the date of the commitment to issue the security. The SEC
concluded, during a review of the recently concluded EMSA transaction, that the
Company should have accounted for the issuance of the Convertible Preferred
Stock under the accounting interpretations that applied to transactions
consummated prior to May 20, 1999. As a result, the Company will be required to
restate its results for the first quarter ended March 31, 1999. An adjustment of
$1.9 million, which increases paid-in capital, represents a $3.68 non-cash,
nonrecurring dividend on each outstanding share of Convertible Preferred Stock.
The dividend equals the increase in the fair market value of a share of the
Company's Common Stock from the date the Company entered into a commitment to
issue the Convertible Preferred Stock ($9.45 per share) to the Company's
issuance of the Convertible Preferred Stock on January 26, 1999 ($13.125 per
share). If the acquisition of EMSA had occurred subsequent to May 20, 1999,
restatement of the Company's first quarter financial statements would not be
required. The restatement is a historical event and will have no
8
<PAGE> 9
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impact on earnings per share in future periods. The restatement of the first
quarter resulted in a reduction of fully diluted earnings per share of $0.54.
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-Q contains and incorporates by reference
"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, among other things, discussions of the
Company's business strategy and expectations concerning the Company's position
in the industry, future operations, margins, profitability, liquidity and
capital resources. All these forward-looking statements are based on estimates
and assumptions made by management of the Company that, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not be
placed on such statements and estimates. No assurance can be given that any of
such estimates or statements will be realized, and it is likely that actual
results may differ materially from those contemplated by such forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (the "1998 Form 10-K") under the heading "Item 1.
Business -- Cautionary Statements," which cautionary statements are hereby
incorporated herein by reference. All forward-looking statements attributable to
the Company or persons acting on behalf of the Company are expressly qualified
in their entirety by the cautionary statements set forth in the 1998 Form 10-K.
In light of these and other uncertainties, the inclusion of forward-looking
statements herein or in any statement made by the Company should not be regarded
as a representation by the Company that the Company's plans and objectives will
be achieved.
GENERAL
The financial statements of the Company for the quarter ended March 31,
1999 include the operations of EMSA since January 26, 1999, the date of
acquisition. The acquisition was strategic in that it positions the Company as
the second largest provider of comprehensive managed healthcare for incarcerated
individuals in the United States and positions the Company to capitalize on
opportunities within the $4.5 billion correctional healthcare industry. Through
the acquisition of EMSA, the Company was able to (1) increase its contracts from
thirty-five to ninety-six; (2) increase the number of inmates served from 64,000
to 133,000; (3) leverage its revenue base whereby no one contract exceeds 8% of
combined revenue; (4) increase its market presence to twenty-five states, versus
sixteen; (5) leverage its corporate general and administrative expenses; (6)
obtain more favorable pricing in areas such as pharmacy, medical supplies and
lab costs; and (7) strengthen certain critical disciplines such as marketing and
client development.
In addition to the strategic advantages, EMSA's contracts are similar to
the Company's prison and jail contracts, which will allow the Company to
implement its operational process, which includes (1) a claims management
tracking system that monitors incidents, claims and litigation; (2) a Daily
Operating Report to control staffing and off-site utilization; (3) Bi-weekly
pharmacy reports; and (4) a comprehensive cost review system that analyzes
average costs per inmate at each facility. Through the implementation of the
above processes, the Company anticipates an overall improvement in EMSA's
margins.
RESULTS OF OPERATIONS
FIRST QUARTER MARCH 1999 COMPARED TO FIRST QUARTER MARCH 1998
Healthcare revenues for the quarter March 1999 increased to $58.3 million
from $27.6 million in the first quarter 1998. The $30.7 million increase is
attributable to both the acquisition of EMSA and an increase in inmate
population and automatic pricing adjustments of existing PHS contracts. Revenue
from EMSA was $28.4 million, while existing PHS contracts increased $2.3 million
or 8.3% as compared to March 1998.
9
<PAGE> 10
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Healthcare expenses during the first quarter 1999 were $52.5 million or
90.0% of revenue versus $24.8 million or 89.9% of revenue for the same period in
1998. The $27.7 million increase is mainly attributable to the EMSA acquisition.
Selling, general and administrative expenses for the quarter ended March
1999 increased $0.3 million as compared to March 1998, due to the additional
costs related to the EMSA acquisition. Selling, general and administrative
expenses for the quarter ended March 1998 include $0.7 million of costs to
related the failed merger with MedPartners. As a percent of revenue, selling,
general and administrative expenses are 5.2% for March 1999 versus 7.6% for
March 1998, exclusive of the costs associated with the failed merger. The
percentage decrease demonstrates the leverage on selling, general and
administrative expense provided by the EMSA acquisition.
Depreciation and amortization increased $0.4 million to $0.7 million for
March 1999. The increase of $0.4 is due to the amortization of cost in excess of
net assets related to the EMSA acquisition, totaling $46.4 million, which is
being amortized over twenty years.
Net interest expense of $1.0 million for March 1998 relates to the
financing of the EMSA acquisition through the Senior Revolving Credit Facility
of $47.0 million and the $15.0 million Convertible Subordinated Notes. Interest
expense of $1.1 million was offset by $0.1 million of interest income.
Income taxes for March 1999 were $0.6 million, which equates to a 56.0%
effective tax rate. The effective rate is directly related to the
non-deductibility of certain expense items. The March 1998 financial statements
have no provision for income taxes due to the utilization of income tax loss
carryforwards.
The Company recorded a gain of $1.6 million in the first quarter of 1998
related to the Settlement Agreement between the Company and MedPartners. As part
of the Settlement Agreement, the Company received payments totaling $2.2 million
in February and April 1998, of which $1.0 million reimbursed the Company for
costs directly associated with the terminated merger transaction. In addition to
the $1.2 million recognized from payments from MedPartners, an additional $0.4
million in employee healthcare and lease costs were reimbursed by MedPartners
for the quarter ended March 1998.
Preferred stock dividends of $45,000 relate to the 5% coupon rate on the
$5.0 million of Convertible Preferred Stock issued as part of the EMSA
acquisition. In addition, the results of operations presented in the financial
statements for the quarter ended March 31, 1999 have been restated to give
effect to the accounting treatment recommended by the SEC at a meeting of the
Emerging Issues Task Force relating to securities similar to the Convertible
Preferred Stock that have a "beneficial conversion" feature. The Emerging Issues
Task Force issued clarifying guidance, effective for transactions consummated
after May 20, 1999, indicating that whether a beneficial conversion feature
exists with respect to a convertible security should be determined at the date
the issuer enters into a commitment to issue the security and that, if a
beneficial conversion feature exists, it should be recorded upon the issuance of
the security. The Company originally accounted for the issuance of the
Convertible Preferred Stock in January 1999 following the Emerging Issues Task
Force's guidance requiring that the existence of a beneficial conversion feature
be determined at the date of the commitment to issue the security. As a result
of an SEC review of the recently concluded EMSA transaction, the Company
recorded an adjustment of $1.9 million, which increases paid-in capital,
representing a $3.68 non-cash, nonrecurring dividend on each outstanding share
of Convertible Preferred Stock. The dividend equals the increase in the fair
market value of a share of the Company's Common Stock from the date the Company
entered into a commitment to issue the Convertible Preferred Stock ($9.45 per
share) to the Company's issuance of the convertible Preferred Stock on January
26, 1999 ($13.125 per share). If the acquisition of EMSA had occurred subsequent
to May 20, 1999, restatement of the Company's first quarter financial statements
would not be required. The restatement is a historical event and will have no
impact on earnings per share in future periods. The restatement of the first
quarter resulted in a reduction of fully diluted earnings per share of $0.54.
10
<PAGE> 11
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at March
31, 1999, were $1.5 million, compared with cash, cash equivalents and
investments of $7.2 million at December 31, 1998. Cash provided by operating
activities during the three months ended March 31, 1999 was $3.6 million
compared to cash used in operations of $.7 million for the comparable 1998
period. The overall increase in cash from operating activities was due to the
transitioning of corporate finance during the first quarter, including
processing of vendor and medical claims invoices and accounts receivable. The
transition delayed the processing of both vendor and medical providers' claims,
as well as billing and collections of certain contracts' monthly base fees,
whereby the net impact was to increase cash. The decrease in cash is
attributable to the paydown of $10.0 million of the Senior Revolving Credit
Facility offset by cash from operating activities.
The transitioning of corporate finance functions was a slower process than
planned as time and effort was committed to complete the independent financial
statement audits for EMSA for January 25, 1999, for working capital statement
purposes, and as of December 31, 1997 and 1998 and for three years ending
December 31, 1998. The working capital audit was required to be completed within
60 days of the closing date while the December audits had a 90-day deadline. The
task of completing four audits mandated the full attention of the entire EMSA
finance department as EMSA had experienced a fairly significant amount of
employee turnover within the last year. Additionally, no employees within the
EMSA finance department relocated to Brentwood, Tennessee where the Company
maintains its corporate headquarters. Accordingly, during the months of February
and March replacements were recruited and hired at the Brentwood location to
support the EMSA contracts.
The following transition tasks have been completed or are operational: (1)
general ledger conversion; (2) medical claims adjudication through its medical
claims system; (3) billing and collection functions are in place with daily and
weekly cash reports being generated which has reduced accounts receivable
outstanding by approximately $10.0 million from March 31, 1999 to June 30, 1999;
(4) daily Operations Report used to manage site financial statements; (5)
bi-weekly reports for staffing and pharmacy costs which account for
approximately 75% of the Company's operating expenses; (6) site, contract and
region specific operating statements; and (7) utilization management reports
identifying open authorizations which will reduce delinquent medical claims
payment which will be demonstrated by a reduction in unpaid medical claims.
The Company believes the impact the transition had on vendor relations was
minimal as the Company had notified its vendors and EMSA medical and non-medical
providers of the acquisition. However, the Company has implemented a priority
list for any medical providers who are displeased whereby any open or disputed
invoices can be quickly researched and resolved. Additionally, the sites are
receiving weekly reports whereby any missing authorizations can be identified
and fixed immediately. The Company is not aware of any violations under its
agreements with its providers.
The Company has experienced a positive trend in cash collections in the
months subsequent to March 31, 1999. The nature and number of contracts
(representing 99% of consolidated revenues are based on fixed monthly fees or
inmate population data provided by the state or county payors) allows the
Company to quickly investigate and resolve any slow pay issues with clients. The
remaining 1% of revenue is pharmacy and catastrophic medical claims
reimbursement under certain contracts. These billings must be supported by
payment documentation prior to submitting to the Company's client.
The Company believes that by June 30, 1999 the disciplines impacted by the
EMSA transition including medical claims and vendor payables processing, billing
and collections, daily operational reporting will be functioning in a manner
similar to the Company's other operating subsidiary, Prison Health Services,
Inc. whereby accounts receivables and accounts payable days outstanding will be
consistent with the Company's days prior to the acquisition.
11
<PAGE> 12
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the current levels of cash, when coupled with
internally generated funds, acquired working capital of $24.0 from the EMSA
acquisition and the line of credit is sufficient to meet the Company's
foreseeable cash needs.
YEAR 2000 UPDATE
The Year 2000 problem is the result of two potential malfunctions that
could have an impact on the Company's operations. The first is computer systems
and software being programmed to use two rather than four digits to define the
applicable year. The second is the use of embedded chips that have been designed
using two rather than four digits to define the applicable year. These chips are
often used in medical equipment used in certain Company sites.
The Company has completed the evaluation of all computer systems and
software it currently utilizes and has determined that 85% of all computer
systems and software will be in compliance without modification. The Company is
currently in the process of modifying or replacing the remaining 15% of its
computer systems and software. The general ledger, accounts payable and accounts
receivable systems have been upgraded, tested and are in production. Timekeeping
software is currently being upgraded and is currently 87% complete. The
timekeeping upgrades will be completed by July 1, 1999. The Company's most
significant outsourcing contract is for medical claims processing and payment
and that vendor has certified that all Year 2000 modifications will be completed
by December 31, 1999.
The Company has undertaken a program to inventory, assess and correct or
replace the equipment that contains embedded chips. The Company has a plan to
inventory its sites, contact vendors, analyze information provided and replace
or modify devices or equipment that will have a direct impact on patient safety
and health. The Company anticipates completion in all material respects of this
portion of its Year 2000 assessment program by July 1999.
The Company is relying on information that is being provided by equipment
and medical device manufacturers regarding the Year 2000 compliance status of
their products. While the Company is attempting to evaluate information provided
by its present vendors, there can be no assurances that in all instances
accurate information is being provided. The Company also cannot in all instances
guarantee that the repair, replacement or upgrade of all items of equipment and
medical device systems will occur on a timely basis. Contingency planning will
be established and implemented in an effort to minimize any impact from Year
2000-related failures of such equipment. The Company anticipates its contingency
planning for this aspect of its Year 2000 assessment to be completed by July 31,
1999. Costs as a result of these types of occurrences are in the process of
being determined.
The Company has also initiated communications with suppliers and vendors
whose supplies are essential for day-to-day operations regarding their state of
Year 2000 readiness. The Company is continuing its efforts to obtain such
information from all critical suppliers and vendors and feels that it will be
able to determine its vendors' status by July 31, 1999. Failure of certain
suppliers and vendors to remain in business without interruptions following
December 31, 1999 could have a material impact on operations or the Company's
ability to provide healthcare services. Contingency plans may include
stockpiling medical supplies and materials, increasing inventory levels and
securing alternate sources of supply. The Company anticipates its contingency
planning for this aspect of its Year 2000 assessment to be completed by July 31,
1999. Costs as a result of these types of occurrences are in the process of
being determined.
Because the Company's physical sites are located within facilities owned
and operated by other entities whose Year 2000 readiness efforts it does not
control, there will be issues that arise which are dependent on these clients'
efforts. The Company has initiated communications with its clients on these
matters. The Company anticipates its contingency planning for this aspect of its
Year 2000 assessment to be completed by July 31, 1999 and feels costs related to
this phase will be immaterial.
12
<PAGE> 13
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company expects to expend approximately $0.1 million in connection with
evaluating, modifying and replacing its computer systems and software and
expects to fund such expenditures through operating cash flows. However, there
can be no guarantees that these estimates will be achieved and actual results
could differ materially from those anticipated.
13
<PAGE> 14
PART II:
OTHER INFORMATION
ITEM 5. -- OTHER EVENTS
On April 27, 1999, the Company issued a press release discussing its first
quarter 1999 operating performance. A copy of such press release is attached
hereto as Exhibit 99.1 and is hereby incorporated herein by reference.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<C> <C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated by reference to Exhibit 3.1
of the Registrant's Registration Statement on Form S-1,
Registration No. 33-43306, as amended).
3.2 -- Amended and Restated By-Laws of America Service Group Inc.
(incorporated by reference to Exhibit 3.2 of 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 of the Registrant's Registration Statement on
Form S-1, Registration No. 33-43306).
11.1 -- Statement re-computation of per share earnings.
27.1 -- Financial Data Schedule for the quarter ended March 31, 1999
(for SEC use only)
27.2 -- Financial Data Schedule for the quarter ended March 31, 1998
(for SEC use only)
99.1 -- March 1999 Earnings Release
</TABLE>
(B) Reports on Form 8-K
1. On February 10, 1999, the Company filed Form 8-K, announcing the
completion of the acquisition of MedPartners' Government Services
Division.
2. On March 26, 1999, the Company filed Form 8-K/A, amending and
replacing its report on Form 8-K, which was originally filed on
February 10, 1999, announcing the completion of the acquisition of
MedPartners' Government Services Division.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICA SERVICE GROUP INC.
/s/ MICHAEL CATALANO
--------------------------------------
Michael Catalano
President & Chief Executive Officer
/s/ BRUCE A. TEAL
--------------------------------------
Bruce A. Teal
Senior Vice President & Chief
Financial Officer
Dated: July 28, 1999
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <C> <S> <C>
11.1 -- Statement re-computation of per share earnings..............
27.1 -- Restated Financial Data Schedule for the quarter ended March
31, 1999 (for SEC use only).................................
27.2 -- Financial Data Schedule for the quarter ended March 31, 1998
(for SEC use only)..........................................
99.1 -- March 1999 Earnings Release.................................
</TABLE>
16
<PAGE> 1
EXHIBIT 11.1
AMERICA SERVICE GROUP INC.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net income $ 480,000 $1,462,000
Preferred stock dividends 1,989,000 --
----------- ----------
Numerator for basic earnings
per share - net income (loss) available
to common share holders $(1,509,000) $1,462,000
=========== ==========
Denominator for basic earnings per
share - weighted average shares 3,575,000 3,530,000
Effect of dilutive securities -- 61,000
----------- ----------
Weighted average common shares
outstanding - diluted 3,575,000 3,591,000
=========== ==========
Basic earnings (loss) per share $ (0.42) $ 0.41
=========== ==========
Diluted earnings (loss) per share $ (0.42) $ 0.41
=========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP INC FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,477,000
<SECURITIES> 0
<RECEIVABLES> 55,138,000
<ALLOWANCES> (237,000)
<INVENTORY> 921,000
<CURRENT-ASSETS> 63,390,000
<PP&E> 6,683,000
<DEPRECIATION> (3,419,000)
<TOTAL-ASSETS> 114,755,000
<CURRENT-LIABILITIES> 57,362,000
<BONDS> 37,000,000
6,842,000
0
<COMMON> 36,000
<OTHER-SE> 12,038,000
<TOTAL-LIABILITY-AND-EQUITY> 114,755,000
<SALES> 58,281,000
<TOTAL-REVENUES> 58,281,000
<CGS> 52,478,000
<TOTAL-COSTS> 56,165,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024,000
<INCOME-PRETAX> 1,092,000
<INCOME-TAX> 612,000
<INCOME-CONTINUING> 480,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480,000<F1>
<EPS-BASIC> $ 0.42
<EPS-DILUTED> $ 0.42
<FN>
<F1>See Form 10-Q/A footnote 5 to financial statements.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICA SERVICE GROUP INC FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,804,000
<SECURITIES> 993,000
<RECEIVABLES> 10,540,000
<ALLOWANCES> (119,000)
<INVENTORY> 271,000
<CURRENT-ASSETS> 18,211,000
<PP&E> 4,576,000
<DEPRECIATION> (2,263,000)
<TOTAL-ASSETS> 28,704,000
<CURRENT-LIABILITIES> 17,007,000
<BONDS> 0
1,842,000
0
<COMMON> 36,000
<OTHER-SE> 6,472,000
<TOTAL-LIABILITY-AND-EQUITY> 28,704,000
<SALES> 27,632,000
<TOTAL-REVENUES> 27,632,000
<CGS> 24,842,000
<TOTAL-COSTS> 27,897,000
<OTHER-EXPENSES> (1,595,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (132,000)
<INCOME-PRETAX> 1,462,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,462,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,462,000
<EPS-BASIC> $0.41
<EPS-DILUTED> $0.41
</TABLE>
<PAGE> 1
EXHIBIT 99.1
(America Service Group Inc. Logo)
N E W S R E L E A S E
FOR IMMEDIATE RELEASE
CONTACT: MICHAEL CATALANO BRUCE A. TEAL
PRESIDENT AND CHIEF EXECUTIVE OFFICER SR. VICE PRESIDENT AND CHIEF
(615) 376-1319 FINANCIAL OFFICER
(615) 376-1361
AMERICA SERVICE GROUP ANNOUNCES
FIRST QUARTER RESULTS
---------------------------------------------
EMSA ACQUISITION ACCRETIVE IN FIRST QUARTER
First Quarter Highlights:
- - EMSA transaction completed and accretive in first quarter
- - Covered inmates expanded by 115%
- - Bank debt reduced by $10 million, or 21%
NASHVILLE, Tennessee (April 27, 1999) -- America Service Group Inc.
(NASDAQ:ASGR) announced today that its first quarter results reflect record
levels of revenues and income from operations. The results include the Company's
acquisition of EMSA Government Services (EMSA), which was completed on January
26, 1999.
Healthcare revenue for the first quarter of 1999 was $58.3 million, up
111% from $27.6 million a year ago. Net income attributable to common shares,
before transitional expenses related to the EMSA acquisition, was $778,000, or
$0.19 per diluted share. This compares with net income, before nonrecurring gain
related to a settlement agreement with MedPartners, of $516,000, or $0.14 per
diluted share, for the first quarter of 1998. As reported, net income
attributable to common shares, including transitional expenses, was $435,000, or
$0.12 per share, for the first quarter ended March 31, 1999.
-MORE-
105 Westpark Drive - Suite 300 - Brentwood, TN 37027 - 615-373-3100 -
Fax 615-376-9862
<PAGE> 2
ASGR Announces First Quarter Results
Page 2
April 27, 1999
During the first quarter, healthcare expenses as a percent of revenue
were 90% versus 89.9% in the prior year, exclusive of the MedPartners settlement
impact. The Company immediately leveraged its corporate infrastructure, as
selling, general and administrative expenses improved from 7.6% of revenues in
the first quarter of 1998 to 5.2% of revenues in the first quarter of 1999.
"This has been a very productive and rewarding quarter," said Michael
Catalano, president and chief executive officer of America Service Group. "Our
integration of the EMSA acquisition is right on track. The reaction of EMSA
clients has been positive. Operating results met our expectations, and repayment
of bank debt is ahead of schedule. This early momentum should lead to a year of
added growth and value for our company."
America Service Group Inc., based in Brentwood, Tennessee, is a leading
provider of correctional healthcare services in the United States. America
Service Group contracts with approximately one hundred government agencies to
provide a wide range of managed healthcare programs tailored to specific client
needs. The Company employs over 4,200 medical, professional and administrative
staff nationwide.
This press release may contain "forward-looking" statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. As such, they involve risk and uncertainty that actual
results may differ materially from those projected in the forward-looking
statements. A discussion of the important factors and assumptions regarding the
statements and risks involved is contained in the Company's filings with the
Securities and Exchange Commission.
-MORE-
<PAGE> 3
AMERICA SERVICE GROUP INC.
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
March 31, % of March 31, % of
CONSOLIDATED INCOME STATEMENT: 1999(1) Revenue 1998(2) Revenue
----------- -------- ---------- -------
<S> <C> <C> <C> <C>
Healthcare revenue $ 58,281 100.0 $ 27,632 100.0
Healthcare expenses 52,478 90.0 24,482 88.6
---------- -------- ---------- ------
Gross margin 5,803 10.0 3,150 11.4
Selling, general and administrative expenses 3,020 5.2 2,112 7.6
Depreciation and amortization 667 1.1 294 1.1
---------- -------- ----------- ------
Income from operations 2,116 3.7 744 2.7
Interest, net (1,024) (1.8) 132 0.5
---------- -------- ----------- ------
Income before nonrecurring gain and taxes 1,092 1.9 876 3.2
Nonrecurring gain -- -- 586 2.1
---------- -------- ----------- ------
Income before taxes 1,092 1.9 1,462 5.3
Provision for income taxes 612 1.1 -- --
---------- -------- ----------- ------
Net income 480 0.8 1,462 5.3
Preferred stock dividends 45 0.1 -- --
---------- -------- ----------- ------
Net income attributable to common shares $ 435 0.7 $ 1,462 5.3
========== ======== ========== ======
Net income per common share:
Basic $ 0.12 $ 0.41
========== ==========
Diluted $ 0.12 $ 0.41
========== ==========
Weighted average shares outstanding:
Basic 3,575 3,530
========== ==========
Diluted 4,166 3,591
========== ==========
Net income per common share, adjusted for charges(1)(2):
Basic $ 0.20 $ 0.15
========== ==========
Diluted $ 0.19 $ 0.14
========== ==========
</TABLE>
(1) Included in March 1999 operations are approximately $496,000 of transitional
expenses relating to the EMSA Government Services acquisition. The majority
of the $496,000 relates to salaries and bonuses which are not anticipated to
occur in the future. Exclusive of these transaction expenses, earnings would
have been $778,000, or $0.19 per dilutive share.
(2) March 1998 healthcare expenses exclude $360,000 of costs covered as part of
a settlement agreement with MedPartners, Inc. The $586,000 nonrecurring gain
is also related to the settlement. Exclusive of these "one-time" items,
March 1998 earnings would have been $516,000, or $0.14 per diluted share.
<TABLE>
<CAPTION>
March 31, Dec. 31,
CONSOLIDATED BALANCE SHEET: 1999 1998
------------- --------------
<S> <C> <C>
Cash and short-term investments $ 1,477 $ 7,211
Other current assets 63,045 17,588
------------- ------------
Current assets 64,522 24,799
Cost in excess of net assets acquired 48,080 --
Property and equipment, net 3,264 1,886
Other assets 2,168 1,690
------------- ------------
$ 118,034 $ 28,375
============= ============
Current liabilities(3) $ 60,641 $ 14,284
Other liabilities 1,477 1,300
Long-term debt 37,000 --
Stockholders' equity(4) 18,916 12,791
------------- ------------
$ 118,034 $ 28,375
============= ============
</TABLE>
(3) Includes $14,460,000 bridge loan which will be converted to redeemable
convertible preferred stock subsequent to shareholder approval.
(4 Stockholders' equity includes $1.8 million of redeemable common stock for
both March 1999 and December 1998 and $5.0 million of redeemable
convertible stock for March 1999.
-###-
